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spk03: Welcome to Bed Bath & Beyond's fiscal 2021 first quarter earnings conference call. My name is Sylvia and I'll be your operator for today's call. At this time, all participants in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star then one on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Suzy Kim. Suzy, you may begin.
spk02: 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. Before we begin, let me remind you that our fiscal 2021 first quarter earnings release and slide presentation can be found in the investor relations section of our website at bedbathandbeyond.com. and as exhibits to the Form 8K we filed ahead of this call. This conference call and the slides we refer to may contain forward-looking statements, including statements about or references to our outlook regarding the company's performance, our internal models, and our long-term objectives. All such statements are subject to risks and uncertainties that could cause actual results to differ materially from what we say during the call today. Please refer to our most recent periodic SEC filings for more detail on these risks and uncertainties, including the risk factor section in our annual report on Form 10-K and 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 but at the effect of excluding amounts that are included in the most directly comparable measure prepared in accordance with generally accepted accounting principles. For reconciliation to those 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 file today. It is now my pleasure to turn the call over to Mark Tritton.
spk12: 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 marks 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 strong 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 at 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 a 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. I want to touch on some of the important highlights from the quarter that underscore our progress. We are accelerating growth through our digital-first Omni Always focus. Net sales of approximately $2 billion for the quarter were comprised of 38% digital penetration at similar sales levels to our strong performance last year, even as stores recovered with customers returning to in-store shopping. This digital penetration is nearly double our 2019 levels, making digital a new strength for our organization. This growth on a two-year basis was 84%. We're continuing to improve the customer experience, most recently expanding our same-day delivery capabilities in both the US and Canada. Through our partnership with DoorDash, same-day delivery is now available in an additional 3,000 zip codes in the US and 47 cities across nine Canadian provinces. This follows the successful launches of our BOPUS and contactless curbside pickup services during 2020. Our stores continue to be an operational strength for Bed Bath & Beyond during the quarter. In Q1, 31% of our digital demand was fulfilled from stores, with Bofus representing 14% and ship from store in the same day delivery, accounting for 17%. Our footprint plays a vital role in our digital-first Omni Always strategy. We are also enhancing the customer experience with Bed Bath & Beyond banner upgrades and remodels, through our previously announced store remodel program. While we have already upgraded and refreshed the entire store fleet with signage and assortment curation, we also initiated 26 full remodels during the quarter, which was our targeted quarterly goal as part of our 130 to 150 store remodel plan this year. Ultimately, we will remodel 450 stores over three years, representing approximately 60% of our store revenue base. Early data from our remodel shows positive indications that sales and margin growth are exceeding our plans across both our prototype A and B upgrades in our pilot Houston market. As New York City returns to its original strength, we're excited about the upcoming unveiling of our flagship Chelsea store in New York as the city fully reopens this summer. We have transformed this store with new concepts, fixtures, open sight lines, revised merchandise, and a customer-centric layout for easy and convenient focus and checkout directly in the city. As for our assortment, we continue to differentiate Bed Bath & Beyond with a curated mix of important national brands and the addition of our own brand portfolio. As planned and previously discussed, we successfully launched our Nestwell, Haven, and Simply Essential lines during the quarter. And this month, we also announced our next launches of Our Table and Wild Sage. Our six brands squared away will launch this July. We have now reached our first half goal to launch six of eight own brands ahead of schedule. Furthermore, our own brand penetration is currently at a high team's percentage, almost double last year's levels. We are well on our way to our 20% goal for 2021. and 30% by 2023. At our Bye Bye Baby banner, we returned to strong growth in Q1 with net sales increasing more than 20% versus last year when stores were still open. More importantly, sustaining its return to positive comp growth, Baby delivered a low single-digit comp on a two-year basis. Our goal to be the partner of choice for new parents is resonating. And we are confident of Bye Bye Baby's bold trajectory towards our 2023 goal of more than $1.5 billion in sales. Finally, we are modernizing our infrastructure to further support our strategy and pursue greater operational efficiencies by enhancing our supply chain and technological foundation. The first phase of our end-to-end supply chain transformation is underway with the construction of our Northeast Distribution Center. As part of this endeavor, we are currently finalizing an agreement with a third-party logistics partner to begin establishing our new store replenishment approach. We've made progress towards reinventing our financial, inventory management, and merchandising capabilities through our technology transformation. We selected Oracle as our enterprise resource planning provider last quarter, and the next component of our IT roadmap is progressing with the appropriate designing and planning for our full ERP migration. We're making great strides in all aspects of our transformation, and customers are also recognizing the evolution. Our active customer base increased sequentially versus last quarter. Even more exciting, half of these active customers are shopping omni and digital, double 2019 levels. These customers shop more frequently and with a larger basket size. we're also paving the way for a market share rebound. In Q1, we recaptured market share on a year-over-year basis with significant gains in our key categories of bed, bath, and kitchen. We also experienced sequential monthly improvement, particularly in the bed category. As our results show, we have made meaningful progress with our transformation in just the first quarter of our three-year journey. We have confidently achieved each milestone along our transformation thus far, and I must thank our team of incredible associates for their work in defining and driving these results. We are a stronger, more agile company than ever before, and we are well on our way to building long-term growth and unlocking greater shareholder value. I will now turn the call over to Gustavo Arnal, our Chief Financial Officer, to review both our strong first quarter results and our outlook for the second quarter and revised full year. Gustavo?
spk11: Thank you, Mark. And good morning, everyone. I'll provide additional perspective on our strong first quarter results 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 expectations on several levels as we deliver on 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 own-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 analyst 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 upsetting store sales reductions of 20%. As Mark described, our digital first only 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 core net sales comparisons versus last year and in comp 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 stat comp basis, sales grew 7%. Our buy-by-baby banner delivered another strong quarter. Versus last year, growth exceeded 20%. Recall, our baby stores remained open in the base period. Also, growth continued versus 2019 with comps in the low single digits. Adjusted gross margin expanded to 34.9% ahead of our guidance of approximately 34%. Gross margin expanded significantly versus the prior year as a result of strong recovery from our stores, the normalization of our digital mix, and the faster penetration of own brands. We are on track for a full year guidance of 35% gross margins. SG&A was lower than last year and remains on track to our full-year plan. During the quarter, we made strategic and incremental marketing investments to fortify the launch of our Bed, Bath & Beyond Home Happier campaign and added investments to accelerate our own brand launches. These actions drove additional profitable growth with strong returns. For the quarter, we delivered adjusted EBITDA of $86 million within our guidance range. Our EBITDA performance illustrates how our healthy top line and strong gross margin enabled us to increase marketing investments in an agile and effective way. GAAP net loss for the quarter was $0.48 per diluted share compared to a net loss of $2.44 last year, a pivot back to profitability of approximately $2 per share. On a GAAP basis, net income includes approximately $56 million of costs, such as charges related to our restructuring and transformation initiative. These special items are excluded from adjusted results to provide a more accurate picture of the underlying performance of our business. On an adjusted basis, EPS was $0.05 versus a loss of $1.96 last year. also a positive pivot back to profitability of about $2 per share. During the quarter, we manage our liquidity and cash consistent with our capital allocation principles. We reduce inventory in our core banners by more than $100 million versus the prior quarter, an approximate 6% reduction enabled by further assortment curation. We continue to transition product in preparation for the introduction of our own brands, as well as from seasonal selling and store closures associated with our network optimization program. We continue to invest and transform our business. Capital spending accelerated this quarter. Given seasonality, free cash flow was an investment of approximately $100 million, in line with our expectations. Our cash balance remained solid at $1.2 billion, and even stronger on liquidity at $1.9 billion, including our ABL. In addition to funding our transformation initiatives, we continue to follow a financial roadmap with a balanced, data-driven approach to prioritize shareholder return. As a result, during the quarter, we repurchased approximately $130 million, or 5 million shares. Programmed to date, we have repurchased approximately half a billion dollars, or 17% of our shares, at an estimated average price of $24.00. This puts us well on track towards our $1 billion goal by fiscal 2023 and ahead of what we communicated at our investor day in October. Finally, I will discuss our guidance outlook for the second quarter and full year. Based on our strong performance for the first quarter and our current expectations for the second quarter, we're raising our full year guidance outlook. I'll first discuss Q2, which covers the month of June, July, and August. In the month of June, we have continued seeing growth versus last year, as well as on a two-year stack basis. For the balance of the quarter, July and August are important months when considering the July 4th holiday and the back to college season. Taking these factors into consideration, we estimate comp sales growth of low single digits. Net sales are expected to be in a range of $2.04 to $2.08 billion. As a reminder, divestitures and fleet optimization will continue to impact year-on-year comparisons. Driving adjusted gross margin improvement will continue being an acute area of focus for us. Accordingly, we expect adjusted gross margin to improve sequentially versus Q1 and be in the range of 35% to 36%. This will be enabled by higher on-brand penetration, a more favorable assortment mix, and continued cost savings. Additionally, this guidance reflects the ongoing impact of higher industry-wide freight costs versus last year. In terms of adjusted EBITDA, we're guiding to a range of $150 to $160 million, and an adjusted EPS range of 48 to 55 cents. And as Mark and I mentioned, we're raising our full-year outlook for fiscal 21. We expect higher net sales in the range of $8.2 to $8.4 billion. We're also raising our comp sales growth expectation for the second to fourth quarters of the fiscal year, which are fully comparable periods as previously discussed. We now expect to deliver low single-digit comp growth compared to robust sales performance during Q2 through Q4 of last year. we are reaffirming our full-year adjusted gross margin of approximately 35%. As the year progresses, we will continue to focus on driving progress via higher penetration of newly launched owned brands, product sourcing savings from negotiated vendor contracts, and more effective data-driven promotion and markdown strategies. Historically, given category mix, gross margin in the latter part of the fiscal year tend to be somewhat lower than in the earlier part of the year. For the full year, SG&A is expected to be approximately 31% of total net sales. On a year-over-year basis, savings will continue to be driven by favorable impacts from store closures and last year's cost restructuring. And finally, we're raising adjusted EBITDA to a range of $520 to $540 million. This translates to an adjusted EPS range of $1.40 to $1.55. On our balance sheet and cash flow assumptions, we're reaffirming our guidance of approximately $400 million in capex, a growth debt to EBITDA ratio below three times, plans for a total of $325 million in share repurchases for the full year, or approximately $200 million for the remainder of the year. We have also provided additional assumptions on depreciation and amortization, interest and tax rates in today's presentation to assist with EPS modeling. We've also included the previously provided breakdown of core sales on a historical basis. We continue to operate in a rapidly changing environment as it relates to both societal health and economic recovery. We continue to monitor the penetration of the COVID-19 vaccine particularly as it relates to customer demand and traffic patterns, both in stores and online. Inflation continues to be a key area of review as we remain vigilant on raw materials, freight, and labor variability facing many industries. We're establishing a consistent track record of performance while also driving a fast-paced and comprehensive strategic transformation. By the end of this year, we will have driven a 25% increase in EBITDA versus 2019 with a healthier, more focused, and growing portfolio of core banners. And over the same period, just two years later, our EPS will be three times higher given our disciplined capital allocation and share repurchase program. I will now turn the call over to Mark for some closing remarks.
spk12: 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 will not only mark our 50th anniversary as a business, it will also be an important inflection point in Bed Bath and Beyond's history. We are reinventing ourselves as an authority at home and repositioning this iconic company to unlock our potential for a new future of sustainable growth and profitability. We will now take your questions.
spk03: Thank you. We will now begin the question and answer session. If you have a question, please press star, then 1 on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you need speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then 1 on your touch-tone phone. And the first question comes from Peter Benedict from Baird.
spk14: Oh, hey, guys. Good morning. So a couple questions. First, you know, look, 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 kind of thinking about that, how you're measuring that. Sounds like you think you've gained share in a number of these core categories. So that's kind of my first question. I don't know, Mark, if you can maybe build off on that.
spk12: Yeah, 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 does the share gain ratio look like? And we see a couple of things there, Peter. It's preliminary. Clearly, we're not back to our 2019 levels of share because we have less doors and we're operating as a linear organization. But what we saw was our rebound was very, very strong, and it actually exceeded that of a number of our competitors who were also closed at the same time. So I would say to you that as a specialty retailer in the home and baby space and health and wellness, we regained really strong share there that we're going to be building off quarter by quarter and sequential growth by month as we've tracked it.
spk14: Okay, thanks. Next question is just on... on kind of inventory and how you're managing that kind of in store versus online and, you know, in stock levels. Just kind of curious, I know you mentioned there's a new store replenishment process that's, I believe it's on tap. So could you just talk about that as you're kind of transforming, you know, the merchandise assortment in the stores and just any timeline or metrics around that would be helpful.
spk12: Yeah, we're really placed with that progress here, Peter. I think Prior to us implementing the full technology suite that's going to help us and enable us with the use of AI to manage our inventory at DC and store at digital level, we're seeing the curation of the merchandise first at store level and then the exit of underperforming brands and labels to make way for a cleaner sort of punctuated by our brands. That's resulted us 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 our in-stock levels are healthy. I think this is important to note as we curate the assortment mix. As we noted, we were 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. And this is prior to us implementing a full suite of inventory management and tracking systems and new supply chain. So we see those as being net benefits as we progress through the three-year plan. But the fundamentals of what we put in place is working well for us. Okay, great.
spk14: And I guess maybe lastly one for Gustavo, just on that. on the free cash flow, you know, negative $100 million, you know, this quarter. But just how are you thinking about that? And as we cadence throughout the rest of the year, what's your kind of view on free cash flow for 21 based on the updated guidance and maybe any of the puts and takes there would be helpful.
spk11: Thanks so much. Sure, Peter. So... 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 I will say that 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 optimizations. And we're fully funded in our restructuring costs and marketing spending. So 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 quarters for seasonality. So we're feeling good about that.
spk03: Our next question comes from Stephen Forbes from Guggenheim Securities.
spk16: Good morning. Maybe, Mark, just a follow-up on Peter's question about market share. I'm curious if you could provide maybe a brief overview on how you view the company's performance right across these top five destination categories. What I mean by that is, as we look at what you're trying to tell us here in the exhibits you've been providing and all the data you've been providing, what is the big takeaways? What are you really trying to tell us about share? What gives you confidence that share gain should build? How are the legacy customers engaging with these categories versus the new customers that you acquired during COVID? Just any sort of context that helps us increase our own conviction, right, that the business is positioned to return to share or capture.
spk12: Yeah, it's a great question, Steve. I think what we see happening is that we are doubling down on those core areas that we discussed, bed, bath, kitchen storage and organ indoor decor we're investing in those we're curating our inventory we're clarifying our price we our price equity in the market is very strong and we're really trading in an omni-channel way which means customers viewing us online shopping in store or purchasing 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 are seeing slightly stronger baskets and have a transaction value from our digital customer. But we're seeing real strength in those areas. One of the things we've been looking at, Steve, is the two-year stack. And I think it's interesting to note that while we saw over 100% growth in our top categories, it was interesting to see an area like kitchenware that really did boom in Q1 last year. But we're seeing double-digit comps in that category on 2019 numbers, which means that trend is sustained. People are still cooking, people are still buying, and they're still thinking about Bed Bath & Beyond in that equation. So we see that having our full omnichannel suite of stores and digital back and operational in this quarter has really brought us back to share growth, and we're going to continue that transformation quarter by quarter.
spk03: Our next question comes from Simon Gutman from Morgan Stanley.
spk08: Hey, good morning, guys. This is Soham on for Simeon. Two questions. First one, Mark, just on the own brands and engagement around that, could you just maybe share some of the KPIs that, you know, you guys are tracking to gauge your success there, you know, whether that be POS data or just, you know, store traffic trends that you could share, you know, once you've introduced those brands into a store?
spk12: Sorry, wrong mute button. Great question. I think for us, definitely it's around our sales targets and plans and the penetration rate overall. And we're seeing a lot of curiosity and a lot of engagement with these brands. And so for us, we are seeing our penetration rate on our brand increase rapidly. As we said, we doubled that from our 2020 number and actually the 2019 number. So we're probably around 9% static We're seeing that in the high teens. And we had declared that our goal for the full year was a 20% penetration rate by the end of the year. So we're very early off to a great start. We have exit of own brand product that is aged as well as the introduction of new. The customers respond really, really strongly. We look at a number of digital metrics here as well as social media engagement. And all of those have been extremely positive.
spk03: Our next question comes from Christopher Hilvers from JP Morgan.
spk10: Thanks. Good morning, everybody. So you reached a 34-9 gross margin in the first quarter. So a few questions there. One, do you think that sort of the clearance activity from the store closures and the own brand transition is done such that there wouldn't be any deductions going, add back going forward? You know, just longer term, if we center on that 34.9, you haven't introduced all of the private label brands and own brands that you plan to. So how does that 35 and 1Q inform, you know, how high you think the gross margin could be over the long term?
spk12: Yeah. Thanks, Chris. As we introduced the own brands, we had both exit and clearance and markdowns. as well as the introduction of the high margin products. I would say to you it bodes well, but we will 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. And we've been really clear about that, that we saw that there's stronger margin potential in the second half than the first, although we do see Q4 traditionally being a little softer versus the rest of the year versus our annualized rates. So the good news is that we see early positive upside. We had all along, and we were very pleased to come above our guidance, that we are in a transition phase, an establishment phase, and then we'll stabilize that in the second half. So we think that will be positive. But again, we're in the early stages of our transformation. I think we see sequential growth in margin. I think an over-declaration of that would be not prudent, so we continue to monitor it carefully.
spk03: Our next question comes from Michael Lesser from UBS. If you let it mute, please unmute yourself.
spk13: Good morning, thanks a lot for taking my question. It's a two-parter. The first part is, so your core categories, your destination categories, if you look at it on a two-year arithmetic stack, we're up 107%. The other categories, which represent a little over a third of the business, were only up on a two-year stack, 88%. I know you're focused on the core categories, but the other categories are still important. When do you think you can get all of them working together simultaneously? And the second part of the question is, your quarter overlapped with the period of the distribution of some sizable stimulus. How much do you think that contributed to your performance during the period? Thank you so much.
spk12: Thanks, Michael. Yeah, I think we've got areas like personal care for us, luggage, some ancillary categories that are underperforming versus those other core categories. Again, our investment has been in the core that's driving more of our attention and activity. And that's the first tab off the rank. I think what we'll see is more stability in the second half with that. We're starting to see some early signs of return to that. We really want to see encouraging store traffic because that is more of a store-based business than a digital business. So we'll see that balance out in the second half. I think in terms of the overall stimulus package, what we saw in the quarter that for us, I think it provided overall consumer confidence. But in terms of it driving the majority of the sales, we think that it's more based on our initiatives and our engagement and then the incremental activities we had like our brand launches. And so I think everyone's benefiting to a certain degree, but we see our strategic factors driving that. So for us versus a lot of our competitors, we see more stability in the trend rather than getting trips and traffic through food and other areas that were benefited from the stimulus package, which we've seen through the data that we don't participate in.
spk03: Our next question comes from Carla Casella from JP Morgan.
spk01: Hi. You're sitting on a relatively large cash balance, and you gave some comments around cash flow, but can you talk about your priorities for that cash flow?
spk11: Yeah, we, hi Carla, Gustavo here. We remain focused on our capital allocation principles. I mean, first and foremost, investing in the business as we're doing, maintaining a strong balance sheet and improving our debt to either that credit ratios and returning capital to shareholders as we're doing with share buybacks. So we will continue being agile on our cash balance and our cash flow and act accordingly to our principles.
spk12: Yeah, Carlo, I'd just add in there that we're at the very early stages of our transformation. We have a lot of things in flight. Brand investments, technology, supply chain, remodeling of our stores and upgrading our digital. What we will continue to look to do is where we have free cash flow or additional free cash flow, how can we look to deploy that against accelerating our efforts in the transformation? But as yet, we're steady as she goes and we're watching those plans evolve. Great news is we're in the right position to be able to review and invest as we move forward.
spk03: Our next question comes from Kate McShane from Goldman Sachs.
spk04: Hi, good morning. Thanks for taking my question. I just wanted to go back to the store comp, which was down 20% versus 2019. I just wondered if you could... maybe contextualize what your expectation is specifically for store comp in your guidance, what you think drives the improvement specifically to the store, and is the solution really the completion of the fleet optimization?
spk12: Thanks, Kate. Yeah, a couple of things there. I think that we still see upside in the return to stores. I think we're tracking this by region and seeing that there is different levels of confidence and therefore traffic that are generated in specific stores. I would cite the Northeast, which is a very strong part of our business historically. That is, I think, more reticent than other areas like the South to return to stores. And so for us, great news is that as an Omni Always retailer, we're balancing that out. And I think there's been a permanent shift in the mix and how our customers operate between those, which is great. And we've reflected that in our operating plans. So I think a return to strength there and traffic is really generated by a number of different things. We believe that the back to college period will be a really interesting pivot to return to a new normal. And we see that that brings multi-generational traffic, both new and existing customers in the store. And when they do, they will be experiencing the new bed, bath, and beyond, whether it is assortment or whether it will be remodeled. In terms of the remodel, the traffic doesn't clearly rely on that as a singular strategic lever, but we are seeing in our preliminary data that the sales lift, margin lift, and even down to the O-brand penetration lift and traffic and transactions have increased above our existing plan where we've completed those remodels. Now, we're in the early stages, so we will be sharing more at the end of Q2 probably around the statistics there, but I think it's a multifaceted pathway to full traffic recovery that we're embarking on as we speak.
spk03: Our next question comes from Bobby Griffin from Raymond James.
spk07: Good morning, everybody. Thank you for taking my questions. Mark, I just want to maybe circle back on the composition of the comps a little bit and understanding it's still blurred between digital and stores. But if you look at it on just a transaction basis, you know, where transactions include store and digital components, And then can you maybe give some color on transactions versus tickets and what's the bigger driver there versus FY19?
spk12: Yeah, good morning, Bobby. We're actually seeing transaction and value growth in both areas. And again, it is definitely buoyed by digital. We're seeing that the store trips per year are now stable against 2019 statistics. And what we are seeing is a change in behavior that when customers shop, they shop bigger and less frequently, although that's relatively stable for us. So I think people come in, they're building a basket, and they're going out the door. We're seeing a change in that. We're going to continue to monitor that early on because we're seeing the own brand penetration and the price value equation really resonating with customers, which is helping build the basket. But it's early on and we want to continue to monitor that through the year.
spk03: Our next question.
spk11: What I would add to that real quick is that we see a larger proportion of our customers being Omni. And as Mark said in the remarks, the frequency of their purchase is more frequent and their tickets is larger. So that's where we feel that our digital first Omni always strategy is really, really, really driving out this
spk03: And our next question comes from Zach Satan from Wells Fargo.
spk15: Hi, this is David Lance. I'm for Zach. Thanks for taking our questions. Just two questions for you. Could you provide some color on the state of the coupon and how its usage is trending? And then second, the 34.9% Q1 gross margin is 40 basis points above 1Q19 levels. And so I was wondering if you could help us bridge the gap there.
spk12: Yeah, I'll take the first part and Gustavo can pick up on the second part for you, David. I think in terms of coupon, we continue to see that this is a major part of our business and something we celebrate, but we are using more strategically and surgically. So what we're seeing is that the allocation and redemption are slightly down as per our plan. And that is mostly to do with store-based traffic changes, but also to how we've managed that and balanced that against great everyday prices. So it's definitely resonating with customers, and we are seeing then a growth in our Beyond Plus membership, which slightly offsets that. Gustavo, a gross margin breach?
spk11: Yeah, David, I'd say two things about our gross margin versus 2019. It is above 2019. by about 50 basis points, we feel good about that because that expansion is, in spite of having two times the digital mix penetration, and also in spite of the significant shipping cost increases that we have seen over this period, which we will start lapping in Q3 or Q4.
spk03: Our next question comes from John Manadesky from Jefferies.
spk09: Hey, good morning, guys. Thanks for taking my questions. First one was just on the remodels. Looks like the 26 recent ones are exceeding internal sales estimates. You're going to be doing over 100 more for the remainder of the year. So is your updated annual sales guide contingent on those initial expectations for remodeled store productivity? And if so, Is that fair to assume maybe some bias above the midpoint of your updated sales range if the next several dozen remodeled stores do as well as the initial ones? That's my first question. Thanks.
spk12: Yeah, thanks, John. Look, I think you're absolutely right. What we're seeing with the plan for the stores is that we actually plan for a disruption ratio. we're actually performing better than that. As we open in four, eight, 12-week sequences, we're seeing that the sales, gross margin, no-brand penetration, and trips and transactions are all above our estimates. Now, that's important to note because our original remodel plans had a very healthy ROIC. And so we're exceeding that base both from the sales but therefore then the return on invested capital level. Our current plans for the full year with only 26 of these completed are does not include a revision of our original estimates on the upside of what these remodels will be going in. Really looking for ongoing proof of concept and consistent deliverables to share and to change that trajectory. But we're very hopeful that we've got some positive undercurrents that we can utilize through the year but not reflected in current plans.
spk09: Quick follow-up on Omnichannel. I think you're expanding the same-day delivery capabilities with DoorDash. Curious if you've had a chance to take a look at kind of the customer utilizing these services, you know, whether it skews more towards newer existing customers. And obviously it may be early, but is there any discernible trend you can see so far in terms of after a customer is engaged with your brand through this vehicle, you know, anything interesting to call out? Thanks so much.
spk12: Yeah, I mean, we're tracking not only the upside potential of what the introduction of Bopus originally meant to our business, which is creating more stickiness with our customer. And that definitely has brought new customers in, but it's a feature that's being used by existing customers. Both in our agreement with Shipt and DoorDash, our goal is to get, you know, goods to our customer faster and create more joy there, that's actually happening, and that's happening with new customers as well as existing. And I think people are being really, really excited about the ease and convenience of shopping Bed, Bath & Beyond compared to years gone by. Early indications is that customer is becoming sticky. We're looking at the age profile of that. More to follow. We want to collect more data on it. But we are seeing repeat purchases and repeat engagement as people become really happy with what that service delivers. And staying tuned because we're going to be sharing more on how we're going to be expanding that kind of delivery timeframe as well as that proximity. That's a constant focus for us in that last mile.
spk03: Our next question comes from Jenna Giannelli from Goldman Sachs.
spk05: Hi, thanks for taking my question. First one is just, on marketing investment given the better top line gross margin you took it up marketing in the first quarter is that something that we can extrapolate is true for the balance of the year I guess I'm just curious on the underlying guidance raise granted it's up but does it also include increased marketing investment than originally planned for the rest of the year thanks yeah it does include that for the rest of the year although what I would
spk12: outlined generally is that in q1 we did have some exceptional circumstances holistic investment in our brand launches that will continue through more into q2 and then we'll see in half to that really balancing down more of a maintenance perspective so some incremental investment we had our customer value proposition and a clear state of intent through our marketing campaign home happier that we wanted to resonate with the customers And so there's some in-the-quarter moments there that will show some sustainable investment which is factored into our future growth. And then there's some kind of more seasonal or quarter-based activity that will dissipate over the year.
spk03: Our next question comes from Christina Hernandez from Kelsey Advisory.
spk17: Hi, good morning. I wanted to ask on the private labels. Can you share, I guess, your early learning so far, which of the brands you've launched have had more impact and what categories? And then also from a customer perspective, what is the feedback you're getting as far as like pricing or the aesthetic of these new private label brands versus the national brands they replaced?
spk12: Yeah, thanks so much, Christine. Look, I mean, I would go straight to the consumer piece in saying that what we're seeing is the customer online is providing reviews that are incredibly high. There's a great deal of satisfaction and excitement from the customer about quality, value, aesthetic, and that average rating actually exceeds our average digital rating across the board, so we're very happy with that in each of the brands. I think in real powerhouses, what we're seeing very early on is out of the three that we launched in the quarter, there was two kind of bigger brands inside the mix. One was Nestwell because it covers multiple categories in bed and bath, and also two, Simply Essential being a completely incremental business for us, which is opening price points. But all three brands have done very well. I think Nestwell is probably the original standout because it is... featuring in our top 10 brands of sales per day exceptionally highly and often is in the number one and two slots. So the adoption from the customer has been very, very strong and great repeat purchasing and word of mouth. The visual presentation in store, the storytelling online, we're getting really good feedback on all that. People are feeling very engaged and understanding what these brands are and that the value is very crisp and very clear and in both how we've articulated and how they can value that against the competition. So all greatness so far and really excited about how these brands will play in this back-to-college period, particularly simply essential when we think we'll have more of a shining moment in back-to-college, even more so than its May launch.
spk03: We have time for one more question. That question comes from Seth Bastion from Wedbush Securities.
spk06: Thanks a lot, and good morning. My question is first on the destination categories. Most of them performed quite well, but why did bath and indoor decor lag versus 2019?
spk12: Yeah, I think for us, Seth, the issue was that we probably had one of the largest product changes inside of this as we exited a lot of product. It was within our plan, and so we see this as a quarterly anomaly. as we look to regain share, that we exited a number of brands which were very dominant in the assortment prior to remix within as well and Haven with other brands coming through the year. So it was the category that we knew were going to take the biggest hit with exit. So AUR was slightly off because we had marked down product in there and higher mix. We think that that is not representative of subsequent quarters. So that's more of a transformation and adjustment category than others. Got it.
spk06: And related to when it comes to the... I'm sorry, go ahead.
spk12: No, so in an indoor decor, similarly, we saw some real boom in the indoor decor area, and we see further opportunity there. A lot of our investments in that space are really focused on the second half of 2021, so stay tuned. Got it.
spk06: And relatedly, when it comes to the markdowns, last quarter year, delta between adjusted reported gross margin was 130 basis points. This quarter was 250 basis points. How should we be thinking about that delta for the subsequent quarters this fiscal year?
spk11: We see this as a transition, and it should start coming down as we move into Q2 and Q3.
spk06: The heaviest part is now in Q1. Fair enough. And by next fiscal year, should we be clean with no adjustments?
spk11: No adjustment related to markdowns. There might be some related to, but minor, related to supply chain or that sort of restructuring. Well, clearly, fiscal 21 is the major year of restructuring.
spk06: Thank you.
spk03: I will now turn the call over to Suzy Kim for final remarks.
spk02: Thank you for participating on our call today. Should you have any further questions, please contact us at iribedbath.com. Have a wonderful day.
spk03: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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