Bed Bath & Beyond, Inc.

Welcome to the Bed Bath & Beyond Fiscal 2021 Third Quarter Earnings Conference Call. My name is John. I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you do have a question, press star then 1 on your touchtone phone. Please note the conference is being recorded. And now I'll turn the call over to Suzy Kim.

Thank you, and good morning, everyone. Welcome to our Fiscal 2021 Third Quarter Earnings Call. Joining us today are Mark Tritton, our president and CEO, and Gustavo Arnal, our chief financial officer. Before we begin, let me remind you that our fiscal 2021 third quarter earnings release and slide presentation can be found in the investor relations section of our website at bedbathandbeyond.com and as exhibits to our related form 80K. 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 cause actual results to differ materially from what we say during the call today. Please refer to our most recent periodic SEC filings for more detail on these risks and uncertainties, including the risk factors section in our annual report on Form 10-K and our quarterly reports on Form 10-Q. The company undertakes no obligation to update or revise any forward-looking statements. Additionally, the information we will discuss today contains certain financial measures that exclude amounts or are subject to adjustments that have the effect of excluding amounts that are included in the most directly comparable measure prepared in accordance with general accepted accounting principles. For a reconciliation to the most comparable measures presented in accordance with GAP, please refer to the table in our earnings release available on our website and included as an exhibit to our Form 8-K filed today. It is now my pleasure to turn the call over to Mark.

Thank you, Susie, and good morning, everyone. We hope you had a safe and healthy holiday season during these turbulent times. During this first year of our comprehensive transformation, Our most recent results demonstrate the complexities of executing a long-term end-to-end turnaround plan while managing a business in a highly unpredictable current short-term environment. Unprecedented macro forces continue to permeate operating conditions, leading to a near-term versus long-term bifurcation in our performance. While we effectively offset higher freight costs that have been at the core of global supply chain pressures, Increasing inventory disruptions impacted our ability to meet demand during the holiday season. These conditions led to sales that demonstrated near-term volatility despite progress on our multi-year transformation. We continued to execute our long-term strategic initiatives to modernize our infrastructure and enhance our agility in any future operating environment. More specifically, during the third quarter, our revenue momentum was below our expectations with net sales of $1.9 billion and a 7% comp decline. As shared with you previously, we experienced a slower start to sales in September and October. In preparation for the holiday season and against the backdrop of the challenging supply chain environment, we fortified our plans to secure the right breadth and depth of product. Overall, our inventory position remained healthier with greater relevancy compared to last year, and in November, we drove improvement and arrested comp declines. Unfortunately, despite strong customer demand, operational challenges such as vendor constraints, locked inventory once in our possession, and a currently ill-equipped legacy infrastructure impacted our ability to drive further improvement in sales trends. Issues in receipt flow and on-shelf availability affected our top 200 items such as kitchen appliances and personal electronics. well as our key categories such as bed and bath the customer experience was compromised as strong demand wasn't met with strong product availability this resulted in approximately a hundred million dollars in lost sales versus demand or a mid single digit impact of the quarter and an even higher impact on December operational issues were not limited to our inventory We also took steps during the quarter to rebalance our marketing resources and correct the disproportionate reduction of our printed circulars, which are a key traffic driver for our business. As context, a disproportionate amount of our sales are generated from our circular at stores and are a key trip driver. While we were able to activate additional plans for distribution in October, paper supply and labor issues with print vendors impeded our ability to reach full-scale circulation. Timely delivery of these circulars by a vendor was also an issue that prevented a return to historical levels of circular distribution and further impacted our ability to drive traffic and generate sales. Yet amidst somewhat normalized conditions, we converted traffic and met demand successfully, both in-store and online. For example, we delivered a high single-digit sales comp in the U.S. over the Black Friday to side of the Monday period underscoring Bed Bath & Beyond as a top destination for customers. We're also pleased to see customers return to brick-and-mortar shopping this year as our U.S. stores delivered mid-single-digit sales comps over this five-day holiday period. During the quarter, we delivered gross margin of 35.9%, well above our plans despite sharp increases in inflation and pervasive freight and supply chain cost pressures. stemming from our experience last quarter. Once we diagnosed the freight cost pressures that impacted the ThinkQ2, we swiftly implemented pricing actions, promotional optimization, and product mix plans to achieve margin recovery. We were surgical in our approach on a skew-by-skew basis to also ensure we remained competitive with the market and still remain so. We also optimized our promotional activity increasing our regular price penetration throughout the quarter versus last year, despite the highly competitive retail month of November. As evidenced by our higher gross margin performance, we have an arsenal of pre-planned promotions that we can now use strategically to drive engagement with our customers profitably. Coupon exclusions, less clearance discounts, and event-driven coupons during peak shopping periods are just some of the examples of how we can diversify our value message without being more promotional in totality. These decisive actions and strategies lead to an adjusted gross margin rate not only exceeding expectations significantly, but above our 2020 and 2019 levels. As you know, this is a key financial barometer of our three-year transformation strategy. Our own brands continue to produce high merchandise margins at increased penetration rates. Despite the supply chain related inventory environment, we launched the final two of our eight total planned own brands for fiscal 2021. Studio 3B and H for Happy enables our customers to home happier with options for modern and contemporary key items to assist with everyday moments of their seasonal celebratory needs. In accordance with our long-term strategy, all our own brands help to create lifelong memories and are a key cornerstone of our three-year profit algorithm. We are pleased to see progress continue quarter after quarter in just the first year of launching this key initiative. Our progress is even more evident in our newly remodeled stores. They are growing faster than the chain with own brands penetration and, accordingly, overall product margin range higher as well. Just as we delivered on gross margin during the quarter, our holistic focus is on elevating our top and bottom line performance as we continue to transform. In the near term, we anticipate conditions to remain complex and we are defining solutions to navigate each quarter. We're implementing plans that will enable sales acceleration over the near and medium term and we will constantly leverage marketing to assist us in strengthening and driving traffic further. Our number one priority is to continue to change our current systems and processes to unlock inventory in a faster and more efficient way to meet demand, above and beyond our mid- to long-term investments. To improve our top in-stock positions, we are working with our vendors to target constrained inventory and improve flow to both DCs and stores. Concurrently, we must enhance our ability to fulfill our store demand once inventory is within our possession, from shipping containers to warehouses to stores. In the near term, we've created new transfer processes that increase third-party logistics capacity and decrease warehouse holds to assist with flow. We're also adding digital supply chain capabilities to automatically shift inventory sources between our owned vendor direct and marketplace availability. Our legacy infrastructure undermined our response times to offset the holiday inventory impediments as visibility was limited ahead of our planned supply chain efforts. To create a more nimble operating model, enablement through better tools and processes are the basis of our ongoing supply chain and technology transformation. This reformation will help us mitigate misalignments in supply and demand and prevent interruptions to our plans in the future. We believe these work streams will add the necessary reinforcements to alleviate constraints in fiscal 22 and beyond. Given our largely seasonless and therefore resilient inventory, the short-term disruptions we're experiencing will therefore normalize as supply chain imbalances eventually improve with our enhanced plan. As always, we will monitor broader category demand and our market share to inform our operational plans. We continue to track developments in the bed, bath and kitchen categories as a subset of the broader home segment that relates most to our business. Recently, we've seen two trends persist. First, overall market growth continues to normalize in the post-COVID environment compared to the high demand environment last year. Secondly, despite the total market decrease in nesting dynamics from 2020, NPD data in the bed, bath, and kitchen categories still show our market share is sequentially stable. We're narrowing the gap in declines versus prior year, and in fiscal 2022, we expect our market share to stabilize further given the conclusion of our store fleet optimization initiative. Furthermore, our customer acquisition strategy for the bed-bath banner gained traction during the quarter as evidenced by our BeyondPlus loyalty programs. We grew from 1.8 to 2.2 million members after one of our largest new subscriber events in November, leading to one of our most successful membership acquisition quarters of Beyond Plus in years. We will leverage this momentum throughout 2022 as we support plans for a new loyalty program later this year. Spanning all our banners, our new program will be designed to reestablish us as the preferred channels for our customers' home and baby needs while building authority, trust, and long-term value across our ecosystem of banners. Another key highlight for the quarter was the continued improvement and overall growth of our Bye Bye Baby banner. Baby continues to deliver double-digit growth with additional benefits to the total group, as more than 65% of our new digital universal cart capabilities are seen cross-shopping between Bed Bath & Baby as well as Harman. As a result of our targeted efforts to improve this business since last year, we are on track to achieve approximately $1.3 billion in sales ahead of our investor-day goal, all while improving profitability and market share. We achieved these results even before the initial strategic transformation of this business, which is planned to begin in the new fiscal year. We now intend to expand own brands to baby in 2022 as we look at margin optimization strategies, given sales results in the businesses that have now stabilized. Of course, we will continue to drive baby sales through exciting new partnership opportunities that combine the power of the Bed, Bath & Beyond and buy-buy baby offerings. For example, baby is an important cornerstone of our recently announced Kroger partnership, as well as our own digital marketplace. Finally, as you saw in today's announcement, we are always committed to managing our business responsibly and responsibly. We are extending our SG&A expense optimization measures of approximately $100 million annualized for the next year that will explore areas such as further store fleet optimization, fixed costs, and discretionary savings opportunities. We will ensure an appropriate expense to sales ratio that reflects our current business while not at the expense of our long-term initiatives. During this first year of our three-year transformation, there has been no shortage of activity. From our new omnichannel and merchandising initiatives to the reformation of our supply chain and technology, we are paving a path towards greater profitability and growth for the future. We are focused on plans to deliver gross margin expansion with sales stabilisation and growth, through both immediate action plans and our unwavering execution of the transformational initiatives we outlined at our Investor Day. Now, on to Gustavo Arnal, our Chief Financial Officer, who will review our third quarter financial results and our outlook for the next quarter and full year. Gustavo?