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Bed Bath & Beyond Blames Freight Woes, Internal Missteps for Q2 Stumble

Bed Bath & Beyond revealed during its most recent earnings call that it experienced a 1 percent comp decline, with total net sales at $1.985 billion for the second quarter. The news came in the wake of a choppy quarter for the home retailer, one affected by Covid-19 surges, increased freight costs, and internal missteps for the company.

“In August, the final and largest sales month of Q2, traffic unexpectedly slowed and therefore sales did not materialize as we had anticipated,” said Mark Tritton, CEO at the home goods retailer. “External disruptive forces such as the resurgence of Covid-19 cases, and growing Delta fears, creates a challenging and volatile environment. This is particularly evident in large Southern states such as Florida and Texas, as well as California, which in aggregate represent approximately 30 percent of our total sales.”

Tritton admitted another hindrance to store traffic was the company’s decision to reduce its spend on printed circulars and coupons—a major component of the store’s marketing for many years.

“There were opportunities where we should have been more effective in allocating marketing resources to stimulate and support traffic in stores and online,” Tritton said. “In an effort to diversify and shift our customer engagement towards online and social media channels, we overcorrected too far from the core fundamental, historical and current traffic drivers.”

Rising freight costs also hit Bed Bath & Beyond hard this quarter, affecting margins.

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“For example, we had anticipated container rates to increase more than 100 percent relative to last year,” said Gustavo Arnal, CFO, Bed Bath & Beyond. “Yet we ultimately incurred rates 150 percent higher as we acted with agility to ensure supply availability. Increases like these unfortunately offset 170 basis points of positive merchandise margin expansion, particularly fueled by own brand penetration.”

Own brand penetration proved a bright spot for the company, with the launch of six in-house brands this year and two more to come in October and November. The company has already exceeded its fiscal 2021 brand penetration goal, hitting more than 20 percent of overall sales.

“Penetration is even higher in our new store remodels,” Tritton said. “These new higher-margin own brands are driving differentiation for Bed Bath & Beyond.”

Tritton pointed to the company’s store remodels, including the relaunch of its New York City flagship that boasts a Casper shop-in-shop experience, as an important driver for traffic.

“We currently have approximately 70 stores remodeled out of our plan 130 to 150 and they are performing above plan,” Tritton said. “The July reopening of our reimagined New York City flagship store in Chelsea was a celebratory milestone for us on our transformational journey.”

With September performance not showing significant improvement over the second quarter, Arnal said the company expects comparably flat sales for the third quarter, and has adjusted expectations for the year.

“We now expect net sales in the range of $8.1 million to $8.3 billion based on comp sales growth of flat to slightly positive for the second through fourth quarter,” he said. “For modeling purposes, this translates to a double-digit full fiscal year comp. Adjusted gross margin for the year is now expected to be in a range of 34 percent to 35 percent compared to our previous expectation of approximately 35 percent.”

Bed Bath & Beyond generated $75 million in operating cash flow during the quarter, driven by working capital improvement. The company invested approximately $76 million of capital in areas such as store remodels, supply chain and IT system, which led to a neutral free cash flow position. The retailer’s cash and investment balance stands at $1.1 billion, and it improved terms and increased its asset base revolving credit facility to $1 billion in August, bringing total liquidity to $2 billion.

Net Sales: Total net sales were $1.985 billion and represented a small comp sales decline of 1 percent. Core banners were down 11 percent, which included a 10 percent impact from the company’s ongoing fleet optimization program. The digital channel represented 34 percent of total net sales.

Store comps delivered growth of 3 percent giving solid performance in June, but lower in subsequent months due to slower traffic as the quarter progress. In the Bed Bath & Beyond banner, comparable sales decreased 4 percent versus last year, while back-to-college performance of 12 percent growth was solid.

The BuyBuy Baby banner delivered comparable sales growth in the high teens percentage versus last year, exceeding expectations. Adjusted gross margin was 34 percent, 190 basis points lower than last year. This was driven by 360 basis point drag from increased freight costs compared to last year, given the unprecedented supply chain challenges, particularly in July and August. This impact far exceeded the significant 240 basis points increase the company had built into their plan.

CEO’s Take: Tritton admitted the quarter fell short of goals, but he doesn’t see the results as indicative of a longterm problem.

“One quarter does not define or derail a multiyear strategic plan,” he said. “The steps we are taking will get us back on track to achieve our near- and medium-term goal. As always, with turnaround, our paths will be dynamic, but we’re confident and committed to our 3-year goals and beyond.”