Bed Bath & Beyond Inc (BBBY) 2016 Q1 法說會逐字稿

Welcome to Bed Bath & Beyond's first-quarter fiscal 2016 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 beginning on Wednesday, June 22, at 7:30 PM Eastern time through 7:30 PM Eastern time on Friday, June 24, 2016.

(Operator Instructions)

At this time, I would like to turn the call over to Janet Barth, Vice President of Investor Relations.

Please go ahead.

Thank you, Adrienne.

Good afternoon, everyone.

Joining me on our call today are Steven Temares, Bed Bath & Beyond's Chief Executive Officer and member of the Board of Directors, Gene Castagna, Chief Operating Officer, and Sue Lattmann, Chief Financial Officer and Treasurer.

Before we begin I'd like to remind you that this conference call may contain forward-looking statements, including statements about or references to 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.

The Company undertakes no obligation to update or revise any forward-looking statements as events or circumstances may change after this call.

Our earnings press release dated June 22, 2016 can be found in the Investor Relations section of our website at www.BedBath&Beyond.com.

Here are some highlights from our financial results.

First-quarter net earnings per diluted share were $0.80.

Net sales for the quarter were approximately $2.7 billion, flat to the prior-year quarter.

Quarterly comparable sales decreased approximately 50 basis points.

In addition, our Board of Directors today declared a quarterly dividend of $0.125 per share to be paid on October 18, 2016 to shareholders of record as of September 16, 2016.

As a reminder, our first-ever dividend was declared on April 6 and will be payable on July 19 to shareholders of record as of June 17.

Fiscal 2016 net earnings per diluted share are expected to be within the range we previously described in our year end press release and conference call.

I will now turn the call over to Steve for his perspective on the first quarter and some operational highlights related to our strategic initiatives.

In addition, he will share his thoughts regarding our recent purchase of One Kings Lane, an authority in home decor and design that offers a unique collection of select home goods, designer and vintage items.

This transaction was announced on June 14.

Later in the call Sue will discuss our first-quarter financial results in more detail and provide an update on our key modeling assumptions for fiscal 2016.

After our prepared remarks we will allow approximately 20 to 25 minutes for questions.

I will now turn the call over to Steve.

Thank you, Janet.

Good afternoon, everyone.

Our first-quarter results were in line with the directional information we provided back in April on our year end earnings call.

During the first quarter we made steady progress on our strategic initiatives, which include significant investments in our business to further strengthen our foundation for future growth.

At the same time we remain vigilant in our mission to do more for and with our customers wherever and whenever and however they wish to interact with us; to provide our customers a seamless experience whether they interact with us in the store, through one of our contact centers, on a desktop, tablet, smartphone or through social media; and to be viewed as the expert for the home, including the accompanying lifestages that make a house a home - such as getting married, having a baby, transitioning to college and moving to a new residence - so as to become the destination for our customers' needs and wants as they express their life interesst and travel through their lifestages, all through the expanding and differentiating products, solutions and services we offer.

On our last call I reviewed the transformation that has taken place in our Company over the past several years.

Today I will provide a brief update on some of the notable developments since our call in April.

In our digital channels, the first of several upgrades planned for fiscal 2016 occurred earlier this month and included refinements to the user experience.

As consumers' shopping preferences evolve we remain focused on providing a consistently better and more personalized omni-channel experience.

We have made further improvements to both our online wedding and baby registry experiences to simplify the creation and management of these registries.

Our mobile websites for these concepts have also been enhanced to improve usability, with refinements to the product list stages, product detail pages and check out.

Earlier this month we also relaunched our Bed Bath & Beyond and buybuy BABY mobile apps with enhancements related to registry, navigation and product search.

From a merchandising perspective and in keeping with our objective to be viewed as the expert for the home, we debuted our new online series of curated and inspirational collections called Look Love on the Bed Bath & Beyond website during the first quarter.

The initial collections include five different lifestyle trends for the home.

These collections serve as look books that engage and inspire customers through the lens of a specific lifestyle trend.

We plan to continually refresh and launch new look books in the future to help our customers find what they need for their home and to make it uniquely theirs.

This merchandising initiative has been supported by targeted marketing communications to introduce and build awareness for these new collections.

With regard to marketing, we continue to leverage our ever-expanding 360-degree view of our customer, which enables us to tailor our targeting techniques and enhance our personalization capabilities of both digitally and through traditional marketing media.

For example, as we further utilize our predictive modeling tools, we are able to achieve improved optimization of our direct mail and print campaigns.

Such as, with our recent outdoor living catalog that was published during the first quarter and promoted directly to customers who modeled to have a propensity to purchase outdoor furniture and accessories.

The virtual version of this catalog is also available online.

We applied the learnings from last year's catalog and developed an improved campaign that included a significantly larger distribution group.

Early results of this campaign have been positive and our analytical models improve with each iteration.

As part of our continued investment in life stage marketing, later this month we will be launching a targeted print campaign for our first Student Life college catalog.

As we learn more about our customers and how they prefer to interact with us, we will be able to further optimize our marketing strategies and provide more personalized, timely and relevant information to them.

Another highlight of the first quarter was the exclusive launch of Ellen DeGeneres' new ED Ellen DeGeneres line of bedding in Bed Bath & Beyond stores and online.

This beautifully designed, high-quality bedding collection is reflective of Ellen's personal style and design aesthetic.

We look forward to growing our partnership with Ellen as she looks to bring her vision for home and home-related merchandise to market.

Another exciting introduction during the quarter was the grand opening of our newest andThat!

store in Kennesaw, Georgia.

This store has a great look and feel.

As I described on our last call, we designed the store to have local appeal with an ever-changing mix of differentiated merchandise and opportunistic purchases, spanning categories such as home decor, seasonal, food, wine and beer, entertaining essentials and guests, all at a great value.

Early reviews have been outstanding.

For those for whom it makes sense, we would love for you to visit the store and give us your feedback.

During the quarter we opened four stores including the Kennesaw andThat!

and we closed one.

We also relocated several stores during the quarter, including our Bed Bath & Beyond store in Hyannis, Massachusetts that opened in its new location in March.

As we evolve our stores we look to integrate additional physical and digital capabilities to create a more experiential shopping environment and showcase the products, services and solutions we offer.

In Hyannis, we have launched our Scan For More digital tool, which enables customers to see customer reviews on specific products as well as product images and pricing information.

And our Interactive Catalogs, which enable customers to view a curated assortment of products in categories such as seasonal furniture and bed and bath.

Later this month we will be adding our Digital Product Advisor tool to assist customers in finding what they are looking for based on responses to questions that will filter the assortment to products that best fit their needs.

If you ever get the chance we'd also love for you to visit the store in Hyannis and give us your thoughts.

Additionally, our development of a unique shopping venue in the Liberty View Industrial Park in Brooklyn continues, which will include four of our concepts.

We currently project to open Liberty View early this fall.

We remain excited about the opportunity to provide our customers with an even more experiential shopping environment through the integration of our ever-increasing and evolving merchandise assortment, and are expanding and improving omni-channel capabilities.

As we have described previously, customers will be able to experience product demonstrations and how-to sessions, food sampling and cooking classes as well as utilize our latest digital tools to assist them in finding the right merchandise for their home.

To close out my quarterly update on our operations, I would like to note that we remain on track to begin piloting our new point-of-sale system in our stores this year, as well as to open a new 800,000-square-foot distribution facility in Lewisville, Texas.

As a reminder, this new facility will allow for fulfilling online orders for all concepts and continue to improve our delivery capabilities.

As Janet mentioned, our purchase of One Kings Lane occurred last week after the close of our first quarter.

I'd like to give a warm welcome to our newest associates.

As an authority on home decor and design, One Kings Lane works directly with home furnishing brands, vintage dealers, designers and tastemakers to offer a curated merchandise assortment.

Additionally, they deliver design inspiration and expert style advice; with studios in San Francisco and New York they also provide complementary interior design services.

The One Kings Lane mission is to help make your home an expression of your personal style through access to a curated assortment, inspiration that fuels your passion and help putting it together.

We have followed One Kings Lane and love the site since its inception, and we are thrilled for the opportunity to provide the team with additional support and exposure to promote and grow the brand.

At the same time, One Kings Lane will serve as a cornerstone for Bed Bath & Beyond's growing offerings in furniture and home decor and, together, we will be able to do even more for and with our collective customers wherever, whenever and however they wish to interact with us and to further our mission to be viewed as the experts for the home.

Over time, we believe this relationship will provide us an opportunity to enhance our gift registry services as well as increase the overall experiential environment of the services and solutions we offer through that design services and studio locations.

We're delighted to be able to partner with such a dedicated and talented group of people.

In addition to providing value to our shareholders through share repurchase and dividends, our strong operations allow us to continue to invest in our infrastructure and maintain our flexibility to take advantage of opportunities, such as One Kings Lane, as they may arise.

As we have consistently said, we believe we're making the right investments to position our Company for long-term success.

Over the past several years we have been transforming our Company and have created an incredible foundation for future growth.

We are excited about the opportunities to do more for and with our customers and to strengthen our business as a world-class omni-channel retailer.

As always, I want to thank our dedicated associates for their ongoing efforts to satisfy our customers and improve our competitive position in the categories in which we do business.

I will now turn the call over to Sue to review our quarterly financial results and provide an update on our modeling assumptions fiscal 2016.

Sue?

Thanks, Steve.

I'll start with a review of our first-quarter results.

As we stated during our last earnings call in April, we anticipated that the contribution of this year's first-quarter net earnings per diluted share to the full year would be somewhat lighter than in previous years, due in part to holiday shifts and advertising changes.

Our actual first-quarter results were in line with this directional information and included a marginal impact from the shift of Memorial Day from first quarter into second quarter this year.

As you probably know, the first quarter typically accounts for the smallest portion of our annual net sales and earnings, so any fixed cost as a percentage of net sales are relatively more pronounced in the first quarter than they would be in any of the other quarters.

Also, as we said in last week's press release, the purchase of One Kings Lane had no effect on our first-quarter results, as the transaction occurred after the end of the first quarter.

Net sales for the quarter were approximately $2.7 billion, flat with the first quarter of last year, due to an increase in net sales from new stores offset by a decrease in comp sales.

Comp sales for the quarter decreased by approximately 50 basis points, attributable to a decrease in the number of transactions partially offset by an increase in the average transaction amounts.

Comp sales from our customer facing digital channels continue to grow in excess of 20%, while comp sales from our stores declined in the low single digit percentage range.

Gross margin for the first quarter was approximately 37.4% as compared to approximately 38.1% of net sales in the first quarter of last year.

The decrease was primarily due to, in order of magnitude, a decrease in merchandise margin and an increase in coupon expense as a result of increases in both redemptions and average coupon amount.

Also contributing to a lesser extent was an increase in net direct to customer shipping expense.

SG&A for the first quarter was approximately 29.6% of net sales as compared to approximately 28.1% of net sales in the prior-year period.

This increase in SG&A as a percentage of net sales was due to, in order of magnitude, an increase in payroll and payroll-related expenses and an increase in technology-related expenses including depreciation.

Also contributing to a lesser extent was an increase in advertising expenses, due in part to the growth in digital advertising.

Net interest for the quarter was approximately $16.3 million and related primarily to interest from our debt.

Our income tax rate for the quarter was approximately 37.7% compared to approximately 37.5% in the prior-year period.

The first-quarter provision included net after tax benefits of approximately $500,000 this year and approximately $1.5 million last year due to distinct tax events occurring during the quarters.

Considering all of this activity, net earnings per diluted share were $0.80 for the quarter.

Moving on to the balance sheet, we ended the first quarter with approximately $645 million in cash and cash equivalents and investment securities.

Retail inventories were approximately $2.9 billion at cost, an increase of approximately 2.3% compared to the end of the prior-year period, due in part to the growth in the inventory in our distribution facilities for direct to customer shipments.

Retail inventories continue to be tailored to meet the anticipated demand of our customers and are in good condition.

Capital expenditures for the first three months of fiscal 2016 were approximately $89 million and included the following -- enhancements to our digital, web and mobile capabilities, ongoing investments in data analytics, expenditures for the continued development and deployment of new systems and equipment in our stores, including our new POS system, spending related to the opening of our new distribution facility in Louisville, Texas, and investments in new stores, store relocations and store refurbishments.

During the quarter we repurchased approximately $178 million of our stock, representing about 3.8 million shares, under our current $2.5 billion share repurchase program.

This authorization had a remaining balance of approximately $2.1 billion at the end of the first quarter.

In addition, our Board of Directors today declared a quarterly cash dividend of $0.125 per share to be paid on October 18 to shareholders of record as of September 16.

As a reminder, our first ever dividend was declared on April 6 and will be payable on July 19 to shareholders of record as of June 17.

Now I would like to review our updated assumptions for fiscal 2016, which include our actual first-quarter results, recent trends in the business and our purchase of One Kings Lane, which we announced on June 14.

We are modeling comp sales to be in the range of relatively flat to a 1% increase for fiscal 2016 with net sales about 170 basis points higher than comp.

Just as a reminder, One Kings Lane will be excluded from our comp sales calculations until after the anniversary of the purchase.

We are modeling gross margin deleverage including increases in coupon expense and net direct to customer shipping expense as we evaluate our free shipping threshold.

We continue to expect the 2016 deleverage to be less than that of 2015.

We are modeling SG&A deleverage as a percentage of net sales, primarily as a result of the following items.

One, additional payroll startup costs associated with the opening of our Lewisville, Texas distribution facility; two, an increase in our investments in compensation and benefits to preserve our ability to attract and retain the best associates in response to wage increases impacting the broader work force, including in the retail sector; three, store payroll hours comparable to the prior year to support servicing our customers in connection with omni-channel activities such as online appointment scheduling, Beyond Store orders, items reserved online and picked up in company store, items returned to stores from online purchases and fulfillment from our stores.

And four, further investments in technology and in our digital, web and mobile capabilities, which will result in an increase in our technology-related expenses, including depreciation.

We estimate depreciation expenses of approximately $290 million for the year.

Annual interest expense is estimated to be between $75 million and $80 million.

We estimate our full-year tax rate to be in the mid- to high 30s percentage range, with continued quarterly tax rate variability as distinct tax events occur.

We anticipate less favorable distinct tax dollars in 2016 as compared to 2015.

We remain on track to open approximately 30 new stores across all new concepts and close about 15 stores.

Most of our store openings are planned in new markets for our various concepts.

Capital expenditures in 2016 are planned to be in the range of approximately $400 million to $425 million, which remains subject to the timing and composition projects.

As we previously said we anticipate our current period of heavy CapEx investment to reach a peak in fiscal 2016.

We believe that the level of capital investment required over the next few years should start to come down off of this spending level.

Our technology-related projects represent a significant portion of our planned CapEx and includes enhancements to our digital web and mobile capabilities, ongoing investment in data analytics and the continued development and deployment of new systems and equipment in our stores, including our new POS system.

In addition to technology-related projects, the CapEx estimate also includes an estimate for the opening of our new distribution facility in Lewisville, Texas, and new stores, store relocations and store refurbishments.

We plan to repurchase shares under our current $2.5 billion authorization.

We continue to anticipate the completion of this program to occur in the latter half of fiscal 2019 or fiscal 2020.

Of course, the completion will continue to be influenced by several factors, including business and market conditions.

As we have described previously, our net earnings per diluted share have been in the $4.50 to just over $5 range since we entered a heavy investment phase several years ago.

Based on the planning assumptions I just discussed, which reflect our first-quarter results, current business trends and also include a slight dilution anticipated by our recent purchase of One Kings Lane, we believe our fiscal 2016 earnings net earnings per diluted share will still be comfortably within this range.

Also, as I said earlier and as we explained on our last conference call, our fiscal 2016 quarterly net earnings per diluted share were expected to have a similar pro rata percent to the total year as they have had in previous years, excluding one-time items, with the exception that we believed the percent for the first quarter would be somewhat lighter, and it was, and the fourth-quarter contribution to full-year earnings is anticipated to be somewhat stronger, due in part to holiday shifts and advertising changes.

In summary, our balance sheet and business fundamentals remain strong and we believe with the investments we are making today we are well-positioned for the future.

As we said before, this is an exciting time for our Company and we continue to manage our business for long-term growth and profitability.

Before opening the call to Q&A we plan to report our 2016 fiscal second-quarter results on Wednesday, September 21.

Janet?

Great.

Thanks, Sue.

Let's move on to the Q&A portion of the call.

(Instructions) Adrienne, we are now ready for questions.

(Operator Instructions) Simeon Gutman, Morgan Stanley.

My first question is on the guidance.

I think last quarter there was some language that -- at hitting the sales range you would be able to hit the high end of that guidance range.

And then you said if the comp is higher than 1 to 2, you can probably exceed it.

It sounds like you took down the sales range a little bit and then you used the word comfortably.

I'm trying to gauge what comfortably is, if that still means at the high-end.

And then, if so, despite the lower sales outlook, what is changing, if anything, other than maybe you built enough cushion into the outlook that enables you to still be in that range.

Thanks for the question.

Taking into consideration One Kings Lane and our current business trends as well as our actual results, we're comfortably within the range of $4.50 to just over $5.

We did change our comps for the year to be relatively flat to a 1% increase, given those actual results and our current business trends.

Okay.

My one follow-up is that if you take out the incremental investments that you called out for the first quarter, can you tell us how the core margins of the business performed relative to plan?

I'm sorry.

Incremental investments?

What do you mean by that?

So if you take out the additional investment, some of the advertising, some of the infrastructure investments and we look at how the core business performed, the margins of the business, did those perform relative to plan?

I guess we could discuss inbetween gross margin and SG&A.

I know if the investments you are talking about would affect gross margin.

So I guess you could summarize what we did for the quarter.

Sure.

What I would say is what we modeled -- the assumptions back on April 6, we can align with those assumptions for the first quarter.

We said that we would be somewhat lighter from an earnings perspective, and we were.

The primary drivers for the gross margin was a decrease in merchandise margin, increases in coupon expense and as you recall that to a the lesser expense, direct to customer shipping expense.

For the SG&A we discussed the fact that we increased payroll-related expenses, technology expenses including the depreciation and, as you mentioned, an increase to lesser extent in advertising expense.

That was due in part to the growth in our digital advertising.

Payroll and technology were called out.

We continue to expect wage pressures.

We are not immune to that.

It's affecting the broader workforce, and that's where we are.

It's Steve.

How are you?

Just in general I'm not sure if I got the gist of the question.

But basically we came in -- we were in line with what our expectations were for the quarter.

So I'm not sure if that answers your question or not.

It does, yes.

Thank you.

Seth Basham, from Wedbush.

Thanks a lot and thanks for taking my question.

Can you give us a little bit more insight into plans for One Kings Lane?

What caused you to do this acquisition and how you see it fitting into the big picture of Bed Bath & Beyond over the next few years?

Do you expect it to be synergistic in any specific ways?

That's a broad question, but I'll try to address it.

First of all, getting to know the people there -- we're blown away by how good they are and how impressive they are.

When we looked at the site and we followed the site all these years, we think that they communicate to the customer tremendously well.

And again, when we talk about doing more with our customer and being the expert for the home, again -- in so many respects they are there.

Their customer, who is passionate about the home, really goes to that site and really looks at it multiple times a day, the type of thing you at your laptop or with your iPad at the end of the night before you go to sleep and you play with it.

So they do a wonderful job.

The plan is that -- one is basically we believe there can be a very profitable model.

So as to provide those resources and support necessary to grow their business.

And as we said in the last call, we intend to really grow our furniture and home furnishings business.

And they really have the ability to serve as a cornerstone for us inn doing that.

They are giving us really immediate credibility as we grow out this business.

Again, for them, we want to give them the opportunity to even further define their point of view to really be able to create more differentiated merchandise, to really strike a chord with their customer.

And it really will be a shining star in our umbrella of brands.

And that's how we view it.

Then, you look at all the things that it could do with us.

For example, we talk about being more experiential.

You look at the design service that they provide, the studio experience that they provide their customers in California and San Fran and New York, those are things that we think could have legs also going forward and might even have applications in our stores at some point.

And then you take a look at the ability to register, in certain respects, either towards a large gift or for a gift card or for specific furniture that could be made available on a continuity basis, so what it can mean for our registry business.

So these are all ways we look at this business and it really excites us.

That's helpful.

And a follow-up -- as you start to already shift the assortment online to bigger-ticket items like mattresses and jewelry, etc., I would have thought that would help boost your online sales growth.

But we've seen some deceleration.

Can you give us some insight into why that's the case?

I might struggle with the nuances, but what is interesting when we heard Simeon's question, when we say we are comfortably versus what's [higher], there is no intention to confuse the issue.

So that's interesting.

But I guess this time we can talk about 25% and I guess we're somewhere along those lines -- we guess the language used is in excess of 20%.

But again, the first quarter is a relatively -- it's the smallest of all quarters for us.

And again, directionally nothing has changed.

Our online digital business is growing extremely well and at the same on the other side of the coin, we are seeing pressure placed upon the bricks-and-mortar aspect of our business.

The lack of foot track that we would like to see or that I think that is being experienced across the board in bricks and mortar.

Very good, thank you so much.

Brad Thomas, KeyBanc Capital Markets.

Thank you.

My question was around the pricing strategy and I was hoping you could just comment on your current analytics and systems capabilities and how able you are to track prices and adjust to the competition around you in terms of daily or hourly or real-time changes and then, more broadly, what is your pricing goal and strategy today?

Obviously you all have a price match guarantee in your stores online.

But when you try to price things online and price in your store and price shipping, what are your goals today as a company?

Our goal is to be at the right price, obviously, for our customers.

So that's what remains to be determined as we have price transparency out there.

And again, I think that we are starting to see anniversarying of that price transparency that everybody seems to be aware of the fact and more and more retailers seem to be selling at the same price.

But again, really what it comes down to, to a great extent, is being at the right price and not being involved in a price war.

And that means having differentiated products.

So, when we look at World Market and look at what One Kings Lane can do in developing differentiated product and we look at Christmas Tree and what they've done with differentiated product and our own product development group at Bed Bath & Beyond, and that differentiated product is so important to us so that it doesn't become just about the price.

But again, we can't be at a different price than other people are at, so we have to be at the right price.

And when it comes to how do we price, it's an interesting question.

It's a good question, because we have a growing group in our analytics.

We look at the pricing.

We surf the Web or whatever you call it, every day, multiple times a day or all throughout the day.

And our buyers and planners get reporting each and every day, by item, categories, by vendor.

And prices are adjusted on a daily basis.

But we are omni-channel.

So our ability -- and we are doing dynamic pricing today.

Again, it's at its infancy for us, but we are doing it.

But it's a little bit more difficult for us when it comes to items that you can find both online and in-store because we don't have the capability or the desire, really, to change prices daily in our stores.

So again, so whether the product is direct from vendor or differentiated product, it's not a concern.

We could be more aggressive, but for the product that you can find in-store and online, to the extent that it has changed online and we have to follow suit in store, it's more difficult for us to do that.

Again, being at the right price is essential to us.

Great, thank you so much, Steve.

David Magee, SunTrust.

Just a couple of questions.

One is, I'm curious about what percent of your customers that order online actually picked the product up in the store.

Is that a metric that you see potential improvement with, number one?

Sure.

That is a service that we offer, to reserve online pickup in-store.

It is growing.

It's something that we find that our customers are enjoying.

That's a growing service that we offer.

I don't think we break out the numbers separately, but it is -- since launch, it has been very popular, as Sue said, it has been growing.

And again, we are wherever, whenever and however.

So whatever it is today, it might grow tomorrow and it might shrink three years from now or three months from now.

So again, it's what we have to be, where the customer wants us to be.

And again, it depends upon what categories in which businesses we are talking about, which concepts.

Thanks, Steve.

Are you all shipping from the store?

(multiple speakers)

We do.

Yes, we have for years.

And again, it's a growing capability, we've had regional fulfillment stores but each and every store has the ability to ship from store, and we do.

If I could sneak one more in, as you increase the home decor --

You're the first one to break the rule, David.

I was wondering who that would be, so let's see who had money on David.

As you increase the home decor business, what categories might shrinking in response, in your stores?

Again, it's interesting you asked that because, for example, you don't necessarily -- home decor can grow online, it doesn't necessarily have to shrink space in stores.

What you will see in our andThat!

store in Kennesaw is that we are significantly growing our assortment of home decor and better home decor than we carried historically at the Christmas Tree Shops.

So again, so when you look at it, we are not intended to shrink the availability of our home decor or the visibility of our home decor products to our customers.

Our intention is to increase it.

Great.

Thank you, good luck.

Seth Sigman, Credit Suisse.

Just one follow-up question on the comps outlook.

I just want to make sure I have this right.

So it sounds like the first quarter was in line but you are taking comps guidance down for the year to reflect the Q1 and current trend.

So does that imply something softer in the second quarter?

If so, is there any more color you can add to what you're seeing, just to help us with that?

Sure.

We did have a 1% to 2% comp for the year.

Obviously, as we had mentioned last quarter that our first quarter would be somewhat lighter than that.

So what we've seen through our actual results as well as current business trends, we're now projecting a zero to 1%.

Okay, got it.

And then just on free shipping, we noticed a number of tests throughout the quarter including reductions in the threshold from 49 to 25 for much of the quarter and it now looks like you're running at 29%.

Can you give us a sense of how that impacted margins in the quarter and any color of what you are observing in terms of elasticity as you pulse that offer throughout the quarter?

So we continue to look at different free shipping thresholds.

We want to learn how the change affects purchasing behavior and other variables.

We want to optimize profitability.

We also have to consider what's going on in the competition.

Free shipping is important to customers and it's part of our value proposition, but ultimately the goal is to retain customers.

And as we do that, looking at optimizing profitability at the same time.

Just to clarify, is the 29% that we are seeing right now, is that the new norm or is there still testing?

Just trying to understand the embedded in the guidance.

It's not the new norm.

It's something that we're looking at for now.

And as I said earlier, we are considering to manage and look at different thresholds that we are considering.

And again, so whether Baby -- I don't know if it was Baby at $99 (multiple speakers).

So baby would be at a different number, and in different parts of the country you might see different tests going on at different times of the year.

These are all things that are part of what we are trying to learn.

So again, there's no finish line with this.

As Sue said, what other people do on customers' expectations play a significant role.

So even if we saw there was elasticity today, you might not see it down the road.

So again, this is something that I think constantly evolves.

And again, what we try to do is we are trying to build out a model that assumes the case of same-day delivery for free.

Not that we're saying that it's going to be there or is going to get there, but we've got to be anticipating that it could get there and how do we build out the most efficient model we can from a logistics standpoint to get product to our customers.

Thank you.

Appreciate you taking the questions.

Michael Lester from UBS.

Steve, how do you think about the length of time for you to execute the Company's transformation?

When do you expect gross profit dollars to stabilize?

And if it's not possible to know that, what key performance measures should shareholders use to gauge the progress of the strategic initiative?

Sure -- I'm not sure if you want to direct that to Stephen.

I thought you did.

But I'll jump in first.

The question is on gross margin -- the pressures are innate in all of retail.

We don't know, as you mentioned, when the margin pressure will stabilize.

But there's many factors that go into that.

There's price transparency, free shipping thresholds like we just discussed, merchandise margins.

But we remain and anticipate to be competitive in all of those areas.

So we're constantly evaluating each of them for optimization.

As we said earlier, for 2015 we are planning deleverage for the year, even though that's the case we are modeling that deleverage to be less than that of 2015.

So we continue to try to look at it, and as we have more details on it, we'll continue to report that out to you.

Do you want to follow up with that?

No, please, go ahead.

I was just going to say just to support what Sue was saying is that we know that our online and our digital business is growing in a healthy fashion.

We know that our gross margins still remain some of the strongest in retail, despite the declines.

We do know that we do have a competitive set, that people today can make decisions not based on short-term profitability, and they run their businesses well and they do good at servicing the customer well.

So, these are things that we have to respond to as well.

So it's hard to -- and I know everybody wants to do a model and they want to say at what point in time will the margins turn around and what is it going to look like but again, when you talk about how we are running the business, things we're investing in, is that you look at a number of years ago and the people, just a short time ago and get all the big boxes.

You had Borders Books, you had Sports Authority, and Circuit City, you had all these industry leaders who are no longer around today because (technical difficulty) retailers have struggled.

And you go back and you say, what investments to make and at what point in time, and when did they pay off.

Well, we just know that in part that we'd be so much better off with the investments we've made for where the Company is today than if we didn't make these investments.

So again, we could have chased short-term profitability or short-term comps by buying comps.

There's a lot of things that we could be doing.

Again, as we have always said and you know us well, we are building this business for the long-term.

And we think the foundation is very strong.

And if you look around the Company, if you walk the offices today of analytics people and the people have all of these PhD's or Master's degrees in statistics and people that are doing product development for us, the people that are doing targeted marketing, when you look at the people that throughout the organization, of a Kind, you look at One Kings Lane and you look at the clay that we have today, the Company has never been stronger.

And so again, so I know it's difficult for people who are trying to write a model to say, well, this turns around when.

But all I can say is that being here every day and doing this now entering my 25th year, we have never been stronger, never been a better company, have never been more excited about what we have.

And again, we're going to be great and we're going to do very well.

And so but where and when it comes out from turning a number around on the bottom line, relative to where we are today -- those are things that we wish we could tell you and we wish you could model it.

But the investments we are making, we are very confident and confident in the direction of the Company and very confident in our people.

That all makes a ton of sense, Stephen.

And I think the market recognizes that Bed Bath & Beyond is a great company.

Where there is some confusion and what's less clear is -- and there's recognition that there's a transformation going on.

It's just hard to measure the progress, especially in light of sales decelerating, profits decelerating.

So what measures, what benchmarks should the market hold you to?

Again, I think that when you look at our growth -- first of all, it's like we always said about going to our stores.

First of all, go to our website, and how much better it is.

Go to the product offering.

Look at all we have added to our assortment.

Look at how well we differentiated product today.

Look at the things that we offer, go to the customer experience, look at our bridal registry, our baby -- still again.

We always start with the customer's experience and we're better today and we are significantly better.

And yet in the areas the customer is migrating to a digital world.

And you look at the growth of our digital business, and our digital business is very healthy.

We tried to reach in every -- these past couple of years, giving you some guidance for the year and what to expect.

And I think for each of those years, we pretty much have accomplished what we told you were going to accomplish, if you look back at what we said at the beginning of the year and where we ended the year.

Again, I know that those are soft answers for you.

But listen, the onus is on us to show you over time that we are going to be not only -- we're going to be one of the few people that is going to be selling almost everything to everybody over time and we are going to be extremely healthy and successful.

And if you look at most any financial metric today relative to anybody in retail, although, yes, the numbers have come down, that we compare very favorably to just about any competitive set that you can look at.

So again, so I think your critique is fair and accurate and the criticisms are fair and the onus is on us to show over time.

Again, there's nothing that you can look at or no experience that the customer has today that isn't better than it was a few years ago.

That's very helpful.

If I could just ask a clarification question, (technical difficulty) so it sounds like you ratcheted down your comp expectations.

Your e-com is still growing 20%, but does that mean you have really ratcheted down your expectation for the performance of the stores?

Well, we have seen softer comps in stores.

That's been our trend.

So we consider both the growth, as we discussed before, in the digital channels and also some of the softer comps that we are seeing in stores.

So that's all baked in.

To put my last two cents in, it's an interesting thing, again, is that we would just say 1% to 2% to 0 to 1%.

That 1% reduction that everybody -- to us, we are trying to run a better business.

And the whole idea that we should get so caught up in a 1% difference in the comp or something like that is kind of crazy to us, but we recognize it's very important to you in the jobs you guys do.

But again, we are not running the business any better or worse if the comp is up 1% or not.

So I just want to give my two cents on that.

That's fair.

I think we all want to see you guys succeed.

So best of luck.

Christopher Horver, JPMorgan.

Michael Lasser definitely broke the rule on the number of questions.

So I'm just glad I got to get on.

You just became our favorite analyst.

You mentioned that CapEx is peaking this year.

Trying to get a gauge on -- and it sort of comes back to normalized levels over the next few years, can you help us out with that?

Can you quantify the capital cost of some of the big projects like the POS and the new DC?

And as you look at to 2017 or next year and the year out, do you have another new DC going or systems replacement in your strategic plan?

So as we had said earlier, we do anticipate 2017 CapEx spend will be lower than that at 2016.

We do see 2016 to be more of a peak for us.

You called out a few of the items that are the big ticket items for this year.

It is the distribution facility, it is our continuing development of POS and some of the equipment and software that we're continuing to put in our stores.

So those are the bigger pieces for us for 2016.

As we get closer to the next year where we refine our capital spend and its timing, we have been making significant investments also from the digital perspective.

And some of those change, it's an evolving environment.

So sometimes you can assume that what you're planning on for 2017 and beyond you need to tweak and change.

So as we get closer to next year we will refine that for you.

And as we do look into the future, past this year, there will be additional investments in distribution and systems.

It's just we happened to have a perfect storm this year where we have the point of sale and distribution center in some of the bigger projects happening all at the same time.

Over the next few years will have them but we are not anticipating that they will all be occurring within one year.

Okay.

So if you look at it from the past four years, you have been more in that low $330 million-ish kind of level.

Is that a normal?

Because investments in the e-commerce and systems never truly end, but is that more as you look out what normalized capital spending is?

We are still a bit away from 2017 and we have a general plan, but we will get --

We'll have to refine that as we get closer.

You are right, it's an historical trend and this is more a peak.

But as we get closer to 2017 we will be able to share more with you then.

In the first quarter you talked about the wage impact being $0.23 for the year and I think the technology is impacting [$0.17].

Does that still hold and do you expect those to be felt relatively evenly over the quarters of the year?

We did call out those items, you are correct, last quarter.

And we do continue to expect wage pressure.

We are not immune to it and we do have those technology expenses including the depreciation.

So they were on the course through the year.

That's what we are predicting.

Okay, thanks very much.

Kate McShane from Citi.

My first question was just about the consumer environment, just because we are well into June here, just how you feel about the consumer environment currently, how maybe it has evolved from the last time we have heard from you.

If you were sitting across the table from me I would say, well, what are you hearing, because you are out there talking to so many people.

So I'd be curious what are you hearing.

Well, I think everyone feels pretty good about the macro data points.

But I think we've heard from quite a few companies there are some challenges out there and some challenging comps.

So I think we're just trying to reconcile exactly what's happening with the consumer.

Is it indeed people saving more or paying down debt, or is there a share of wallet, or is there something more?

Just curious about your view in that context.

Again, listen, we're not economists.

So we can -- we can give our perspective.

It's probably not worth anything.

But again, my personal view, and it would just be my personal view, is that there has not been -- there's no great catalyst for additional spending.

It's not the economy has a huge wind at its back.

Every time they want to raise interest rates that doesn't happen.

Again, I think the notion that there's something different out there that's happening -- I think maybe if you look back, obviously, if you'd look back 2008 and 2009, if you look back over the past seven years, you have seen maybe some very gradual incremental improvements to the economy.

But again, I don't think that it's anything to write home about.

And I don't think there's, again, any -- absent what might happen in an election year or something, but no great catalyst that's going to change that, short term.

But that -- again, that's just a personal opinion.

Okay.

And if I could ask my second question around the credit card agreement that you guys signed earlier in the month.

Do you have any additional details about that agreement and how maybe you are thinking of positioning the card along with the loyalty program or using coupons with the loyalty program of any kind?

Yes, so you are right.

We did announce a partnership regarding a new co-branded credit card.

It's considered in our modeling assumptions.

At this point will not have a significant impact in the short term, and we will assess the benefits over time.

I don't think it's launching with anything other than the rewards that are associated with the card.

So you earn some percent back from shopping within all of our concepts and then percentages for you to -- gas or restaurants and outside purchases.

But it's not going to be tied into a greater loyalty program upon launch.

Okay, thank you.

Dan Binder, Jefferies.

I promise not to ask a comp question.

First on the ED bedding brand or launch, obviously exclusive, it's interesting.

And on that I was curious if you could discuss a little bit more where your private label and exclusive mix is and if there's an internal priority to increase this meaningfully so that you can distinguish the Bed Bath & Beyond format in the broader market.

First of all, to get to the end of the question, yes, there is.

There's a tremendous focus.

We say that we wake up every day and go to bed every night saying differentiation.

But we have to have differentiated product.

So like we said, in the World Market we see significant differentiated product.

We see it Christmas Tree.

Again, the objective with one Kings Lane is really to free them up to allow that to really express their point of view.

And at Bed Bath, yes, we've been working very hard to grow the differentiated product at Bed Bath as well and at buybuy BABY.

So, again, that is very much part of our mission.

When you say -- I'm not sure if you asked if this is a goal and objective or where we want to be.

But again, the customer will tell us because we don't pick a number or percentage of our assortment.

We really look at it category by category, what's the opportunity, what can we be bringing to market, making that makes us different, that has great value, that really adds something to the customer's choices out there.

And then, we look at other things like can you really make it?

Obviously, things with a plug or a mold are much more difficult to really work on differentiated product but again, what's the markdown exposure.

Again, you have to make it.

So all these things are taken into account, but the objective is really to be great merchants.

And to be great merchants, we should be really a leader in bringing differentiated product to market.

So is the objective an objective of every part of the organization, and it's been growing in every part of the organization.

You can look at Harmon Face Values, for example, and you look at all the private label product we are bringing to market.

So again, very, very, very critical for us.

And then my follow-up question, which is -- you mentioned during the call or highlighted that One Kings Lane has a highly curated assortment but the Bed Bath -- which I realize is a different concept in the marketplace.

This looks like it's moving towards the [in style], more things for more people and I was just wondering is there an internal view you can share with us on how far you take that assortment and still remain relevant.

I'm not sure -- when you say you, who's the you and who's [to remain relevant]?

Well, in other words, if I go online and I look at your progress over time, you added a lot more items that seems that offer more things to more people.

So when I am trying to understand is how far can you take that without losing the customer on too broad an assortment.

In other words --.

(multiple speakers)

Curated versus endless aisle.

That's a great question.

We think and we believe we can accomplish both.

We think it is very important that we move our brand, the Bed Bath brand, to be viewed more as the expert for the home, not just about items, so that how we show things, how we market ourselves, how we communicate with our customer, that we really believe that we have to do a better job.

And we think One Kings Lane does a wonderful job of that.

So again, we do believe we have to move down the continuum in that way.

But at the same time, when we add more product, today, because of our analytics and targeted marketing and the ability to serve up to a customer something that -- you know, know where the customer came from online, where they are going to, what their interests are, what they purchase from us, to give them a view that really speaks to that customer so they don't have to be bothered with -- they don't have to [inaudible], because that's what they see our site for that's what they see our service.

So we don't have to show them a chicken coop or a snowblower.

But for the person who might want to be looking for a chicken coop or a snowblower, that we have it for them.

So we think that by being smart that we can do both, that we can extend our offering and, to our customers, target them better to speak to them for their interests and their lifestages.

Great, thanks.

This will end our question-and-answer session.

Thank you for joining us on the call today and for participating in our inaugural Q&A.

We welcome your feedback.

As with everything we do, we strive to get better every day.

We appreciate your interest in Bed Bath & Beyond and look forward to speaking with you again when we report our second-quarter results in September.

Have a good night.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.