Bed Bath & Beyond Inc (BBBY) 2016 Q2 法說會逐字稿

Welcome to Bed Bath & Beyond's second-quarter fiscal 2016 earnings call.

All participants will be in a listen-only mode until the Q&A session of the call.

Today's conference call is being recorded.

A rebroadcast of the conference call will be available beginning on Wednesday, September 21, 2016 at 7:30 p.m.

Eastern Time through 7:30 p.m.

Eastern Time on Friday, [September 23, 2016] (corrected by company after the call).

To access the rebroadcast, you may dial 888-843-7419 with the passcode ID of 4332261.

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

Please go ahead.

Thank you, Adrianne, and 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 would 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 September 21, 2016 can be found in the Investor Relations section of our website at www.BedBathandBeyond.com.

Here are some highlights from our financial results.

Second-quarter net earnings per diluted share were $1.11.

Net sales for the quarter were approximately $3 billion, a decrease of 0.2% compared to the prior-year period.

Quarterly comparable sales decreased approximately 1.2%.

Sales from our customer-facing digital channels grew in excess of 20%, and sales from our stores declined in the low-single digit percentage range.

In addition, our Board of Directors today declared a quarterly dividend of $0.125 per share, to be paid on January 17, 2017 to shareholders of record as of the close of business on December 16, 2016.

Fiscal 2016 net earnings per diluted share are expected to be within the range we described in our previous earnings press releases.

I will now turn the call over to Sue, who will review our second-quarter financial results and our fiscal 2016 key modeling assumptions.

Steven will then discuss some of the notable developments relating to our strategic initiatives.

After our prepared remarks, we will open up the call to questions.

I will now turn the call over to Sue.

Thanks, Janet, and good afternoon, everyone.

I'll start with a review of our second-quarter results, which include the activity of One Kings Lane from June 14.

Our net sales for the quarter were approximately $3 billion, a decrease of 0.2% from the second quarter of last year, primarily due to a decrease of approximately 1.2% in comp sales, partially offset by an increase of approximately 1% in non-comp sales, including new stores and One Kings Lane.

The decrease in comp sales for the quarter was attributable to a decrease in the number of transactions, partially offset by an increase in the average transaction amount.

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

Comp sales from our customer-facing digital channels grew in excess of 20% in the second quarter, while comp sales from our stores declined in the low-single digit percentage range.

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

The decrease as a percentage of net sales was primarily due to, in order of magnitude, a decrease in merchandise margin and an increase in coupon expense as a result of an increase in redemptions, partially offset by a slight decrease in the average coupon amount.

Also contributing, to a lesser extent as a percentage of net sales, was an increase in net direct-to-customer shipping expense, which reflects a reduced free shipping threshold of $29 at Bed Bath & Beyond for much of the quarter.

The inclusion of One Kings Lane reduced total Company gross margins by approximately 12 basis points in the second quarter.

SG&A for the second quarter was approximately 28% of net sales as compared to approximately 26.4% of net sales in the prior-year period.

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

The inclusion of One Kings Lane increased total Company SG&A expense by approximately 16 basis points in the second quarter.

Net interest expense for the quarter was approximately $18.2 million compared to $25.1 million last year.

Approximately $5 million of the decrease resulted from a favorable change in the value of our nonqualified deferred compensation plan investments.

However, that favorable change was offset by an unfavorable change in SG&A, and therefore, the $5 million reduction in net interest expense did not impact net earnings.

The remaining decrease of approximately $2 million in net interest expense for the quarter is the result of the realized loss related to the tender of certain auction rate securities, which was included in last year's second quarter.

Our income tax rate for the quarter was approximately 36.3% compared to approximately 38% in the prior-year period.

The second-quarter provisions included net after-tax benefits of approximately $2.9 million this year as compared to net after-tax costs of approximately $800,000 last year, due to distinct tax events occurring during the quarters.

Considering all of this activity, net earnings per diluted share were $1.11 for the quarter.

Moving on to the balance sheet, we ended the second quarter with approximately $661 million in cash and cash equivalents and investment securities.

Retail inventories were approximately $2.9 billion at cost, an increase of approximately 1% compared to the end of the prior-year period, due in part to the growth in the inventory in our distribution facilities for shipments to customers.

Our newest facility in Lewisville, Texas opened for inbound freight during the second quarter, and we are targeting it to begin shipping to customers in October.

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

Capital expenditures for the first six months of fiscal 2016 were approximately $185 million, and included the following: enhancements to our digital 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 Lewisville, Texas; and investments in new stores, store relocations, and store refurbishments.

We opened six new stores during the second quarter, including three Bed Bath & Beyond stores, two buybuy BABY stores, and one Cost Plus World Market store.

Since the end of the quarter, we have opened one Bed Bath & Beyond and one Baby store, both in the Canadian Province of British Columbia, and closed one Bed Bath & Beyond store.

In addition, our joint venture in Mexico now operates eight stores, including the newest store in Morelia, which opened in July 2016.

During the quarter, we repurchased approximately $121 million of stock, representing about 2.7 million shares, under our current $2.5 billion share repurchase program.

This authorization had a remaining balance of approximately $2 billion at the end of the second quarter.

In addition, we paid our first quarterly dividend in July.

And today, our Board of Directors declared another quarterly cash dividend of $0.125 per share, to be paid on January 17, 2017 to shareholders of record as of the close of business on December 16, 2016.

Now I would like to review our planning assumptions for fiscal 2016, which incorporate our year-to-date results, including One Kings Lane, and recent business conditions.

We are modeling our comp sales change to be in the range of relatively flat to a 1% increase for fiscal 2016, with the net sales increase to be about 125 to 140 basis points higher than the comp sales change.

We are modeling gross margin deleverage, including increases in coupon expense and net direct-to-customer shipping expense, as well as the inclusion of our modeled results for One Kings Lane.

Even with the inclusion of One Kings Lane, we still expect the 2016 gross margin deleverage to be slightly less than the deleverage of 2015.

We are modeling SG&A as a percentage of net sales to deleverage, primarily due to payroll and payroll-related items, including wage increases; further investments in technology, including depreciation; as well as the inclusion of our modeled results for One Kings Lane.

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

Annual net interest expense is now estimated to be $75 million.

We estimate our full-year tax rate to be in the mid-to-high-30 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 concepts and close about 15 stores.

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

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

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

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 in 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 results through the second quarter, the slight dilution anticipated by our purchase of One Kings Lane and current business trends, we continue to model our fiscal 2016 net earnings per diluted share to be in this range.

Also, as we said before, the fourth-quarter contribution of net earnings per diluted share to the full-year is anticipated to be somewhat stronger than the similar pro rata percent to the total year it had been in previous years, excluding one-time items, due in part to the additional shopping days between Thanksgiving and Christmas and advertising changes.

With that, I will turn the call over to Steven, who will share some highlights of the progress we are making to position Bed Bath & Beyond for continued success.

Steven?

Thank you, Sue.

As retailing continues to evolve, there has been a democratization of shopping, enabled by technology and the Internet, which has resulted in an ongoing shift in the way the customer shops.

We now have more choices, more transparency and more convenience than ever, all resulting in significant investments in technology and dramatic shifts in the retail landscape, highlighted by both new shopping options on one end, and retail consolidation and closings of websites and stores on the other.

Over the past several years, it is in this environment that we have been transforming our Company and have laid the groundwork 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, omnichannel retailer.

We are making great progress in improving our capabilities every day.

We are taking a systematic and logical approach.

We are evolving toward providing a more inspirational and personal shopping experience with an expanded offering which includes a more differentiated product mix and enhanced services and solutions for our customers.

This is to earn the reputation with our customers as the expert for the home and their accompanying life stages and life interests.

Our investments over the past several years have furthered our foundational ability to do so.

The opportunity to do more for and with our customers has never been greater.

At the same time, while we make the investments necessary for our transformation, we remain disciplined in our efforts to achieve positive returns and improve the long-term profitability of our Company.

Today, I will provide an update on some of the developments since our last call.

We announced the purchase of One Kings Lane on June 14, about two weeks into the second quarter.

As we've said previously, One Kings Lane will serve as a cornerstone for Bed Bath & Beyond's growing offerings in furniture and home decor.

We are only a little more than three months into the integration process, so it's still early, but things are progressing as expected.

We continue to be impressed by the quality and capabilities of the people of One Kings Lane, and we believe that their merchandising expertise and passion for their customers' homes will further enhance both our ability to satisfy, and our credibility with, our customers.

Over time, we believe One Kings Lane will provide us an opportunity to improve the overall experiential environment of the services and solutions we offer through design services and studio locations.

We believe the home furnishings space provides us tremendous opportunity to build a large, curated assortment of differentiated product, to engage with our customers in a meaningful way, and to provide inspiration across various lifestyles.

With respect to differentiated product, Cost Plus World Market, Christmas Tree Shops andThat!, and Of a Kind, have always had a substantial assortment of proprietary and private-label products that we continue to improve upon.

At Bed Bath & Beyond, buybuy BABY, Harmon Face Values and One Kings Lane, we have also strived to grow our proprietary offering, and, as brands are very important to our customers, we have worked to expand our exclusives, or first-to-market opportunities, for named brand products.

Some examples of these merchandising initiatives include proprietary or exclusive brands such as Wamsutta, Olivia and Oliver and ED by Ellen DeGeneres in Bed Bath & Beyond, and Wamsutta BABY, and Jonathan Adler Crafted by Fisher Price, in buybuy BABY.

We also have a growing line of private-label health and beauty care products under the Harmon Face Values label.

And just this week, One Kings Lane launched the One Kings Lane Collection, a line of proprietary furniture and lighting.

In addition, we now offer more than 3,000 items that can be customized using text, a monogram, or personal photos.

This personalization service is available on the Bed Bath & Beyond and buybuy BABY websites, and we will begin to make it available in-store through the Beyond store this Fall.

These items are easy to find under our Personalized Gift category, and are identified on most shopping pages via an icon or label that indicates personalization is available.

It is an easy and convenient way to create a unique gift or accent piece for your home.

Early customer response has been favorable, and we are continuing to add to the assortment of items that can be personalized.

We view personalization as a significant opportunity for us to create additional product differentiation and enable us to do more for and with our customers.

We also continue to broaden our merchandise categories online.

Some recent examples include other Home Improvement products such as power tools, kitchen and bath fixtures, and solar and gas generators.

We also expanded our Fitness category to include treadmills, stationary bikes and other exercise equipment.

In the Bath department, we have recently increased our assortment of vanities and lighting.

And in our Outdoor category, we have added camping gear and equipment.

Differentiation and constant improvement are paramount for us, and this also applies to the services and solutions we provide.

We have added more curated experiences to the Bed Bath & Beyond website such as a new category called Designer Picks, which offers an inspirational collection of favorite finds from throughout our websites, put together by professional designers.

Within our Shops category, you can find a curated assortment of products and solutions organized by themes such as healthy living, smart innovation and fine linens.

We have also added several new lifestyle trends to our Look Love collection.

And our Back to College offering this summer, in addition to our popular in-store events and other services such as Pack and Hold, Shop Now/Ship Later, and college registry services, we launched Shop With an Expert.

This new service enables customers to make an in-store appointment with one of our expert associates to receive personal assistance to get campus-ready.

Our associates and our website have valuable information regarding thousands of US colleges, and in many cases, the details about select dorms on campus.

We also produced our first Student Life Catalog that was mailed in June to a targeted distribution of incoming college freshmen.

This 36-page catalog, also available digitally, presented a more inspirational view of the products, services and solutions we offer for this important life stage.

We were pleased with the results of this catalog, and we will continue to evolve our targeted marketing efforts in this area.

We also recently introduced a Product Expert Chat feature on the desktop to select categories on the buybuy BABY and Bed Bath & Beyond websites, to enhance the online shopping experience and provide customers with an opportunity to interact with one of our expert associates.

Currently, we have enabled several categories, including car seats, strollers, monitors, coffee and tea makers and cookware.

So, for example, if you were browsing through items in the car seat category, you would be prompted to chat live with one of our expert associates for further assistance.

Our customer service representatives, engaging in live chat, undergo additional training to be able to respond to product-specific questions.

We have plans to roll out additional categories going forward.

These new offerings give us an opportunity to elevate our customer service, and as a result, create more stickiness with our customers.

We know our customers benefit from our expert associates when they shop with us in-store.

Now we are beginning to translate a differentiated level of service and expertise to the digital experience.

As consumer shopping preferences continue to shift to digital, our investments are driving a better omnichannel experience.

We have another round of digital upgrades scheduled over the next couple of months.

Some examples for Bed Bath & Beyond include extending chat and in-store appointment scheduling to our mobile website; adding the ability for our customers to browse the entire site, including product lists and search result pages for a particular item, and then further refine their search by what's available in their local store; adding interactive tools to guide our customers through building a registry, as well as assisting them in shopping for specific locations or events; and continue to improve our search experience through enhanced algorithms and data integration.

Our goal is to create a seamless and more personalized shopping experience, and to present our customers with more relevant product recommendations and offers, not just more product but a more relevant experience.

This means we need to serve up their offerings in such a way that resonates with our customers.

To that end, our marketing capabilities continue to evolve as we further leverage our robust customer database and third-party data to tailor our targeting techniques and enhance our personalization capabilities.

For example, our targeted lifestyle campaign for college, new mover, baby and wedding, enable us to engage with our customers and present timely and relevant information to them about a specific life stage.

These campaigns enhance our ability to be viewed as an expert by communicating the products, services and solutions we offer at a relevant time for the customer.

As with everything we do, we strive to improve upon the execution of these campaigns in order to better satisfy our customer, expand our services, and achieve greater returns.

We have also been refining our existing print advertising program and expanding our specialty print pieces, including catalogs, to drive engagement and enhance product awareness.

So far this year, we have published two catalogs, Outdoor Living and Student Life.

We will soon be releasing a third catalog called Welcome Home, which will showcase the depth and breadth of our product expertise in a more inspirational way than we have ever done before.

This 84-page catalog will also be available digitally and includes interactive features to drive further engagement.

We are really excited about telling our story and furthering our efforts to be known as 'the expert for the home.'

We have several other marketing initiatives underway this Fall, including the rollout of our new cross-concept co-branded credit card, and the testing of some additional assets of a future loyalty program.

Our focus on driving a better omnichannel experience also includes advancing the rollout and driving adoption of My Offers, our virtual coupon wallet, to additional Bed Bath & Beyond customers as well as to our buybuy BABY customers.

We're also evolving our physical channels to further integrate our omnichannel capabilities to enhance the in-store customer experience by bringing our products, services and solutions as well as our brands, to life.

We want to highlight the service components that reflect how customers are utilizing our stores, as well as provide a more experiential shopping environment through events such as product demonstrations, how-to sessions, food sampling and cooking classes.

Our growing list of services include being able to reserve an item online and pick it up in-store, being able to return online orders to a store, have a product shipped to your home from a store, or to schedule an appointment for wedding and baby registry, and to shop with an expert for college.

In addition, we have introduced new technology in some stores such as a scan for more digital tool, which enables the customer to view product images, get product pricing information as well as customer reviews; our interactive catalogs, which enable customers to view a curated assortment of products, such as seasonal furniture, and bed and bath items; and our digital product advisor tool, which enables customers to find what they are looking for, based on responses to questions that will filter the assortment to products that best fit their needs.

We've also talked previously about our newly-located Bed Bath & Beyond stores in Hyannis, Massachusetts; and our new andThat!

store in Kennesaw, Georgia.

These are other examples of how we are evolving our physical footprint by testing and bringing differentiated products, services and solutions, including new technologies, to our stores.

We continue to learn and transition our stores over time.

We are set to open our newest retail space in Brooklyn in November.

Liberty View Industrial Park is the setting for this unique shopping venue, which will include a Bed Bath & Beyond, a buybuy BABY, a Cost Plus World Market, and a Harmon store, all under one roof.

We are excited with this new iteration of the blending of our physical and digital capabilities as we move towards a more experiential shopping environment.

And finally, regarding our newest retail distribution facility in Lewisville, Texas.

As Sue mentioned, this new facility opened for inbound freight during the second quarter, and we are targeting to begin shipping to customers in October.

Over time, this 800,000-square-foot facility will be able to fulfill orders for all our concepts and improve our overall delivery capabilities.

We continue to assess our supply chain network for opportunities to achieve greater efficiencies as we build world-class fulfillment capabilities.

We remained on course this quarter as we continue to strategically navigate the ever-evolving retail landscape.

We remain focused on our customers and what we need to do to earn still more relevancy, and to become their destination as the expert for the home and their accompanying life stages and life interests.

It is a transitional time for retail.

And many retailers, including us, are experiencing pressure on their operating margins.

Despite the fact that we continue to achieve among the highest profit origins in retail, we too have experienced downward pressures on our financial results as our transformation continues.

During this evolution, we recognize that we must remain disciplined in our efforts to achieve positive returns and improve the long-term profitability of our Company, while returning value to our shareholders.

We have spoken a lot today about differentiation.

Nowhere is it more important than it is with our people.

Our historical success and the success we will achieve in the future is due to our dedicated, hard-working, intellectually honest, intellectually curious and never satisfied associates.

I'd like to thank our 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 back over to Janet, so we can move forward with the Q&A portion of our call.

Thank you, Steven.

We would appreciate it if you would limit yourself to one question and one follow-up, please, so that we can get to as many questions as we can.

If you are unable to ask your question during the call, I will be available afterwards to speak with you.

Adrianne, we are now ready to take questions.

(Operator Instructions) Seth Sigman, Credit Suisse.

Thanks for taking the question.

Good afternoon, guys.

So my first question is on gross margin.

The decline this quarter was, I guess, less bad relative to prior quarters.

The factors you discussed are pretty similar.

But I guess the question is, which components were getting better sequentially?

And then, as you think about the current sales trends, how do you think about the promotional levers and perhaps the need to be a little bit more aggressive as we move through the year, to achieve the comp guidance that you provided?

Thank you.

Hi, Seth.

It's Sue.

So, for the second quarter, we did see a decrease in merchandise margin and increases in coupon expense and, to a lesser extent, direct-to-customer shipping expense, in that order.

That is consistent with what we also saw the first quarter.

So that has been our general trend for what we are seeing.

Regarding your second question, if you don't mind repeating it.

Yes.

I'm just wondering about what the promotional levers you have to potentially improve sales as we move through the year?

And I guess the point was that gross margin -- the decline this quarter was less bad relative to the prior quarters.

And is there a need to perhaps get a little more aggressive as we head into this important holiday period?

Well, regarding the back half and the promo levers, I mean, we do have in -- for the back half of the year, our third quarter is anniversarying a slight decline in comp from last year.

It was our weakest quarter.

So we have that.

We also have two additional shopping days between Thanksgiving and Christmas, and we also have some of the advertising changes we mentioned, including our Welcome Home catalog.

We're going to continue to work on managing the deleverage of our gross margin.

We do believe that, for the year, the gross margin deleverage will be slightly less than last year.

And -- so that's what we are modeling for, for the full year.

And Seth, this is Steve.

The only thing I would add to that is that we've built into our expectations that it will be a fairly promotional back end of the year.

We don't see any indication from other retailers that that would be different from -- that our expectation should be different from that.

And Seth, this is Gene.

Also, as far as promotional leverage, we have been testing different shipping thresholds.

And we are planning on the $29 free shipping threshold that we currently have through the holiday season.

Okay.

Thanks for that color.

And then my follow-up is about the SKU expansion that we have seen online.

We've certainly seen it in the furniture category.

And then I think you talked about a number of categories that you have added online most recently.

Can you give us a sense of the inventory commitment required to really grow those businesses?

And then also, if you are starting to see any sort of incremental sales lift as a result of this SKU expansion?

Thank you.

Sure.

A good deal of the inventory we are adding is vendor direct.

So there's really no additional inventory requirement on our part.

And we are seeing stickiness and good performance across many of the categories that we are adding.

It's -- you know, in the big picture, it's just incremental.

I wouldn't call it significantly meaningful at this point, but we're showing -- it is showing that the customer is starting to recognize it, it's appealing to the customer, and it's growing.

Thank you.

Kate McShane, Citi.

Thanks so much for taking my question.

My question is centered around more of the dorm business.

I know, Steve, you mentioned a little bit about this in your prepared comments, but I just thought, specific to the quarter, what you saw for the Back to College, Back to Dorm business?

And how much did Memorial Day contribute to the second quarter?

I'll start and Sue can jump in.

But I think we said that, starting with the back end in Memorial Day, I said that we -- what did we call it?

That we said it would be --?

It was a marginal impact.

A marginal impact on the first quarter, so a marginal benefit to the second quarter.

That's correct.

And with Back to College, there are so many ways for us to measure it.

There are certain things that indicated good strength.

We measure the number of events, the number of attendees at events, the number of high school kids we reach, the number of Pack and Holds we do.

From a sales perspective, it's a little bit more difficult for us to measure it because we peg items each year that we call Back to College items.

And they don't -- they're not the same, necessarily, year-to-year.

And sometimes even additional categories might drop off or get added year-over-year.

So when we look at the entire quarter, which was relatively flat for us, I think it's fair to say that, directionally, to conclude that our Back to College business is probably similar.

Okay, great.

Thank you.

And my second unrelated question is -- differentiation was a big focus also of your prepared comments.

And I know you have achieved a lot of differentiation by acquisition, whether it be One Kings Lane or Cost Plus.

So could you maybe remind us how you are thinking about acquisitions going forward, especially in light of the focus on differentiation?

Sure.

Well, in terms of a capital allocation structure, obviously, we first invest back into the Company.

And then second, it would be acquisitions.

If -- and so we are constantly looking at things that we think would be beneficial or complement our business.

And so that's where we would look at acquisitions.

We have done some in the past, as you've seen -- recently, One Kings Lane.

And it's something that we would consider.

But it's -- again, it's part of our capital allocation reviews that we discuss with the Board on a regular basis.

Thank you.

Alan Rifkin, BTIG.

Thank you very much for taking the question.

My first question is, as you continue to expand into non-core categories, be it eCommerce or the catalog or extending merchandising categories, Steve, could you maybe tell us how you are managing the risk of getting into these categories with respect to some of your return requirements?

Yes.

It's -- listen, we've had historically very high returns.

The Bed Bath business that we developed was a very profitable business.

And basically, a lot of the things, and basically I think everything that we've added of significance, has been -- it has impacted the margins that we operate under.

But when you talk about non-core categories, Alan, we wouldn't call eCommerce a non-core category.

eCommerce is a core category for us.

I mean, again, how we reach the customer, how we do more with the customer, how do we satisfy the customer, there's -- the digital experience is part of the entire experience, and we have to be great at it.

So -- but again, the things that we are doing, we do tend to do things incrementally.

When you mentioned or when Kate mentioned acquisitions, the things that we purchase were always done in a way that we didn't bet the farm on it, that we always tried to test into something, to make it work, to get better at it and to roll it forward.

Similarly, all the things that we are doing with these categories, they're not risky in the sense that if it's furniture or home decor, if it's video, it's vendor direct, for the most part.

These are categories that we are bringing in, and how we show them, we do them in a way that it's not to the detriment of our core categories, so it doesn't confuse the customer, but doesn't busy the site in a way that they can't find what they're looking for.

So even as we add categories to our website, it's very important that we improve the website and our marketing and communication and personalization, so that a customer can find what they are looking for, and we are not just adding a bunch of nonsense to customers or noise to a customer.

So everything we do is with an eye towards being better in the eyes of the customer, and with an eye towards not betting the house on anything, but doing things systematically, deductively, logically, testing them out, proving them out and then rolling them forward.

Okay, thank you.

And then it appears for the second quarter in a row, you've slightly reduced your revenue estimate, despite keeping comps in your earnings guidance the same.

Can you maybe just tell us where the incremental gains on the [EBIT] margin are coming from?

There was a little bit of noise at the end of your question.

I'm sorry.

What did you say, Alan?

Unfortunately, that line disconnected.

We will move on to --

Well, we want to go on record that it wasn't us.

(laughter)

And we will move on to Budd Bugatch from Raymond James.

Please go ahead.

This is David Vargas on for Budd.

I think I'll take a stab at that previous question that was asked.

Kind of -- the results this quarter kind of imply that you are keeping -- you are taking down a little bit of your sales guidance for the year, but keeping the EPS window roughly the same, even though it is a wide margin.

Can you tell us where some of the levers are, maybe in the P&L, that might help you achieve that, continue to achieve your earnings number but potentially on a little bit softer topline?

Well, some of the items that we have been discussing is we do have our gross margin that we've talked about, how we do think the deleverage will be slightly less than last year.

We have initiatives, ongoing initiatives.

We are always trying to optimize our couponing and marketing strategy, as we've discussed before, with our Data Analytics team.

And we will continue to try to look at the SG&A line items and try to be a focus from a cost-cutting initiative -- we have always been a cost-conscious organization -- and ongoing culture of cost reduction.

And also, I'm not sure but -- we did maintain our comp guidance.

We did maintain our comp guidance of relatively flat to a 1% increase.

Right.

So David, you talk about the spread between comp and non-comp?

What are you talking about?

Yes, exactly.

So the results came in a little bit weaker than what we were looking for.

But keeping -- we're ending up keeping our EPS roughly the same, keeping EPS guidance roughly the same.

But I think the results this quarter were a little bit weaker than -- they were weaker than what we were looking for.

So I was just wondering where in the P&L there were opportunities to take costs out?

Right.

(multiple speakers) One thing I would say is that, there's been no fundamental change, that directionally, this quarter was what we expected.

And so whether -- so our maintenance of the guidance -- I know that you are saying that you were higher than where we came in, perhaps.

But again, for us, there's been no fundamental change directionally where we are, that we expected this foot traffic to be down and sales to be where they are in the stores, and basically where sales were digitally, to be about where they are.

So for us, we're still able to maintain that flat to 1% comp range and to maintain the historical range that we have been in during this time of heavy investment for our earnings.

So, I'm not sure.

But for us, again, we remain basically on course as we anticipated it.

Okay, thank you very much.

Thanks, David.

Simeon Gutman, Morgan Stanley.

It's Simeon Gutman.

First question is a follow-up to the first question that was asked regarding sort of sales and gross margin.

I'll just ask it a little differently.

So your gross margin was down a decent amount but a little better on a run rate, if you take out One Kings Lane.

But the topline decelerated, it got a little worse.

And curious if there's anything to read into it, the current state of your promotional intensity, if you got less promotional, if there's some deliberate strategy where you are saying if you take your foot off the promotional lever, what type of response you see on the topline?

You mean promotional versus last year, the first quarter -- or this last quarter versus last year less promotional?

Yes, or look at it sequentially.

Right?

The topline looks like it got a little worse, it decelerated, and the gross margin also got a little bit better.

And so thinking about if there's anything you are tinkering with on either side, or if just this is how the business played out?

Yes.

I mean, overall, the promotional environment is consistent.

I mean, we are always tinkering and trying things, maybe switching from print to digital or --

Trying to become more efficient.

But there has been no significant change in the promotional environment last quarter.

There are some advertising changes that Sue described that we have in the third and fourth quarter.

We have the new catalog coming out.

There's also some additional advertising changes.

But nothing -- and now continuously testing in between store and digital advertising, but there's nothing significantly different.

Okay.

And a follow-up on One Kings Lane.

Can you talk about what you think -- what was hurting them or their chances of success as an eTail business?

And then how does that change?

Like, what are you doing differently?

Why do they become more successful within the Bed Bath portfolio?

You know, they -- I think they have always been a very successful merchandising organization.

We have always admired the way they show product and tell a story about product.

Some of the things that we can add to an organization of that size are just capabilities that a larger company has that we can absorb within our structure, that they would have to bear on their own.

So, sometimes you just get the leverage of scale joining a larger organization like ours.

Alan Rifkin, BTIG.

I think I got cut off in the middle of my last question.

Can you hear me okay?

We can.

Okay, thank you.

It appears for the second quarter in a row you've slightly lowered your revenue outlook while maintaining your comp and earnings guidance.

Is something -- where the incremental improvement in EBIT margins was coming from that gives you the confidence that you can still hit that earnings range?

Thank you.

Yes.

So, in terms of improvements, we continue to try to manage our expenses and believe that we can achieve that by still maintaining the range, the historical range, we have previously provided.

And as Sue said earlier, the third quarter was the quarter last year that we did have a negative comp, so slightly weaker.

And the fourth quarter this year, we do benefit from, I think, it's two additional shopping days between Thanksgiving and Christmas.

Yes.

And also the timing on the weekend of when Christmas falls, benefits us.

Right.

And some slight shift in our advertising.

Did we lose Alan again?

Adrianne?

Next line?

You're welcome.

We can move on to the next.

(Operator Instructions) Michael Lasser, UBS.

Thanks a lot for taking my question.

It's on the productivity of your coupon.

Do you think you are seeing the same level of customer response, especially as the world becomes a bit more dynamic and transparent?

And are you seeing the same level of return that you might have, historically?

Well, we did see an increase in coupon usage for the second quarter with a slight decrease in the average coupon amount.

I mean, price transparency continues to be prevalent and the coupon helps bridge that gap if there is a difference.

From the coupons critically -- it has always been an important part of our value proposition.

But at the same time, we are committed as an organization to move to smarter, more intelligent marketing, personalized, targeted, being more meaningful, and being more efficient and optimizing that over time as well.

So -- I think that when we go back to the old question, was it like in 2008 and 2009 when people became more cost-conscious, became more aware of pricing when things started to go down this track, you know, the coupon has clearly -- and has been associated -- strongly associated with what's been very important.

But really we need to be working, and we are working, on becoming a lot more intelligent about our marketing and making it much more personalized.

But you do think, though, the consumer is responding the same way to your coupons that they have in the past?

You know what?

I think that, as Susan -- as Sue said, I guess, in this last quarter, that the coupon redemption was actually up.

So, at the same time, I think that people aggregate -- they gain intelligence about it over time in terms of how they aggregate them, how they use them.

So that does change.

And I think what other competitors do in availability of coupons, impacts things as well in their marketing.

So but I don't think, if you are looking for a thesis, that it has become a lot less responsive or a lot more responsive, we cannot support that thesis.

Okay.

And you are expecting your comps to get better over the next two quarters, particularly in the fourth quarter, due in part to more days between Christmas than -- Thanksgiving, Christmas.

So do you think that's going to have an equal impact on your stores as it will online?

Or do you expect one channel to get better?

I'm just trying to understand like where do you expect to see the improvement in your business over the next couple of quarters?

Good question.

It's funny because it's all integrated for us.

So a customer goes into a store, and whether they are literally standing there and they are buying online on their phone today, or a customer is researching online and going into a store.

So it bleeds in many different ways, so it's not easy to predict.

But we would expect and we would be modeling that incrementally both should improve.

Again, being up against a weaker third quarter, it's, in both cases, across our businesses and the additional days benefits whatever channel you shop through and whatever concept you are shopping with.

So we should see it incrementally across every way we do business.

Christopher Horvers, JPMorgan.

Thanks.

Good evening.

So a couple questions.

Is the $29 freight ship threshold, is that going to be a permanent change?

And then following up on the gross margin question, so, if you take out One Kings Lane, the gross margin decline did moderate.

So I'm curious why that happened?

Is it that you are becoming more efficient in terms of the distribution aspect?

Is marketing, some sort of marketing efficiency driving that?

Are investments moderating that's impacting cost of goods?

Because from a big picture perspective, I think the market is trying to figure out when that gross margin rate might flatten out.

And is there something going on underneath that's driving that moderation that you could talk about?

Well, I'll take the first part and you will take the gross margin.

Okay.

The $29 -- nothing is permanent.

Right?

I guess death is permanent, but I'm not even sure taxes are.

But the $29 is something that we've planned now through the holidays.

But we have to be nimble enough to respond to competitive environment and into things that we learn and see in this time frame.

But we are modeling and planning on that through the holiday season.

But again that -- so we would not term that as permanent.

For the margin question, I'll leave that for Sue.

Sure.

So to your point, when you exclude the 12 basis points, there was a little bit of improvement, I guess, in the deleverage.

But essentially, we are always looking to improve any aspects within gross margin, the merchandise margin, as well as, as we discussed earlier, even though we have increases in coupon expense, we are looking to optimize, through coupon strategies, how to improve that.

We are always focusing on strengthening our deals with our vendors and the additional differentiated products.

That helps to mitigate margin erosion as well.

Yes.

And as Sue had said earlier in our comments, we had anticipated the pace of gross margin deleverage to be reduced, and less than last year.

Brian Nagel, Oppenheimer.

Thanks for taking my question.

So I wanted to just dive a little deeper into the comment you made -- I guess you made previously -- about some forthcoming moderation in your investment spend.

So the question out there is -- maybe just remind us again of the timing of that -- discussing the magnitude of how much -- I think this was mostly on the CapEx side you were discussing.

And what investments are you making now that are beginning to wind down?

Thanks.

So (multiple speakers) -- okay.

So, you're right, Brian.

We have talked about how 2015 is a peak in terms of the CapEx spend for us and that we anticipate coming off that after 2016.

One of the items that we've called out for 2016 and previous years is our POS, which we do believe that will not be as anniversarying as much as it has in the peak for 2016.

So there are items that come on and there's items that come off.

But POS is one of them that I can call out.

And also the new Lewisville distribution facility that we mentioned in the call earlier, that is just opening for inbound freight this past quarter but will start opening for outbound freight next month.

So that's another call-out that we made earlier in the year in terms of part of the CapEx spend for the year.

As you recall, that's an 800,000-square-foot facility.

And as I think we said on the last call, yes, we will have large investments in the future, whether we open up future distribution centers.

This year we also expanded our call center.

We just had a lot of large expenditures all hit in this year, and we don't anticipate, at least for the foreseeable future, that we'll have all those large investments like that all hit within one year.

So just does the move online towards your omnichannel model -- does that keep investment -- I mean, talking about this moderation coming this year and next year, but does the online initiative basically keep investment spending higher than it otherwise normally would be?

I guess what you're asking, Brian, is there a new normal?

Yes, that's said better.

No, it's so dependent upon technology, things change so quickly, we are seeing literally hundreds of vendors that we didn't see three years ago with opportunities of things that we might want to try or do or look at.

So I think that that's right to think that way, that there's more opportunity, more things to -- that are possible and things that we would be choosing among than, historically, when you were opening up stores, and that's the world you lived in.

And the things that you were doing, whether it be in logistics or real estate or construction office or planning, the things that you were doing were much more predictable and they would staid; whereas the things we're looking at today are rapidly changing.

So I think there is a new normal.

But what Sue and Gene were saying, for the foreseeable future is that we do see what's on the horizon, the short-term horizon, and that we see the spend coming down.

But I do think there is a new normal.

Dan Binder, Jefferies.

Just following up on that question, I mean, versus when you started this investment phase, do you foresee it being longer and deeper as you respond to new competitive threats?

And I know you commented on the CapEx, but as you think about the gross margin investment, the expense side and the P&L, is that something that you think peaks this year as well?

Or do we need more time?

You know, I would say that we need more time.

I mean, the pressures on gross margin are -- continue to be innate to all of retail as retail is just going through a transition.

And we have been going through a period of investment for some time.

And I will say a lot of the things we are investing in today, we wouldn't have foreseen years ago.

There are a lot of opportunities, and this is our forecast for now.

And we think that at least for the next year or so, we should be in that position.

But we are always going to be looking at opportunities to improve the Company and improve our future.

And like Steve said, there's a lot more to review and decide and invest in than there have historically been, when we were just simply opening stores.

And at the same time, hopefully, with the new POS system, the backend and the frontend put into place for the Web businesses, a lot of the big expenditures, hopefully the things that we'll be building on won't be as expensive as putting them in place initially.

And then with regard to the new categories, I know you had some questions on the call about it -- I'm just curious.

You are obviously adding stuff here to have a bigger presence with -- or potentially a greater share of wallet with the customer.

But what -- how do you think about your position in the marketplace?

What's Bed Bath's angle?

Is it going to be price on these new items?

Is it assortment?

Is it content?

And how do you get recognition for those categories?

I mean, I just did a quick search on some of those items that you mentioned, Bed Bath doesn't immediately come up as the top place to buy those items.

So I'm just kind of curious what the strategy is there and where do you see yourself providing some sort of a competitive advantage?

Well, you're right, Dan.

For the moment, really there has been little marketing around most of it.

So -- and it will be an effort to be better known for these areas.

But I think it really starts with us doubling down on being viewed as the expert for the customers' home and everything home-related.

And if we start there and do a good enough job there with differentiated products, with really getting better services and solutions in place, then it opens up the doors to these other things.

The further you move from the trunk of the tree out to the branches, the more difficult it is to tell the story.

But when we are adding lighting and furniture and those type of categories, those will be easier for us.

But for someone to look like -- for a chicken coop, that will be less likely.

But again, we're not in a rush to make a mistake.

We have to do it right and be diligent about it.

We also have to vet all these vendors that have vendor direct to make sure that they could ship, they could ship on time, that their product is what they say it is, that their customers' experiences are good before we would want to be out there pounding our chest that we have it.

But over time, if we execute against the core business and continue to earn the reputation and the credibility with the customer, growing these other aspects of the business will be a marketing effort that's a lot more easily done.

But it's a great question, Dan.

Brad Thomas, KeyBanc Capital Markets.

Thank you for taking my question as well.

A follow-up on some of the expenses for this year, the $0.23 for payroll, I believe you reiterated that number when you reported the first quarter.

Is that number still looking good for this year in terms of an expense?

And as we think about some of the growing areas that wage pressure is emerging, it does appear from many retailers that it's trickling into 2017 as well.

How are you thinking about payroll outlook for next year at this point?

Thank you.

Hi, Brad.

Yes, we did call out, in an order of magnitude, payroll-related expenses for Q2 that's similar to the -- an increase that we saw in Q1 as well.

And we believe payroll and wage pressure will continue.

We are not immune to it.

It's impacting the broader workforce, including all of retail.

It's also something that we are seeing, as you pointed out, being a more than one-year impact, that there are scheduled increases, depending upon the state or the city or the county, for multiple years out.

So we will need to incorporate that as we make our plans going out, and provide that communication in the future.

But we do see continued wage pressure.

Peter Benedict, Robert Baird.

Thanks for continuing on with Q&A here.

You gave the gross margin and SG&A impacts from One Kings Lane.

Could you give us a sense for what maybe the sales contribution was in second quarter?

You know, I think that is not something that we directly provided, although I'm sure with some of the communication and information that we've had, you could make some assumptions from there.

That's probably not the direct answer.

It's something we can consider in the future.

But I do believe, with some of the assumptions we provided -- or some of the metrics we provided, you could make some relative assumptions.

But overall, it's not material.

The entire sales activity for One Kings Lane for the quarter is not material.

It's a small part of the overall business.

Yes.

No, that's fair enough.

Thank you.

And I guess, what -- can you help us?

-- what drove the change, in your view, about the gap between total sales and comp growth?

You narrowed that, versus your prior view on the first quarter.

What drove that change?

Thank you.

Yes.

There was a multitude of reasons for assumption changes in there.

We've updated it for Q2 actuals.

It reflects modeling changes for non-comp businesses such as Linen Holdings and 1 One Kings Lane.

It reflects changes in timing for new store openings and closes, and reflects changes in shipping and sales return estimates.

So it's a multitude of items in there.

And we will continue to update that as the year progresses.

Mike Baker, Deutsche Bank.

So, we talked a lot about investments and CapEx [peaking].

I guess this was kind of asked, but I'll ask it again more directly.

Should we expect a similar trajectory in terms of investments that more directly impact the P&L, i.e., cost of goods sold or SG&A?

And then I guess the follow-up to that, and related to that, is -- you have been saying for a while that earnings would be in that range of $4.50 to just over $5 during this heavy investment phase, and then it sounds like this could be the peak year of that heavy investment phase.

So is the proper conclusion that earnings will break out of that range next year?

Thanks.

Well, right now we are working on our fiscal 2016 year.

And when we get closer to fiscal 2017, we will provide information on where we think that model and EPS range would look like for next year.

And if you wouldn't mind repeating the first part of your question?

I believe it was investments in cost of goods sales, cost of goods sold, and SG&A for the year?

Sure.

Yes.

I mean, pretty -- I'll just ask it more simply.

This year will be the peak year of investments on CapEx.

Will it also be the peak year in investments that impact the P&L more directly?

As in pricing or --?

I'm not sure I understand.

SG&A.

Is this -- you spent a lot of (multiple speakers) -- yes?

Well, we are going to continue investing in payroll.

As we had mentioned, we do have wage increases, and we are committed to providing superior customer service in our stores.

And so the technology expense is also associated with our strategic initiatives, and we will continue to see some of that as well.

It depends on our mix of strategic initiatives as we roll forward in terms of IT projects.

Right.

Well, I guess that will suffice.

I'm sorry, Mike.

Go ahead.

I was just going to say that's the point of the question right there, is that the CapEx investment is peaking.

Can we say that that technology investment peaks this year as well?

Or are you not saying that?

Well, in terms of CapEx, if we invest less in CapEx in future years, the less CapEx you would have over time, you have less depreciation associated with that, if that's what you're asking about.

And considering all your existing assets remaining the same, you would see, over time, a benefit in the P&L with less depreciation.

Okay, okay, understood.

Thank you.

Matt Fassler, Goldman Sachs.

A couple of quick ones.

If you think about One Kings Lane and its impact on the second quarter, were there any transaction costs that may have inflated the SG&A on a one-time basis that won't recur going forward?

No.

Yes, nothing significant.

But what we would say, Matt, is that a lot of the benefits have yet to be derived, the closing of the San Francisco Wharf, and the system conversion, a lot of the benefits, obviously, we haven't begun to see yet.

Understood.

And then secondly, your inventory growth was subdued relative to what you had seen over the past few quarters, which I guess is good news to the extent that the environment is challenging.

Can you talk about what brought the inventory levels down?

Do you feel like you are in stock where you need to be, particularly as you broaden out the assortment and as you presumably take on some inventory from One Kings Lane?

Yes, we took on some inventory for One Kings Lane.

We also took on a little inventory related to the opening of the Lewisville, Texas facility we talked about.

In our inventories, we continue to manage them.

We are obviously getting ready for holiday, and so we think they are in good shape and they are going to continue to be tailored to meet customer demand.

And then also going forward, Matt, you look at that settlement.

We said it a few times.

The inventory we are adding for the furniture and home decor business, that's heavy VDC.

And that if you go into our Hyannis store, the Bed Bath, the new store there, I think you will see an example of some opportunities to do what we call Store of the Future, which is to show product not carried and make it available to the customer, and reduce inventory carrying costs.

Great.

Thanks so much, Steve.

You're welcome.

Seth Basham, Wedbush.

Good evening and thanks for taking my question.

My question revolves around differentiated products, and you spoke about in this call.

If you can give us a sense across the enterprise what percentage of your sales mix is for proprietary or exclusive products, that would be really helpful.

Here's the answer.

The answer is that we don't have a target.

But we do have the objective to drive differentiated product.

And I think you've probably heard it from us before.

And everybody will cringe, but differentiated product is life-and-death to us.

So it really is.

So if you look at Bed Bath & Beyond, which does depend a lot on branded product, we work on lead-time, first-to-market with product, but we've worked very hard on.

If you look at Artisanal or you look at ED bedding, or you look at what we have done with Wamsutta, very important.

If you look at concepts like Cost Plus World Market, Christmas Tree Shops andThat!, largely proprietary, significant proprietary products.

Look at One Kings Lane and that we have now launched this private-label program.

If you look across Harmon, where we measure cost in growing our private-label product, in each of the categories that we do business in, it's essential for us to drive differentiated product and to, over time, be known for it.

So -- but we don't set a goal because it goes down to what we are able to execute and customer acceptance of it.

So, in certain categories, things that have a plug, it's very difficult for us to drive a lot of differentiated product.

So, I can't answer the question with a percentage or a number, but I could tell you that it's larger in certain businesses, smaller in others, and being driven passionately across all.

That concludes the question-and-answer session.

I will now turn the call back over for closing remarks.

Thank you, Adrianne.

And thank you all for joining us on the call today.

We look forward to having you join us on our next quarterly earnings call, which is scheduled for December 21, 2016.

Have a good night.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating and you may now disconnect.