Bed Bath & Beyond Inc (BBBY) 2016 Q3 法說會逐字稿

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

(Operator Instructions).

Today's conference call is being recorded.

A rebroadcast of the conference call will be available beginning on Wednesday, December 21, 2016, at 7:30 PM Eastern time through 7:30 PM Eastern time on Friday, December 23, 2016.

To access the rebroadcast you may dial 888-843-7419, with the passcode ID of 43897412.

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

Please go ahead.

Thank you, Adrienne, 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'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 December 21, 2016, can be found in the Investor Relations section of our website at www.bedbathandbeyond.com.

And for those of you who may have holiday parties to get to tonight, here are some highlights.

Third-quarter net earnings per diluted share were $0.85.

Net sales for the quarter were approximately $3 billion, an increase of approximately 10 basis points compared to the prior-year period.

Quarterly comparable sales decreased approximately 1.4%.

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 April 18, 2017, to shareholders of record at the close of business on March 17, 2017.

Given the comp in the fourth quarter to date, and our assumptions for the remainder of the year, including the critical days leading up to Christmas, we are modeling a full year comp sales decline of approximately 50 basis points, with net sales increasing about 1%.

Fiscal 2016 net earnings per diluted share are expected to be at the low end of the range we have described in our previous earnings press releases.

During our call today, Sue will review our third-quarter financial results and some of our planning assumptions for fiscal 2016.

And then Steven will give an update on some operational and strategic developments, including the recent acquisition of PersonalizationMall.com, which is known as PMall.com and PMall.

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

I'll now turn the call over to Sue.

Thank you, Janet, and good afternoon, everyone.

I'll start with a review of our third-quarter results, which include the activity of PMall for the last few days of the quarter.

Our net sales for the quarter were approximately $3 billion, an increase of approximately 10 basis points from the third quarter of last year, primarily due to a 1.5% increase in non-comp sales, including One Kings Lane and new stores, partially offset by a 1.4% decrease in comp sales.

As we expected, our third-quarter comp sales trends were running sequentially better than the second quarter.

However, sales softened considerably a week before the presidential election.

After the election, comp sales picked back up; and, in fact, we experienced relatively strong comp sales from Black Friday through Cyber Monday.

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

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

As a reminder, One Kings Lane and PMall are both currently excluded from our comp sales calculations.

PMall will be included after the one-year anniversary of its acquisition.

One Kings Lane will be included in comp when the re-platforming of its systems and integration of its support services, both of which are currently in process, have been in place for a period long enough to allow for a meaningful comparison of One Kings Lane sales over the prior period.

Gross margin for the third quarter was approximately 37% as compared to approximately 37.8% in the prior-year period.

This decrease as a percentage of net sales was primarily due to, in order of magnitude: first, an increase in net direct to customer shipping expense as a result of more promotional shipping offer activity, including a change in the Bed Bath & Beyond free shipping threshold from $49 last year to $29 this year; and for a few days, we offered free shipping on all purchases.

And second, an increase in coupon expense, resulting from increases in redemption and the average coupon amount.

The inclusion of One Kings Lane reduced total Company gross margin as a percentage of net sales by approximately 13 basis points in the third quarter.

SG&A for the third quarter was approximately 29.8% of net sales as compared to 27.9% 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 expenses, included related depreciation.

The inclusion of One Kings Lane increased total Company SG&A expense as a percentage of net sales by approximately 15 basis points in the third quarter.

Our income tax rate for the quarter was approximately 34.5% compared to approximately 35.3% in the prior-year period.

The third-quarter provisions included favorable net after-tax benefits of approximately $6 million this year as compared to $6.9 million last year, due to the distinct tax events occurring during these quarters.

Considering all of this activity, net earnings per diluted share were $0.85 for the quarter.

Moving on to the balance sheet, we ended the third quarter with approximately $559 million in cash and cash equivalents and investment securities.

Retail inventories were approximately $3.2 billion at cost, an increase of approximately 1.4% compared to the end of the prior-year period, due in part to the growth in inventory in our distribution facilities for shipments to customers, as well as the inventory balances from PMall and One Kings Lane.

Our Lewisville, Texas, facility, which opened for inbound freight last quarter, began direct shipments to customers during the third quarter.

Retail inventory continues to be tailored to meet the anticipated demands of our customers, and are in good condition.

Capital expenditures for the nine months of 2016 were approximately $276 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; the re-platforming of One Kings Lane's systems and integration of its support services; spending related to the opening of our new distribution facility in Lewisville, Texas; and investments in new stores, store relocation, and store refurbishments.

We opened 10 new stores during the quarter, including five Bed Bath & Beyond stores, four of which were in Canada; four buybuy BABY stores, three of which were in Canada; and one Face Value store.

We also closed eight Bed Bath & Beyond stores.

During the quarter we repurchased approximately $76 million of stock, representing about 1.8 million shares, under our current $2.5 billion share repurchase program.

This authorization had a remaining balance of approximately $1.9 billion at the end of the third quarter.

In addition, our Board of Directors today declared a quarterly cash dividend of $0.125 per share to be paid on April 18, 2017, to shareholders of record at the close of business on March 17, 2017.

Now, again, here are some of our planning assumptions for fiscal 2016, which incorporate our year-to-date results, including One Kings Lane and PMall since their dates of acquisition, and recent business conditions.

Given the comp in the fourth quarter to date, and our assumptions for the remainder of the year, including the critical days leading up to Christmas, we are modeling a full-year comp sales decline of approximately 50 basis points, with net sales increasing about 1%.

We continue to model gross margin deleverage for the full year, including increases in coupon expense and net direct to customer shipping expense.

We've said previously that we expect the gross margin deleverage to be slightly less than in fiscal 2015.

Including the extension of Bed Bath & Beyond's $29 free shipping threshold, the slight deleverage from One Kings Lane, and the slight leverage from PMall, we are modeling the full-year gross margin deleverage to be relatively flat with fiscal 2015.

We continue to model SG&A as a percentage of net sales to deleverage for the full year, primarily due to payroll and payroll related items, including wage increases; further investments in technology; including related depreciation; and advertising expense.

This assumption includes slight deleverage for One Kings Lane and PMall.

As a reminder, last year in the fourth quarter, SG&A included certain nonrecurring items which benefited our fiscal 2015 full-year net earnings per diluted share by about $0.06.

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

Annual net interest expense is estimated to be approximately $75 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.

Year to date, we have opened a total of 27 stores and have closed nine stores.

Earlier this month, we opened Beyond at Liberty View, a unique shopping experience in the Sunset Park neighborhood of Brooklyn, consisting of four of our retail concepts under one roof, including Bed Bath & Beyond, buybuy BABY, Cost Plus World Market and Face Values.

In addition, we opened our second reformatted andThat!

store, which is located in Jacksonville, Florida.

We remain on track with our fiscal 2016 model to open approximately 30 stores, most of which are in new markets for our various concepts, and close approximately 15.

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.

We expect to repurchase shares under our current $2.5 billion authorization and anticipate the completion of this program to occur sometime 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 nine-month results, including One Kings Lane and PMall since their dates of acquisition, and our recent business trends, we are modeling our fiscal 2016 net earnings per diluted share to be at the low end of this historical range.

We are currently in the process of completing our financial planning assumptions for fiscal 2017, which, as a reminder, is a 53-week year.

We will provide further information related to our modeling assumptions for fiscal 2017 during our fourth-quarter conference call, which is planned for April 5, 2017.

With that, I will turn the call over to Steven.

Thank you, Sue.

Our third-quarter results were in line with what we experienced during the first half of the year.

This reflects the increasing proportion of sales moving online through various digital platforms.

Within this environment, we have been working continuously to evolve our Company and expand the breadth of the differentiated products, services, and solutions we offer.

By providing real answers to our customer needs at the right time and at the right value, we can further strengthen our credibility as the experts for the home, and for our customers' accompanying life stages and life interests.

Today I will provide an update on some of the key developments in our business over the past several months, and the progress we're making in transforming our Company to be increasingly relevant and to improve our competitive position in this ever-changing retail environment.

As we reported on November 23, we made an all-cash acquisition of PersonalizationMall.com, an industry-leading online retailer of personalized products.

The addition of PMall expands our existing personalization and customization capabilities and further enhances our offering of differentiated products, services, and solutions to our customers.

As we have said previously, we view personalization as a significant opportunity for us to create additional differentiation and enable us to do more for, and with, our customers.

The market for personalized products is highly fragmented, and estimated to be in excess of $15 billion, with a high-single-digit annualized growth rate.

Historically, demand has been largely driven by gifting occasions, peaking during the winter holiday season.

Over the past 18 years, PMall has developed into a highly successful and innovative company within the personalization category.

A key competitive advantage is their fully integrated, proprietary technology platform that drives quality, speed, and efficiency.

PMall's production facilities are capable of automating 14 different innovative personalization processes on a variety of surfaces.

These processes include sublimation, embroidery, digital printing, engraving, and sandblasting.

PMall already has a large assortment, with the opportunity to grow.

The assortment includes personalized products to commemorate all of life's events and special occasions such as weddings, birthdays, holidays, and the welcoming of a child.

Their streamlined production processes enable a one-day average turnaround time.

And, importantly, they also share our passion for and commitment to excellent customer service.

PMall will remain a distinct brand under the Bed Bath & Beyond umbrella.

And we will support them as they continue to improve the customer experience by enhancing their product mix, upgrading their e-commerce website, and driving optimization of their marketing initiatives.

As we described in our November 23 press release, we expect the acquisition to be slightly accretive to our fiscal 2016 net earnings per diluted share.

Going forward, there are synergies that should result in future cost savings and efficiencies in areas including shipping and marketing.

While PMall will remain a distinct brand, at the same time we already have nearly 5,000 items available on the Bed Bath & Beyond and buybuy BABY websites, and in-store through the Beyond store that can be personalized.

We believe there is an extensive opportunity to grow this assortment.

We're excited to partner with PMall and leverage their advanced personalization and production capabilities to further advance our personalization capabilities across our other concepts.

In addition to growing our assortment of personalized products, we have also continued to build out our product and service offerings within other categories, notably furniture and home decor.

As we have previously said, the home furnishing space provides us tremendous opportunity to build a large, curated assortment that includes unique and differentiated product that will engage with our customers in a meaningful way by providing inspiration, solutions, and services across various lifestyles.

Also, we recently introduced a new home decor feature, a Drapery Design Gallery, to be available in select stores and online at bedbathandbeyond.com.

Customers can customize draperies for their home by choosing from 250 fabrics, three header styles, and four lengths.

In just a few simple steps, customers can select the look and style of the window treatment that best fits their home decor.

To showcase our expanded offering, including within the home furnishings and decor categories, and our expertise for the home, we released our first-ever Welcome Home catalog in early October, containing 84 pages of product inspiration for the entire home.

In some respects, we are at the beginning stages of building awareness of our wide-ranging assortment of differentiated products, services, and solutions for the home and the accompanying life stages and life interests through more inspirational imagery and content.

Catalogs of this type are one way to introduce customers to these expanded offerings and our broad-based expertise.

While the results of the catalog will include the benefits of longer-term brand building, we are pleased with the initial reception of the book and the positive feedback from customers.

Based on the initial results, we plan to release another home catalog this spring to further reinforce our position as the expert for the home.

Also, to further these efforts, we are bringing a significant portion of our creative and photography work in-house, and hiring a team of about 70 people who will work together, alongside existing One Kings Lane creative and photography staff, in our new creative and photo studios in Manhattan.

We believe bringing more of these capabilities in-house will allow us to have greater control over our ability to produce more inspirational content.

In addition, we expect this effort to help increase our digital marketing assets and drive other operational efficiencies for the business.

During the third quarter, other marketing initiatives included the launch of a beta test for a new annual membership program called Beyond+.

For an annual fee of $29, which is being used in our test, members receive 20% off their purchases as well as free standard shipping on every order for an entire year.

The initial test includes a small cross-section of our customer base, and we are currently monitoring the purchasing behavior of our members over time.

We will formulate the next steps for this program based on the key learnings from the beta test, which to date remain encouraging.

In addition to elevating the customer experience through our product and marketing initiatives, we have also advanced our initiatives to elevate the experience within our stores.

As Sue mentioned, we have opened our second reformatted andThat!

store, which is located in Jacksonville, Florida.

We were excited to design this new store to reflect the lifestyle of the area and to feature merchandise inspired by its coastal location.

The grand opening occurred last week, and we look forward to learning from our customers' response to our store.

As you may recall, our first reformatted andThat!

store opened this past April in Kennesaw, Georgia, and it continues to perform well.

A couple of weeks ago, we opened the doors of our new shopping venue, Beyond at Liberty View, located in the Sunset Park community within Brooklyn.

With approximately 120,000 square feet, this is a unique shopping destination that includes a Bed Bath & Beyond, buybuy BABY, Cost Plus World Market, and Face Values, all under one roof.

For about two years now, we have worked to help transform this historic industrial complex, constructed in the early 1900s, into a vibrant retail space that showcases the products, services, and solutions we have to offer today.

We believe the learnings generated from this initial Beyond experience will be beneficial to us in many ways.

First, many of the aspects of what we've done here, including our enhanced assortment and services, can be rolled forward to other store locations.

Second, we will iterate the entire experience in other settings where appropriate.

This experience gives us tremendous clay to work with in continuing to do more for and with our customers.

We are very excited to be open in Brooklyn and service the local community, and have planned our grand opening to take place during the Martin Luther King holiday weekend in January.

In addition to bringing a Bed Bath & Beyond, buybuy BABY, Cost Plus World Market, and Face Values together in one location and under one roof, there are many features and services special to the Beyond venue.

They include: an experiential environment where customers and their families can participate in product demonstrations, how-to sessions, cooking classes, and other live events in our event space called 71 at Beyond, named after the year Bed Bath & Beyond was founded; our Born in Brooklyn feature, consisting of Brooklyn-based designers and their products; a seamless and more personalized shopping experience, utilizing our latest digital tools to assist customers in finding the right merchandise for their homes and lifestyles, such as scan for more, which enables a customer to view product images and get product pricing information as well as customer reviews; interactive catalogs, which enable customers to view an expanded assortment of product such as seasonal furniture and bed and bath items; and a digital product advisor which enables customers to find what they are looking for based on responses to questions that filter the assortment to products that best fit their needs; also a dedicated area called the Beyond room for customers to work with our in-store experts for concierge services such as our personal shopping, registry, and soon-to-come decorating services; a curated collection called "Best of New," which will feature the best new items from Bed Bath & Beyond, buybuy BABY, Cost Plus World Market, and Face Values.

This collection will be located in the Beyond room; a Blow In, Blow Out bar where customers can make appointments with professional stylists to wash, blow, and style their hair; additional special services such as home delivery, assembly, and installation services; a unique food hall style dining experience called the Bay Market Kitchen, which serves casual American cuisine as well as local craft beers and select wines.

In addition to the restaurant, there are other food stations featuring local fare that change vendors on a regular basis, and coffee bars featuring local favorites such as Brooklyn-based Toby's Estate Coffee.

The Sunset Park community is a thriving and dynamic part of Brooklyn, and we're happy to be part of this growing and diverse neighborhood.

We believe that this venue, including the revised format of our stores, along with the enhanced services we offer, will become a retail destination for customers to have a fun and productive shopping experience.

We hope many of you will be able to visit Beyond at Liberty View and give us your feedback.

In summary, it continues to be a transitional time for retail.

And new advances in technology are creating opportunities for our customers to shop in a more seamless environment, and for us to do more for and with our customers, and connect with them in a more personalized manner.

As our business transforms, we are navigating the competitive landscape and adapting as customer preferences and purchasing behavior evolve.

We believe that we are making the right investments for our Company's long-term success, and are well positioned to deliver for our customers and our shareholders.

In closing, I would like to thank our dedicated associates, including our new team members from PMall, for their ongoing efforts to satisfy our customers and improve our competitive position in the categories in which we do business.

I wish you all a healthy and happy holiday season and new year.

Janet, I'll turn the call back over to you.

Thank you, Steven.

We will now turn to the Q&A portion of our call.

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

Adrienne, we're now ready to take questions.

(Operator Instructions).

Christopher Horvers, JPMorgan.

Two questions.

First on the beta test of the shipping program, I believe this was invite only; was curious what the response was in terms of how many people signed up; and would love to hear what has surprised you the most.

And then my second question is on the SG&A line, if you just look at the sequential SG&A dollars, it really blew out here in the third quarter.

So was curious what really drove that.

Was payroll dollars and advertising dollars actually growing year-over-year; and, hence, more than just deleveraging?

And what other factors continued to that level of spending?

I will handle the beta test question.

It was an invite only, correct.

It's a limited test.

And we were quickly oversubscribed.

So, as I said, one of the things that we are learning was going out at $29 and trying to get an understanding of it.

The other thing about it is the learnings of it.

It's very much a work in progress right now because the initial reaction was very good; but how does it modify behavior over time is really what we're looking to learn.

So it's really too early to really give you any real information on it.

But so far, it's exceeded our expectations and we're very happy.

But there's a lot to learn about what it will be, and what it could mean to us.

And I'll take the second question regarding SG&A.

So, you had asked about payroll and technology increases.

We did, as we called out on the call, have a negative 1.4% comp.

So that impacted, from an SG&A perspective, the deleverage that we saw on those two line items.

Well, I guess it's really from a sequential dollar -- it seems like your SG&A rate has really accelerated in the third quarter.

From another perspective, just look at the dollars in 3Q versus 2Q.

It seems to have taken a step function up, so it seems like it's something beyond the deleverage.

Yes.

Well, as we've said in the call, in addition to the deleverage our payroll, we have been making investments in it, especially in the rate this year, so there is a sequential dollar increase in payroll, as you said.

Also other categories may have some sequential increases, but payroll was the main one.

Alan Rifkin, BTIG.

Steve, in the recent past, your acquisitions have increasingly been along tangential lines.

Does there come a point in time where you take a look at the current portfolio, particularly as it relates to Christmas Tree Shop or even Bed Bath & Beyond stores that are possibly not earning their cost of capital, and you take a more disciplined approach to potentially shedding assets?

And then I have a follow-up, please.

You know what?

That we're not locked into [heading] assets or disgorging of assets.

We're trying to do the things that make sense for the Company.

So again, we said it over and over again, but our focus is on the customer.

How do we more with the customer?

And the ability to offer these services, the categories of product, the solutions that we can offer, and how to leverage that is the goal.

We start with the customer, trying to understand their interests, their life stage, through analytics and targeted marketing to service them.

So, whether we are adding furniture and home decor, whether we're adding services or if we're adding differentiated product and personalized product, all these things are in keeping with what we're doing, with our objective, and our stated objective, to do more with the customer.

So whether we add people by way of hiring people, or we buy a small company, or how we move forward, it's just a vehicle in a lot of ways.

So, all these things are giving us a better ability to deliver for the customer.

So, it's not that we're trying to get bigger, or there's nothing about ego here; it's all about being better.

And so it's the same thing with disgorging.

We will close stores when they make sense to close them.

We will move things out of a portfolio if it makes sense to do that.

If we're providing certain types of services that don't make sense, or that we can't make sense of, we will stop doing it.

Of course, we will try to do it correctly, and then we would stop doing it.

So we don't look at it as a size component of getting bigger or smaller.

It's really just being better.

Okay, thank you.

And a follow-up, if I may.

Based on your commentary, obviously you are now going to be in the $4.50 to $5-plus EPS range for what will now be five years.

I know you haven't given 2017 guidance yet, but by your estimate, when do you think that we may break out of this $4.50 to $5 range?

Is it two or three years out?

Or is it hopefully something sooner than that?

And along those lines, do you still anticipate that this year will be the maximum investment spend with respect to e-comm?

Thank you.

Yes, you know what the answer is?

First of all, we don't give guidance beyond this time frame.

And the truth is is that I think anybody who tells you what they will be making, three or four years out, it's just based upon a set of assumptions.

As everybody learns is that the further out you go, the more difficult it is to predict what it's going to be.

A lot of these investments we have made have really been foundational for us.

They've put us in a position to grow, and that's hopefully what will happen.

But we're not able to say.

We don't know.

We know for sure if we didn't make these investments we'd be one of those companies that you wouldn't be talking to anymore.

So, we're fortunate that we still make some of the best returns in retail.

We know that it's not a sexy place to be today, retail.

We know what our competitors are doing, or not doing.

So, these investments are really intended to position us to grow our earnings.

We won't be satisfied until we are growing our earnings again.

I wish I could tell you exactly the day that would be, but it's just not the case.

And we're not going to be telling you something that's three or four years out.

Obviously things that we're working on, like the growth of our digital business, which has been so strong -- the larger the component of our overall business our digital business becomes, and we continue to grow it, that will be beneficial to us.

If we are able to execute against the differentiated product, the services and solutions that we offer, that will help us to achieve greater profitability.

With the differentiated product, the margin structure is different.

So all these things are component pieces of getting better and producing the better earnings.

But it's the question that is the right question to ask; it's the question that we work towards accomplishing.

But there's just simply -- I can't tell you when that is.

There's internal variables that we execute against that we think we're doing fairly well, and there's external things that are happening in the marketplace.

Still, the lion's share of our business is done in bricks and mortar.

And we're seeing a reduction in foot traffic I think it is being seen across all retail.

And as long as we have a significant component in bricks and mortar like that, that is a bit of a headwind for us.

And regarding our CapEx, directionally this is our peak period.

But I do want to call out that CapEx doesn't always neatly fit into a fiscal year.

The projects shift due to timing or whatnot, so we will take that into account with our planning assumptions for 2017.

Because we also need to take a look at PMall, which we recently acquired, and what their needs are in terms of CapEx, as well.

But right now we are -- directionally, yes, we are in the peak period of CapEx.

Steven Forbes, Guggenheim.

You talk about differentiation a lot.

So when you think about the in-store experience maybe in a holistic manner, do you think there is a greater opportunity over the near term to drive differentiation through service and customer engagement, more so than product?

Is that where the focus should be when you think about the short-term opportunity here?

It has to be both.

When we talk about it, we're going to be providing -- differentiated product, and I've said it often, is life and death for us.

And we have got to continue to increase the degree that we explain to the customer the differentiated product that we carry, and how it's different, and why it's better and how it's the right value for them.

At the same time, when you talk about the services, whether we have the largest bridal registry, whether we are going to have the largest baby registry, the largest new mover business -- all these things are important to deliver on those related services.

When we talk about the decorating services or being able to have scheduled appointments to go into create a registry; when we talk about the things that create the additional stickiness with the customer, the more experiential things that will increase foot traffic relative to where it is today -- those are all critical elements of being different, but making sure that the customer understands that we are different and we're delivering on the message that we're different.

So it can't be done in one way.

Again, it goes back to the inspirational content we're showing, all the things we're doing to make the customer feel as if we're the expert for the home.

It's just not one road that we could travel.

Each of these things are important to us.

I understand that you were in our Brooklyn location, I think, today.

Yes.

So, you'll see there some of the things that we're delivering for the customer.

And not everything is even open yet.

But again, those are the things that we're trying to explain to the customer.

So if you could bring the differentiated product, if you could bring together the local product, if you can bring together different services that we offer and the expertise that we provide, all these things have to be -- you have to be great at them.

The customer has to understand that you have them, and you have to deliver on them.

So I wouldn't say one is more important than the other.

They are all critical to us.

And then that's probably a perfect segue into a follow-up.

How long do you think it takes before you can capitalize on the earlier future learnings from Liberty View?

And at what pace do you think you can roll it out?

How do you think about repurposing the space in the legacy stores?

Are you starting to think about leveraging some of these learnings?

Because obviously the store is very different, whether it be the merchandising, the customer experience, having all the brands where they are.

How do you think about leveraging that?

And at what pace can you do it?

Interestingly enough, a lot of the things we brought together in Brooklyn we've actually offered in other places.

And it's the first time that's all been pulled together.

So when you look at some of the digital experience -- the scan for more, the interactive catalogs, the digital product advisors -- those exist elsewhere.

The idea of doing localized product and shelving, like the Born in Brooklyn aspect, we've done elsewhere if you go down to Kennesaw.

And some of the fixturing, if you go to Hyannis and you see the new Bed Bath & Beyond, some of the fixturing and the signing components we've done elsewhere.

So if you take some of the special services -- the home delivery, the assembly, the installation -- some of these things have been done elsewhere; the growth of the food component that we have in the stores, the craft beer and wine that we sell directly ourselves.

So all these things have -- some aspects of it have been in the works elsewhere, and we've taken these learnings and we put it into this one venue.

So those things are being rolled forward.

And hopefully as we open up new stores, they will not look like the old stores.

And to the customer, it will be recognizably different.

We're taking those learnings now and moving them forward.

On an individual basis that has been happening, and the opportunity exists going forward.

And on the big scale to take the project in its totality and iterate it and do it elsewhere -- that also exists.

Simeon Gutman, Morgan Stanley.

One question on sales, one on margin.

On sales, just trying to get a sense of tempo in the business.

I think it was mentioned that it was good, Black Friday, and I think through Cyber Monday.

The implied Q4 guide I think is almost plus 1. Just curious if that implies that the trend has continued.

Then can you talk about what percentage of the quarter, in terms of revenue, is still to go?

So, you're right.

We did mention that we had some strong comp sales from Black Friday through Cyber Monday.

And we've had what we've seen to date.

We do have a few critical days leading up to Christmas that we have assumptions for, and then plans for the rest of the quarter.

We do, in our model, have a slightly positive comp for the fourth quarter.

And Simeon, just also to add to what Sue said is that sequentially we had hoped for and were seeing sequentially a better third quarter than both our first and second quarters, in terms of our comp, right up until the week before the election.

And then I think there was a lot of noise around the election; and after it, we recovered again.

From all those perspectives -- and then had a good Black Friday weekend right into that -- through that Monday.

So again, all that is encouraging.

I guess I didn't want to ask this as the follow-up.

But can I ask why are you seeing all categories pick up?

Is it response to free shipping?

Is it response to some of the higher ticket items you're selling in the home furnishing space?

Curious, what's the change?

Is it something that feels sustainable to you?

We really don't talk specifics about a category, an individual category.

But as we've been calling out, we have seen good growth in our digital channels.

And we're going to continue to provide great customer service through the rest of the quarter.

And Simeon, since you didn't want to ask that as your follow-up, we should give you a third question?

Michael Lasser, UBS.

You've always kept your cost structure very lean, especially on the SG&A side.

So if sales continue to be sluggish, do you have opportunity to pull back on costs?

And what's your philosophy there?

How do you manage that without impacting the customer experience?

Well, you said it well.

You can impact the customer experience.

That's one thing that we feel is extremely important.

We've talked in the past about how we're a cost-conscious organization, and we feel we have a culture of cost control.

It's something that we look at and monitor every day.

And we will continue to see where we can cut costs, but obviously not at the expense of customer service.

(multiple speakers) I think we were just looking at the question about the SG&A, regarding the dollar rise in the third quarter.

The third quarter was the first full quarter for --

One Kings Lane?

One Kings Lane.

Yes.

And also we had a little bit of PMall.

Yes.

Did you say that?

I'm sorry.

No, no.

But you are absolutely right.

Yes, we didn't mention that, but we should have.

So you do you think you have an opportunity to cut costs if sales remain sluggish?

And let me add my follow-up question, because that was more of a clarification.

You are running up against a 3 times adjusted leverage ratio.

What's your appetite for buying back stock as you move towards that guard rail?

Thank you so much.

Our appetite in buying stock is that we generally dollar average in.

And we look at that every quarter, and consider through that.

The first thing we're looking to use the dollars for is basically to reinvest in the Company.

Yes.

After that, we would look at acquisitions and then into dividends.

But share repurchases, those come at the end of that.

But we do have share repurchases.

We do plan on continuing that program.

And on the SG&A side, your capacity to pull back on -- could you size that amount that you could potentially tap into, if sales do remain under pressure?

You know what?

Again is that the things that we're spending on are because we believe in these investments we're making.

So it's not a lack of capability.

And we've always said we could produce whatever numbers anybody wants in a short term.

But the things we're investing in and the foundation we're building is to be a great company.

We're not going to save our way to greatness.

It's not our intention to cut back on things that we believe in; and that we believe we need to be building on, for the sake of producing additional earnings for a particular period of time.

The things we're doing, we believe, will generate the additional sales over time and will generate the additional profitability.

But it is like you said; it's something we've always been tremendously cost conscious.

But the decision we made not to do these things has been a -- not for lack of capability, because these are the things we believe we need to be investing in.

Seth Sigman, Credit Suisse.

I wanted to follow up on the fourth-quarter outlook.

When you look at the guidance, it implies an improvement in earnings growth, or less of a decline.

Some of that is the sales improvement that you talked about.

But how much of that is accretion from PMall?

And also what else would be contributing to that earnings improvement relative to some of the margin trends we saw in the past quarter?

Well, we do have PMall included for a full quarter in the fourth quarter.

They have some slight leverage in terms of gross margin.

And we also do have, as you previously mentioned, a slightly positive comp in the fourth quarter planned.

Okay.

And can you quantify the accretion from PMall?

When we did our release, we did say it's slightly accretive overall, from an EPS perspective.

That's as far as we disclosed.

But, overall, PMall is not material.

But it is slightly accretive to the overall business.

Understood, okay.

And then, Sue, you outlined some investments earlier in the year -- the $0.17 for technology investments; I think it was $0.23 for payroll.

Can you give us an update on how that's tracking?

It seems like a little bit higher with One Kings Lane and PMall, but just where are we today?

And then also as you think about next year, I realize you're not going to give guidance, but can you give us a sense of whether these investments or these expenses start to roll off?

Or do you consider them as part of the embedded cost structure going forward?

Just trying to understand, do we assume a higher level of spending could persist in 2017?

Thanks.

Sure.

We have been calling out all year that we've had increases in payroll and technology, so we have been seeing what we originally mentioned way back when, at the beginning of the year.

And so we continue to see those trends.

Yes.

And as far as next year, the investment we made in the payroll rate will continue next year.

That won't reverse itself.

That will continue.

We've given people raises, and so they will still continue to have those next year.

And like Sue said, we continue to invest in technology platforms.

So that will continue next year also.

Matt McClintock, Barclays.

I was wondering if you could talk a little bit more about the opportunity in personalization.

You mentioned 5,000 SKUs already.

I was wondering, how big can that be?

And how crucial is that to the differentiation strategy that you are trying to follow?

Thank you.

It's just a component piece of it.

It's important.

I think, what we did we say?

It was a 15 -- what was the numbers?

$15 billion market?

I know again all these things -- you could read any trade journal; believe it, or not believe it.

Part of it is also what do you make of it.

Now importantly, when we talk internally with all our merchants, they think it's a significant opportunity with our existing merchandise assortment to drive business through personalization.

And personalization is an aspect of differentiation.

It's one aspect of it.

I wouldn't say that it's more or less important than other things that we could do to differentiate.

But it's something that we were building out ourselves.

We've looked at opportunities for a while, and we were really thrilled to be able to have been able to partner now with PMall.

And we think that this is the beginning of something that will grow very well for us.

And it also complements a couple of our lifestyle businesses, such as baby or bridal, where personalization is a desired product at that time.

Right.

And again we go back to talking about doing more with the customer, understanding their life stages and their life interests.

If you understand those things -- be able to buy a gift that is directed towards those very important events or interests, it could be very competitively sound for us.

One of the things is that their processes are very strong; and they have a strong customer service mentality, and they have -- the technology is very strong.

And their turnaround time is world-class.

And the capacity to support the rest of our business, we believe, is there.

So for all those reasons, growing them for what they do under the PMall name, and then what it could mean for the rest of the organization, we think, will be wonderful.

If I could follow up on that, as you think about the market, the $15 billion that you talk about, is there really anybody that's doing it the way that you could potentially bring personalization to the consumer?

I'm just trying to think about the competitive dynamic that exists in that market today.

Are you looking to take market share of that market?

Or are you just looking to grow the addressable market, in a more meaningful way because you are focusing on something that's just unserviced today?

I think both.

I think that if you -- as they improve their look and their feel, as they improve their blanks and so they are products that they offer and they're marketing, there's an opportunity to take market share.

And as we develop new categories within personalization with our product offerings, I think there's an opportunity to expand the market.

Both would be opportunities.

It's funny, because going back when bed and bath was a business, there was just little bed and bath stores and it was done by department stores, and they thought the market was X. But then you get specialization, all of a sudden you recognize the market might be Y.

No different in the pet industry, or no different with container stores or closet and storage.

So in each of these categories, I think that if you execute something well is that you do, in part, develop demand.

So that is hopefully part of what we will do.

Matt Fassler, Goldman Sachs.

My question focuses around how you think the Company is thinking about value as you think about list price, as you think about the coupon, and what levers you have to drive the perception of the value you deliver.

And I know that the membership program is probing at ways of thinking about that.

But how has that evolved, in your views, as pricing has gotten somewhat more transparent, and the competitive environment has broadened out, as you described earlier in your comments?

Thank you.

You're welcome, Matt.

Yes, you have to have differentiated product.

Again, we keep going back to that, is that if we really want -- it's great that -- if we want to be less sensitive to that direct competitive pricing model, that you have to have differentiated products, services, and solutions.

So we start with that, and that's very important to us.

However, when it comes to being at the right price for similar or the same merchandise, we've taken the position and we maintain that: we have to be at that price, so that if other people -- which price transparency more so than ever, that you have to be at the right price -- I mean that] the right price before the coupon.

We can't have the coupon be a -- think that that's, in any way, an answer for us.

It might be for some customers; it might be for some point in time.

But we have to be at the right price without the use of the coupon.

So that's the way we've thought; that's the way we think, that we've constantly looking at and crawling our competitors' websites.

That we have a dynamic price capability that we are using today, and growing it.

And so it's all important, and it's something that we report on with every buyer, every day, and with every planner.

And we look at -- and measure ourselves against to make sure that we're at that theright price, because we don't believe that for a second that it's okay not to be.

I'm not sure if that answers the question, Matt.

It does.

And to the extent I guess that in the past perhaps you leaned on the coupon more to bring you to that targeted price, and now you want to get there beforehand.

Is membership the best or most likely way to deemphasize the coupon?

Or are there other kinds of marketing you could do to maintain that traction and drive the traffic, without hitting yourself twice on price by getting right product coupon and then having that extra discount.

Well, listen, I don't want to keep beating this drum, but it is the truth is that -- first of all, we have to be thought of by the customer as their first choice.

When we talk about all those life stages and life interests, truly when I talked about baby and bridal and new mover, and back to college, and decorating your home, we have to be the first choice.

We have to be the first choice for enthusiasts.

We can't have it be a competitor when it comes to cookware or bakeware, or when it comes to closet and storage.

We have to be the first choice for these things.

So it is somewhat important that we have that differentiated product, that we really do provide services and solutions that are better for the customer; and they recognize that, and that we do it through inspirational marketing and we do it through better content.

I was just looking before, something that we do versus one of our competitors in the cookware arena, and how we show it online and how we talk about it, and frankly, we're doing well.

So these are the things that a customer has to see.

That's critical to us.

Because again, it can't be about the coupon.

We have to be at the right price.

There's all different things that are evolving, that there's product that the vendors maintain pricing.

Everybody is at the same pricing; we've never been able to take a coupon on.

That's not a new model.

That is something that we understand.

There's product that, to a customer, we say it's different, but they might not understand how it's different.

So we're not doing a good enough job of communicating so we can't price it differently, perhaps.

But when it's the same product, or the customer believes it's the same product, we have to be at that price, pre-coupon.

To be at the wrong price going forward, the customer won't find you.

When they go online, we're not going to be relevant.

We're not going to show up in algorithms.

We're not going to be in the right place if our pricing is wrong.

New customers who come online don't understand, or even know we have a coupon, or what the coupon is, or what it means.

So for us to be reliant on a coupon and to be at the wrong price, it's just the wrong thought process.

So when you said we used to think that way, I don't know if you -- if somebody in the organization told you that, it's not the organizational think.

We've never believed that we could be at a wrong price because of a coupon, or the coupon protects us from being at the wrong price.

Never the case.

Dan Binder, Jefferies.

Maybe just following up on that question: when you say the right price, I just want to understand who you are putting in that competitive set.

Is it Target and Walmart?

Is it Amazon?

Is it all of the above?

And does that put you in a position where you actually want to be the low-price leader, or just need to be within X percent of the low-price leader?

They are all competitors, as are the department stores, as are the specialty players, as are the other online pure play people, so they are all competitors.

Now, the overlap of merchandise with a Walmart is far different, or to a Target, and maybe less so with an Amazon, in a different way.

But for the same product, all those places are very relevant.

So to the extent we're at the wrong price, we're at the wrong price.

And then when you asked me, what's the right price, that's something that is literally is an interesting question.

We have all these analysts now, and they run all these algorithms, and they'll come back with the conclusions of how you move the shopper.

If you are within a certain percent or at certain price points, or certain times of the year in certain categories, you have to be at exactly the same price.

So all those things are things that are not one answer, across the board.

In some cases you have to be at the same price.

And maybe, in some instances, if you were $0.10 higher our 2% higher, it might not be important if they are bundled with other things that only we carry, perhaps.

In some cases we're competing with somebody who is really a category killer, is really known for it, and maybe we have to be the below that price to be relevant.

So all those things -- there's not one answer.

But generally if you ask me that question, the general answer I'm going to tell you is -- at the same price is the general answer I would give.

Okay.

And my follow-up question related to new categories that you've added online over the course of the last year to two years.

Curious if you could just give us an update on how those categories are doing; and if you've found ways to differentiate in those categories beyond just the initial urgency to get them up and on the website, to have the assortment that you want.

Well, the categories are all growing.

That's a general all, but most things in life aren't all, but it happens to be because they all started small.

Across the board, they are all growing.

The other thing that we did talk about and that we acknowledge is that we haven't gone to great lengths to introduce our customers to these other categories today.

It's critical that we be great in our core categories.

It's critical to us I think that we be great in really the really close ancillary categories.

At that point it would make sense to start introducing them to everything else that we sell.

At that point, we would know about our customer.

We will know more about their life stage, their life interest, what they shop for, what they've searched for, where they've searched on other sites, where they come from, where they gone to when they left our sites, to be able to offer them the other product that we sell.

But for today, we really haven't gone to really any lengths to really introduce the customer to all the other things we are adding.

It will be there, and at the point in time that we are prepared to do that, the assortment will be rich.

There's so many things about it.

A lot of it is vendor direct.

So a lot of it we have to get relationships with these vendors and have confidence in their capabilities to satisfy the customer, to deliver to the customer.

If you look at certain categories and look at the search and how you search for it on our site, you'd be disappointed.

You would look at things and say, my God, that's not best-in-class in some of these categories.

So to be running to introduce the customer to certain categories today when we don't do it well, when we really have to double down on our core categories to make the customer understand how we're different, why we're different, why we're greater than, it's just -- it hasn't been the appropriate time.

When you take a look at the 84-page home catalog that we did, that is perhaps a first step in introducing to the customer that all of the -- a number of other things that we sell, or categories that we sell.

So that's one of the things we -- the first time a content piece has gone out, to even introduce it to them in a large scale.

And that book was a very limited book.

In the spring, we will have the opportunity to expand upon that.

But it's really hasn't something that -- I think if you were to ask nine out of 10 customers -- maybe I shouldn't be giving numbers -- but most customers, a lot of the categories we've added that we carry it, they'd be surprised.

I know that Gene tells me stories all the time about family members who don't know.

I count on Gene to make sure these are good communication vehicles for us (laughter).

So it's a big opportunity for us, but we're not in a rush to be awful at something.

So, we will get there.

But for the time being, we're adding to our website; we're organizing it so it can be searched.

We're leaning on the vendors to make sure that they can deliver on our promise of service for our customer.

And at the appropriate time, we will introduce the customer to the expanded offering.

Budd Bugatch, Raymond James.

This is David on for Budd.

Thank you for taking my question.

I was hoping that you could provide a little bit of color on the ticket and the frequency of shop for customers that have gotten the opportunity to sign up for the membership program.

Listen, if Budd was here, Budd would tell you that -- don't even ask that question.

We're not going to share that type of information.

It gets a little bit more specific than we are prepared to discuss today.

It's really a small segment.

It's a real learn for us, and it's a really -- it's going to be a learn over time.

It's so important to understand that this initial excitement about joining these programs and an initial use related to it, and to understand the sustainability of it and what it means over time is something that we need to learn.

Okay.

Then maybe coming at that different way.

Can you talk about -- or can you give an idea of the online customers that choose to get fulfillment of a product to home?

Under the old free shipping threshold and the current $29 free shipping threshold, what percentage of those online orders qualify for free shipping?

Under the beta test, you mean?

It's going from the $49 to the $29 at Bed Bath & Beyond?

Is the question how much of the shipping at $29 -- how much of the shipping becomes free shipping?

Yes, as a percentage of all orders placed online, how much of it ships free under the beta test $29?

And under the -- I think the older or the prior free shipping threshold, correct me if I'm wrong, was $49 -- what percentage of online orders ship free?

Yes, we don't have the percentages to release.

But it is a significant portion that shipped free, and it obviously did go up once we lowered the threshold.

Okay.

And that's been a significant contributor to the gross margin decline, just as more customers have shopped online and you have expanded that?

Yes.

(multiple speakers) It was one of the callouts we made actually was the -- it was an order of magnitude, it was the first one.

Okay.

All right.

Thank you for taking the question.

Denise Chai, Bank of America.

So you mentioned closing 15 stores.

Were there any common themes in terms of location, demographics, maybe competitive set or performance?

Is this a new run rate for closures?

And just given all your investment in e-commerce, how are you thinking about your store network now?

No, no, and we love it.

When we look at it, it really has been a cross-section of stores.

It really has more to do with coming to the end of a term, not being able to negotiate a favorable occupancy, looking out over a future term of the lease with our expectations of what's happening with foot traffic.

Also, we look at what business do we pick up in a market without the cannibalization?

We look at the other impacts of closing the store.

Because getting to your last part of the question, the third part of the question, the stores are critical.

The stores, not only for their four-wall profitability, but the stores are also today for the appointment scheduling, to start a registry, the buy online and pick up in the store, to be able to buy the expanded assortment and return something in a store.

Those things are critical.

The store in a market drives the online digital business.

It drives it, the visibility of the store.

So all those reasons why I think the stores are important.

And the second part of the question, I guess, which is the run rate question, is that there really isn't a run rate.

These are independent decisions being made based upon what's coming available to renegotiate, and the landlord's flexibility, and the impact of keeping it open or closed based upon the new economics.

If you told me that every landlord was going to cut their occupancy in half, I would tell you that the run rate would be one thing.

If you told us that everybody was going to try to -- that wouldn't be the flavor of the day, then it would be something else.

But I don't -- it's not fair to say a run rate.

We really are making independent decisions, in each case, trying to make the right decision.

Okay, thank you.

Understood.

And just a follow-up on that.

How big is buy online, pick up in store?

And can you comment on attachment when people make a transaction like that?

What was the last part, I'm sorry?

When they do by online, pick up in store, how often do they buy something else in the store?

It's a growing part of our business.

It's popular.

And so we continue to make sure that we offer it, and we think it's a great service for customers.

We don't -- we haven't shared what the incremental attachment rate of other items when the purchase happens in the stores.

We haven't shared that information.

Okay.

Thank you.

Brad Davis, SunTrust.

It's David Magee.

I had a couple of questions.

One is with regard to the comp number, if you looked at the stores that have the latest offering of Harmon and Cost Plus, and other items that were more seemingly traffic-driving, how do those stores do, relative to the broader comp pool?

We slice it and dice it in all those ways.

And I'd say that what we're experiencing really is -- those differences are a lot -- small, at best.

The notion that if you have more commodity goods, you are going to create more foot traffic, so that those stores might experience a smaller decline in the comp; that makes logical sense.

And those departments might do -- might fare better.

But again when you look at it in totality is that it really is -- this is something that we're seeing across the board in relatively similar proportions when it comes to the impact of the foot traffic and our reductions in comp.

There is not a silver bullet by saying that, oh, if we had more stores with commodities or more stores with combination BABY, Bed Bath, that we would be doing decidedly better.

It's very -- it's on the margins.

Okay.

Thanks, Steve.

And my second question has to do with just the way you all are messaging now.

Obviously couponing has been around for a while, and the whole new catalog I thought looked good, and the Beyond+ sounds promising.

Which do you think will have the most traction with Millennial customers going forward?

Well, my 18-year-old daughter texted me today because in the Wall Street Journal they wrote about our beta plus program.

She says, no, they're wrong; because everybody will want to spend more money there.

So it's personal to every Millennial.

When you say what would have more?

I think it really depend upon an individual.

I think that when you talk about a Millennial, they're really into business opportunities where we are growing our digital business.

When you talk about a Millennial, you're talking about the social media that even when they see and -- and when we look at our experience with Instagram or with Facebook, and we see that when we're improving those vehicles to communicate with the customer, and you see the response rate increase; when you look at the ability to drive better content online; when you look at being able to be more inspirational -- I think all that would register well with the Millennials.

So when you talk about, well, do you think that the beta program or the -- that, I don't think it's those types of things.

I think it's really reaching the Millennial customer where they are.

And it starts with our back-to-college business.

It starts with our bridal business, with our baby business, with our new mover business.

Those are opportunities to address this customer to provide them a great experience, learn about what they're doing, what they're interested in and what they're doing next, to communicate to them what we have to offer and how we're providing solutions for them to create that stickiness.

So really I think -- is to be where they are and to deliver in a way that they appreciate it.

So, (inaudible) I don't think that you can look at those two programs and say one of those two programs is some type of answer.

Laura Champine, Roe Equity Research.

We'll keep it brief.

When Bed Bath rolled out more advertising that promotes the fact that coupons are saved to a consumer's online account, did that drive incremental usage of coupons online?

Are you talking about My Offers?

Yes.

Yes.

And you're talking about the -- on our postcards, where we called out that that post card could be used online?

Yes.

Did that show an -- did you see an incremental level of utilization of the My Offers site, or of the coupon generally when you did that?

Yes, I think a certain percentage of the customers saw that on the coupons.

There's always been a desire for a segment of the customers to use their big blue, we call them -- big blue coupons -- online.

And a percentage of them did use them online.

And then just as a follow-up, you've called out e-commerce growth, better than 20% for many, many quarters now.

Is it a material lift that you see when you lower shipping thresholds?

Or are you needing the lower shipping thresholds just to be competitive?

The competitive environment is important.

It really is.

And so -- and as Sue said, and how it impacted us is that it is received by the customer and it is a relevant element for a customer deciding where to shop.

We went to the $29, and we were really at it all quarter.

Yes, except for a few days (multiple speakers).

And it's being extended at this point?

It is, it is.

So, you could take from that -- that's our interpretation.

Peter Benedict, Robert Baird.

Real quick, thanks -- two questions.

One, just on the membership program, Steve, you said you were encouraged so far.

How do you define success here?

Is it customer acquisition and revenue growth?

Is that priority one?

Where does maintaining the margin profile rank within your goals for that program?

It all rolls up.

Again, listen, if you end up -- it comes out to profitability, right?

You're looking at the lifetime value of that customer, and you're looking at if you are improving -- if you're creating additional stickiness, they're shopping more often, what's their average ticket.

You're looking at what you're giving away in connection with that.

You're looking at also the opportunity to reduce mailings to that customer.

So all those things are part of the equation, but really understanding is that relationship a more profitable relationship for us, which is something that we will see over time.

And when we say about that the response to it exceeded our expectations, and we have a long waiting list of people who have been told about it.

So, from that perspective, it's a learn as well.

But we went out there with the test of $29.

And we went out there with the purpose of learning what it will be; not just initially, but what it will be with these customers over time.

And that's what we're doing.

So really it's -- the chapters are not written yet.

We can't give you answers.

But ultimately we want to be able to be -- have that relationship be more profitable for us, because the customer is having a more sticky relationship with us, and they feel better and are happier and are shopping with us more because of it.

Okay.

Thanks for that.

Understood.

And so just quickly on the interest guidance for the year, obviously the fourth quarter is implied a decent step-up versus the trend rate so far this year in terms of quarterly interest.

Are you expecting another deferred comp adjustment like we saw a couple times last year?

Is that what's driving the uptick in interest in 4Q?

Yes, it's generally -- oh, you are referring to the prior year?

No.

I just think it implies something north of -- probably north of $22 million in the fourth quarter, and it has not been running anywhere near that in the last few quarters.

So I'm just curious what's driving the uptick.

Yes, the previous quarters will have adjustments to the non-comp, non-qual plan.

We never anticipate what the current quarter is going to show.

It's really dependent on the stock market, because most of the participants have their investments in stock market funds.

So typically we'll pay in each quarter, just our interest payments on our debt, and some of the amortization of the capitalized leases.

And then it will fluctuate.

So it rarely will be that number at the end, unless the stock market stays the same.

As the stock market goes up or down, it will go --

It will impact it.

And of course, it's all offset in SG&A and has a zero impact on the P&L.

Okay, understood.

Thank you.

Seth Basham, Wedbush.

I wanted to circle back to the topic of pricing, just to understand where you're at now.

You want to be competitive at your competitors' level.

Do you feel like you're there, as of now?

Based on our study against Amazon, which obviously is only one of your competitors, a basket of goods that we priced is still meaningfully higher than Amazon.

So that's why we're asking.

Yes, first of all we've -- that is all good input.

But yes, we do believe that you're never there because of dynamic pricing.

But we crawl our competitors' websites throughout the day.

And I just looked at a report -- I don't know if it was two days ago -- again that shows that we were in a good place.

So, that doesn't mean on every item at every minute, we're going to be right.

And whatever you could send us or whatever we could learn, it's valuable to us.

We've seen reports over time that indicate that we're X percent better, which is not what we're showing, either.

But we have very hard data on every SKU that overlaps with our competitors.

So, I'm not saying you're wrong, because you picked the basket, and I'm -- and we need to study it.

But we do this all day long, every day, and we believe we're in a good place.

Got it, okay.

If you are in a good place on price, and you are driving personalization, et cetera, what do you think is the main thing that's leading to some share loss that you guys have been experiencing?

Is it simply just a decline in footsteps through your doors because of the overall retail trend, or something else?

I think that's the biggest contributor.

When you look at the large percentage of our business that we rely on in-store today, is that -- when we look at all our competitors, basically, and we see that they're having similar issues with foot traffic, that would seem to be it.

When we look at our digital business and how strong it is, as we look at components of our business, where we expect it to be relatively strong, it keeps coming back to foot traffic in the stores.

I guess it was the case that we expected this; that we expected this, over time, that if we could drive and grow our digital business, the better off we'll be in that sense, in terms of our top line.

And we -- and as far as this quarter itself that we just reported on, we were seeing that sequential improvement from both our first and second quarter, right up until that week before the election.

And then after the election we started to improve again, but we had a couple very bad weeks.

And we had a strong Black Friday through that Monday, and we're anticipating a positive comp for the fourth quarter.

But given that all in totality, it would all be better with stronger foot traffic.

And that is all we have --

And by the way, just to be clear about it -- because Seth asked a great question -- that this is our model; and we always want to beat our model, but it's our model.

But to the extent that we underperform our model and it doesn't come in as planned, then it does jeopardize the entire model.

So to the extent that we thought that we'd be stronger in terms of the range at the beginning of the year, and now we're less strong within that range -- listen, if things were worse, we would be out of the range.

So all those things are the reality of building the model.

But for now, the model would show, and the business would indicate from where we are today and where we predict that we're going is that the trend line is a good one for us.

But we will have to see.

And that's all that we have in the queue.

I will now turn the call back over to Janet Barth for final comments.

Great.

Thank you, Adrienne.

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

From all of us here, best wishes for a happy holiday.

And we look forward to having you join us again on our next quarterly earnings call, which is scheduled for April 5, 2017.

Have a good night.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating and you may now disconnect.