Bed Bath & Beyond Inc (BBBY) 2017 Q2 法說會逐字稿

Welcome to Bed Bath & Beyond's Second Quarter Fiscal 2017 Earnings Call.

(Operator Instructions) Today's conference call is being recorded.

A rebroadcast of the conference call will be available beginning on Tuesday, September 19, 2017, at 8 p.m.

Eastern Time through 8 p.m.

Eastern Time on Friday, September 22, 2017.

To access the rebroadcast, you may dial (888) 843-7419, passcode ID of 45587344.

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, our 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.

Our earnings press release dated September 19, 2017, can be found in the Investor Relations section of our website at www.bedbathandbeyond.com.

Here are some highlights from our second quarter financial results.

Net earnings per diluted share were $0.67, including the unfavorable impact of the restructuring charges related to the accelerated realignment of our store management structure of approximately $0.08, which was announced on August 3, and the estimated costs associated with the impact of Hurricane Harvey of approximately $0.02.

Net sales for the quarter were approximately $2.9 billion, a decrease of approximately 1.7% compared to the prior period.

Quarterly comparable sales decreased approximately 2.6%.

Comp sales from our customer-facing digital channels continued to have strong growth in excess of 20%, while comp sales from our stores declined in the mid-single-digit percentage range.

And the Board of Directors today declared a quarterly dividend of $0.15 per share to be paid on January 16, 2018, to shareholders of record as of December 15, 2017.

I will now turn the call over to Steve, who will discuss strategic undertakings driving change across our company to improve operational efficiencies and to create future growth.

Sue will then discuss our quarterly results in more detail and then give an update on our modeling assumptions for the year.

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

I'll now turn the call over to Steve.

Thank you, Janet.

First off, I would like to express that our thoughts and prayers continue to go to the millions of people, including our associates, their families and our customers, who have been impacted by the devastating effects of Hurricanes Harvey and Irma.

I'd like to acknowledge our many dedicated associates who, even while contending with storm-related challenges at home, nevertheless made tremendous efforts on behalf of the communities affected as well as on behalf of our company.

Throughout this time, our main concern has been for the safety of those impacted and to provide assistance to our associates and those most affected.

In all, we had approximately 200 stores immediately impacted by these storms, but within a week, in both cases, almost all of them were back open and operating to serve our customers.

And as of yesterday morning, all of our stores opened on time with the exception of one store that suffered extensive damage, and all but one store have returned to standard hours of operation.

This was truly an impressive result, and we are very appreciative of our associates' extraordinary efforts to make it happen.

Still, our main concern continues to be for our associates, their families and all of the affected communities.

We continue to work with partner charitable organizations and our vendor community to help strengthen the success of the ongoing recovery efforts in the affected areas.

Turning back to the quarter.

During our call in June, we discussed our business and our intention to update you on this call as to our full year outlook based upon gaining greater visibility to the full year.

During our second quarter, we did see a continuation of our early fiscal 2017 trends, namely strong growth in our customer-facing digital channels and increased softness in transactions in our stores.

In addition, our expense structure also absorbed increased costs this quarter associated with the accelerated realignment of our store management structure and the estimated impact of Hurricane Harvey as well as our planned investments in the business, including in areas such as product fulfillment, customer service, marketing and technology.

Overall, our results were softer than we anticipated back in April when we gave our 2017 modeling assumptions, so we have taken down our model for the rest of the year.

In a few minutes, Sue will provide more details of our quarter and our view of the remainder of the year.

As for retail generally, we know the way customers shop continues to change.

How they discover product, their expectations and knowledge around pricing and services offered and how they share their thoughts about their shopping experiences are all changing rapidly.

With this understanding, we have been evolving and, in some cases, transforming many aspects of our business to support our mission to be our customers' first choice for the home and heartfelt life events.

I'd like to spend the next few minutes discussing what we are doing to accomplish this, and then I'll turn the call over to Sue.

I will start with operational excellence.

One significant undertaking has been the transformation of our information technology group, related business processes and our approach to developing, managing and delivering technology solutions in order to meet the needs of our business.

We have adopted a new model that allows us to better identify, prioritize, resource, collaborate and deliver against our ever-increasing technology road map.

We have recently hired a new Chief Information Officer and our first Chief Technology Officer, both of whom are now engaged to drive an improved company-wide effort to ensure successful delivery of our initiatives.

In addition, we have established a strategic portfolio management office or SPMO to better focus our resources and expedite our results in areas we think will provide the most significant benefit to our company.

Drawing together a cross-functional group of knowledgeable internal personnel and newly hired experts, this dedicated team can move faster with better resources to create efficiencies, realize cost savings and deliver on our future growth opportunities.

Through the efforts of the SPMO, we are building an integrated portfolio of strategic initiatives, which will provide increased focus on areas we have been working on to improve.

We have launched 4 of them to date, which are internally referred to as customer service transformation or CST, gross margin enhancement, inventory optimization and supply chain.

CST is focused on transforming our store operating model to better meet the evolving needs of our customers in an omni-channel environment.

By delivering operational efficiencies, CST allows us to more effectively utilize our resources and position our associates to deliver the services required to meet the changing needs and desires of our customers, in other words, freeing up our people to be more available to take care of our customers with things like fulfilling an order that was reserved online and picked up in a store, returning an online order, placing a Beyond store order, handling a scheduled customer appointment or buying a gift from a registry.

The gross margin enhancement initiative focuses on improving our margins by increasing efficiency across the entire life cycle of our product from source to customer.

We are partnering with our vendor community to streamline operational and technological processes to accelerate speed to market and reduce product and sourcing costs.

The objective of our inventory optimization is to deliver differentiated and curated assortments across all of our channels and concepts while improving the returns of our working capital.

Our teams are identifying and assessing opportunities across SKU rationalization, store space optimization, assisted store ordering, product allocation and our e-commerce inventory planning, warehouse and fulfillment processes.

The objective of the supply chain initiative is to drive continuous improvement in our supply chain across all channels and concepts.

We're evaluating our current infrastructure and operational capabilities, benchmarking them against industry best practice and developing a multiyear strategy to meet and exceed our customers' expectations going forward.

In the short term, we are assessing our e-commerce fulfillment warehouses to identify opportunities for operational efficiencies and improved speed to customer and enhancing our supply chain network to support the growth of our furniture and decor initiative.

The SPMO initiative that is furthest along is CST and includes the realignment of our store management structure, which took place in early August and resulted in a reduction of about 880 department and assistant store manager positions.

If you recall from our August 3 press release, we said that these efforts simplify our store management structure and strengthen our ability to meet the growing and changing desires of our customers by focusing additional staffing needs in non-management roles, placing less emphasis on a management structure that supported a more rapid rate of store growth or, as I said before, to be able to free up our people to be more available to take care of our customers' changing needs and desires.

Also within our CST, we have engaged Accenture's retail practice to implement our new human capital management and e-learning systems as well as their retail stores team who, with our in-house industrial engineering team, will assess our Bed Bath & Beyond store operations and expedite the identification and rollout of best practices to further strengthen the store services we provide.

The first phase of CST is complete, as announced in August.

The additional phases of CST and the other SPMO initiatives are in various stages of implementation.

We believe these initiatives as well as all the projects we have outside the SPMO should provide significant opportunity for us to drive further operational excellence and produce savings in excess of $150 million over the next few years.

And this will allow us to strategically reinvest a portion of these savings into driving future growth for our company.

I look forward to providing updates on each of these initiatives as they move forward.

Next, I'd like to tell you about the more customer-centric things we're doing as part of what we refer to internally as why us.

Why us consists of 3 broad objectives that drive our ability to achieve our mission: to be trusted by our customers as the expert for the home and heartfelt life events.

The first objective is to have a differentiated and complete product assortment of the right quality product at the right price.

The second objective is to have better services and solutions, and the third objective is to deliver a more personalized, entertaining, inspiring and convenient customer experience.

Each of these objectives is being supported by numerous ongoing initiatives across all channels, and I'd like to highlight a few of them for you today.

Let's start with furniture and decor.

As we have said, this category represents a significant sales growth opportunity for us and is an important contributor to further establishing ourselves as the expert for the home.

And we have accelerated our efforts to build an assortment that covers a variety of different styles and price points.

Although our assortment is still small in comparison to larger furniture retailers, over the past 18 months, we've added nearly 200,000 furniture and decor SKUs online, with One Kings Lane representing about 1/3 of them.

And our onboarding capabilities continue to improve.

We also continue to evolve our furniture assortment and presentation within buybuy BABY and Cost Plus World Market both in-store and online.

And One Kings Lane, already known for its unique furniture collections and vintage items, has added its own private-label line of furniture.

In addition to developing the right mix of products, we're also focused on having enhanced services, such as decorating, installation and assembly, that are part of the furniture and decor experience and which will again further our credibility as a trusted expert for the home.

In connection with decorating, we acquired Decorist back in March and now are beginning to leverage their growing online design and networking platform to offer affordable and personalized home design services to our Bed Bath & Beyond and buybuy BABY customers and further it with our One Kings Lane customers.

In addition to the decorating services we now offer online through Decorist, we're also now introducing our furniture and design bars in a few Bed Bath & Beyond stores as well as in a few buybuy BABY stores.

We also plan to expand One Kings Lane's design studio experience, including its new studio in Southampton, New York, which opened this past summer.

Also through our various partnerships, we're now able to complete the furniture and home decor experience by creating the connection between our customers and local professionals for home assembly and installation services.

To help customers better understand the growing assortment of furniture and decor, find product that's most meaningful to them and create a home they love, we are leveraging our digital experience to create curated collections such as Designer Picks, Shop the Room and our lifestyle shops.

Another way we are building awareness of our growing home furnishings and decor assortment has been through catalogs.

This year, Bed Bath & Beyond has published 3 specialty catalogs, with our fourth home catalog set to be released in early October.

These catalogs allow us to speak to our customers in a more inspirational way and showcase our expertise in the home through a curated and visually appealing presentation of our expanded offerings.

In addition, later this month, One Kings Lane will premiere its new catalog that illustrates in a very artful way the breadth and depth of the unique One Kings Lane product offering across a variety of lifestyles.

As I said earlier, furniture and decor represents a significant sales growth opportunity for us and drives each of our 3 objectives in support of our mission.

Today, we have a relatively small share of this large market with under $1 billion of business across our company.

Additionally noteworthy, digital sales of furniture and decor in Bed Bath & Beyond and buybuy BABY combined represent only about 13% of our total company sales in the category.

And we are planning to more than quadruple their online business over the next few years.

We see the furniture and decor category being a multi-billion-dollar opportunity and as we have said, being an important contributor to further establishing ourselves as the expert for the home.

Next, let's take a look at our customer-facing digital business, which is part of our integrated and seamless customer experience.

As we described in prior calls, we can't tell where or through which channels a customer initiated a transaction, but we can provide information as to how a sale was consummated.

So with that in mind, comparable sales consummated through our customer-facing digital channels have experienced steady sales growth in excess of 20% for the past 13 quarters, benefiting from enhancements to our digital and analytic capabilities across our web, mobile web and mobile apps.

In the digital environment, we have endless aisles and our online assortment includes almost everything we carry in-store and then much, much more.

We have an ongoing initiative to accelerate our SKU onboarding process, and we are currently on track this year to add more than 300,000 SKUs.

As our online assortment expands, we have been applying dynamic pricing to currently more than half and growing of our online-only SKUs in order to manage our competitive pricing position.

This is a significant area of focus for us as we continuously monitor our competitive value propositions.

We have many initiatives focused on improving the customer experience online, including enhancements to our search and navigation tools, our content and the services we offer.

In addition, we have several initiatives, enhanced and enabled by digital capabilities, to personalize the customer experience and drive engagement such as My Offers and our BEYOND+ membership program.

Of course, as I alluded to earlier, the online experience also includes requirements for product fulfillment, and we continue to work to enhance and drive efficiencies in our fulfillment capabilities.

We offer our customers various shipping options, from standard delivery all the way up to white-glove service.

In addition to our standard shipping offers, we have a new 525,000-square-foot fulfillment center opening in Las Vegas this fall, and we are expanding our pilot same-day delivery services in Houston, Dallas and Washington, D.C. to now include Seattle and the boroughs of Brooklyn and Queens in New York City.

Sales from our customer-facing digital channels, which exclude sales derived by orders placed in-store through the Beyond store, represent roughly 15% of our net sales today.

So even with the strong growth of our customer-facing digital channels to date, we continue to have the opportunity for and will drive significant growth in our digital channels.

Let's move on to differentiated product.

As we have said, there are degrees of differentiation and significance of that differentiation in the minds of our customers.

For us, differentiated product includes exclusive, personalized, one-of-a-kind and vintage product.

Sales of differentiated product represent about 1/2 of our total sales and as I said, is an important component of achieving our mission.

Building a strong foundation of differentiated product across all our concepts and channels has always been a critical focus for us.

Personalized product represents a nice subset of our differentiated product offering and represents a significant opportunity for us to further strengthen our competitive position.

Since our acquisition of PersonalizationMall.com in November 2016, we have substantially grown our offering of personalizable product, and today, we offer about 7,400 personalizable SKUs on the Bed Bath & Beyond website, including PMall SKUs and other third-party vendor SKUs.

We'll be adding another 5,000 SKUs over the next several months.

This fall, we will begin to present our personalization capabilities in-store by creating small vignettes in a couple dozen Bed Bath & Beyond stores and a graphic presentation in about 70 other stores to show the type of merchandise that can be personalized and ordered online with the help of an in-store associate or at home.

Our new andThat!

stores are also beginning to introduce customers to PersonalizationMall.com using an interactive display that allows exploration of the different options for personalizing merchandise, with the option to place an order directly from PMall while in the store or the ability to complete the transaction at home.

Overall, we are still in the early stages of developing a more complete assortment of personalized product and services, and we look forward to continued strong growth in this category.

Lastly, I'd like to say a little more about our newly evolved andThat!

concept.

The evolution of Christmas Trees Shop has been ongoing for several years.

We launched our first newly fixtured and merchandised andThat!

store about 18 months ago in Kennesaw, Georgia, and 6 months later, we opened in Jacksonville, Florida.

The evolution of the concept includes an enhanced mix of trend-right differentiated merchandise of better quality, design and value, in conjunction with an elevated treasure-hunt experience with more locally sourced product and enhanced fixtures, lighting and in-store visuals that create a fun and engaging shopping experience for the customer.

We expect to open 3 new andThat!

stores in a little more than a 2-month period.

The first, which just opened, is in Woodland Park, New Jersey.

Then, we'll open in Fairfax, Virginia, followed by Rehoboth Beach, Delaware.

We're excited by the evolved model and believe it is poised for strong growth in the coming years.

As we have said, changing customer preferences and other market forces will continue to transform the retail industry and require ongoing investment.

We are accelerating our efforts to make the investments and add the resources necessary to position our company for long-term success.

As illustrated by the examples I just described, through our focused approach to driving operational excellence across our organization and to deliver against our why us objectives, we will further strengthen our competitive position to be our customers' first choice for the home and heartfelt life events.

We understand that the things we are doing and the investments we are making to transform our company, while all necessary in an evolving retail environment, are contributing to the unfavorable trends in our financial performance.

However, we have never had better people, merchandise choices, services offered and capabilities to reach our customers to work with.

And we are hellbent on moving aggressively to drive change, to satisfy our customers and produce better financial results.

I will now turn the call over to Sue to review our quarter results in more detail.

Thank you, Steven, and good afternoon, everyone.

Beginning with our second quarter financial results, our net sales were approximately $2.9 billion, a decrease of approximately 1.7% from the second quarter of last year, primarily due to a 2.6% decrease in comp sales, partially offset by an increase of 0.9% in non-comp sales, including One Kings Lane, PMall and new stores.

Our second quarter comp sales reflect a decrease in the number of transactions in stores, partially offset by an increase in the average transaction amount.

As Steven said, we believe in an integrated and seamless customer experience, and although we cannot tell you through which channel a sale was initiated, we can provide information based on where the sale was consummated.

As a reminder of how we reference certain omni-channel transactions, sales consummated on a mobile device while the customer is physically in a store location are referred to as customer-facing digital channels.

Customer orders taken in-store by an associate through the Beyond store, our proprietary web-based platform, are referred to as in-store sales.

Customer orders reserved online and picked up in a store are also referred to as in-store sales, while purchases made online that are subsequently returned to a store are referred to as a reduction in store sales.

With that said, comp sales from our customer-facing digital channels continued to have strong growth in excess of 20%, while comp sales from our stores declined in the mid-single-digit percentage range.

Gross margin for the quarter was approximately 36.4% as compared to approximately 37.4% of net sales in the second quarter of last year.

In order of magnitude, this decrease as a percentage of net sales was primarily due to an increase in net direct-to-customer shipping expense, a decrease in merchandise margin and an increase in coupon expense resulting from an increase in redemptions, partially offset by a decrease in the average coupon amount.

The inclusion of PMall, whose acquisition we will anniversary at the end of the next quarter, improved total company gross margins by approximately 12 basis points.

SG&A in the quarter was approximately 30.6% of net sales as compared to approximately 28% of net sales in the prior year period.

In order of magnitude, this increase in SG&A as a percentage of net sales was primarily due to increases in payroll and payroll-related expenses; advertising expenses; the store management restructuring charges; occupancy expenses; technology-related expenses, including related depreciation; and estimated costs associated with Hurricane Harvey.

PMall also increased total company SG&A expense as a percentage of net sales in the second quarter by approximately 6 basis points.

Our income tax rate for the quarter was approximately 37% compared to approximately 36.3% in the prior year period and reflected net after-tax benefits of approximately $1.5 million and $2.9 million, respectively, due to distinct tax events occurring during these quarters.

Included in the net after-tax benefit for the second quarter of fiscal 2017 is the unfavorable impact of approximately $0.01 per diluted share related to the adoption of the new share-based payment accounting standard.

Considering all of this activity, net earnings per diluted share were $0.67 for the quarter, including the unfavorable impact of the store management restructuring charges of approximately $0.08, the estimated costs associated with the impact of Hurricane Harvey of approximately $0.02 and the unfavorable impact of the new share-based payment accounting standard of approximately $0.01, which I just mentioned.

Now looking to our balance sheet.

We ended the second quarter with approximately $563 million in cash and cash equivalents and investment securities.

Retail inventories for the quarter were slightly less than last year at approximately $2.8 billion at cost.

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

Capital expenditures for the first 6 months of 2017 were approximately $177 million with more than 40% related to technology projects, including investments in our digital capabilities and the development and deployment of new systems and equipment in our stores.

The remaining CapEx was primarily related to investments in our stores; a new distribution facility in Las Vegas, which opened last month for inbound freight; and a new customer contact center, which we opened last week in the Orlando, Florida area.

Also during the quarter, we opened 5 stores and closed 1 store.

Since the end of the second quarter, we have opened an additional 3 stores and closed 1 store.

Share repurchases under our current $2.5 billion share repurchase program were approximately $56 million in the quarter, representing about 1.8 million shares.

This authorization had a remaining balance of approximately $1.6 billion at the end of our second quarter.

In addition, our Board of Directors today declared a quarterly dividend of $0.15 per share to be paid on January 16, 2018, to shareholders of record as of December 15, 2017.

Now let's turn to our outlook for fiscal 2017.

We have updated our full year modeling assumptions for fiscal 2017, which include our actual results for the first half of the year and the continuation of the trends we have been experiencing, namely strong growth in our customer-facing digital channels and increased softness in transactions in stores.

In addition, we have modeled further increases in our overall expense structure to reflect some of the accelerated spending associated with the organizational changes and transformational initiatives we discussed today during the call and our assumptions for the estimated financial impact from Hurricanes Harvey and Irma.

More specifically, we are modeling consolidated net sales to be relatively flat, including a slight benefit from the 53rd week in fiscal 2017 and the estimated unfavorable impact from Hurricanes Harvey and Irma.

Comparable sales are estimated to decline in a similar percentage range as we experienced in the first half of the year.

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

We continue to model SG&A as a percentage of net sales to deleverage for the full year, including increases in payroll and payroll-related expenses; advertising expense; the store management restructuring charges; technology-related expenses, including related depreciation; the estimated costs related to Hurricanes Harvey and Irma; and the impacts from One Kings Lane and PMall, both of which were acquired during fiscal 2016.

We are modeling 2017 depreciation expense to be in the range of approximately $310 million to $320 million.

We are modeling net interest expense of approximately $75 million to $80 million for the full year.

We are modeling our 2017 tax rate to be higher than last year but still within the mid- to high 30s percentage range, primarily due to the impact of adopting the new share-based payment accounting standard.

We also anticipate the net after-tax benefits from other distinct tax events will be lower than in 2016.

Capital expenditures are modeled to be in the range of $350 million to $400 million, which remains subject to the timing and composition of projects.

We continue to believe that for the foreseeable future, we are plateauing at about these levels.

In addition, more than half of the 2017 spend is planned for technology-related projects in support of our growing omni-channel capabilities.

We plan to open approximately 25 new stores in fiscal 2017 and close approximately 15 stores, leading to a net reduction in Bed Bath & Beyond stores and net increases in stores for the other concepts, where we are focusing on new markets and formats.

We continue to expect our positive cash flow to fund our operations and capital expenditures as well as our quarterly dividends and share repurchase programs, which is subject to several factors, including business and market conditions.

We believe we will end the year with approximately the same or slightly higher cash and investment balances than last year.

All of this considered, we are modeling net earnings per diluted share for the full year to be about $3, with the balance of the net earnings per diluted share to be split roughly 20% in the third quarter and roughly 80% in the fourth quarter.

We will review our third quarter results and provide an update on the progress of our ongoing initiatives and our full year modeling assumptions during our next quarterly conference call scheduled for Wednesday, December 20.

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

Adrienne, we're ready to take questions.

(Operator Instructions) And our first question comes from Peter Benedict from Robert Baird.

I just want to ask about the gross margin enhancement initiatives.

I mean, I'm just trying to get a sense for where you guys think gross margin starts to stabilize.

I mean, the direct-to-consumer shipping headwinds probably are going to persist here, given the strength you're seeing in that business.

So where is the opportunity really going to come from?

Is it around the merchandise margin?

Is it around the couponing?

Help us understand how you're seeing that over the next year or 2.

Yes.

Peter, the gross margin enhancement, it has several components surrounding initiatives that we can use to enable us to increase our efficiencies in importing products and in a lot of the components of vendor relations as far as how to most efficiently move the product through our supply chain and including sourcing costs.

And is there any thought around the couponing program just in aggregate?

I mean, the role that, that should play, does that still make sense to have?

Any ideas or thoughts around maybe changing that?

Just curious your thoughts there.

Yes.

Hey, Peter, it's Steve.

So listen, it's an important component of our value proposition for many of our customers, so it's something that, as we improve our marketing and our personalization generally, it affords us the opportunity to play with how much couponing we do and who receives it, at what point in time, as is BEYOND+.

But again at this point, it is a strong driver for us, again, in Bed Bath.

Obviously, Cost Plus has its own loyalty program.

Some of the entities, concepts don't have couponing.

But at Bed Bath, it is and it remains important.

And as to your question about the direction of our margins generally is that, again, there is a mix issue here.

Even as we get better, and our gross margin enhancement initiative will allow us to do that, there is a mix of merchandise that we sell -that it's the type of merchandise we sell and where we sell it.

So whether we're selling it in stores, we're selling our own merchandise online or we're selling merchandise directly that's being shipped from vendor, vendor direct, they have different implications from a margin structure in terms of markdowns and other elements that are unique to each way we sell it as well as whether you're selling more hardlines, more softlines, more private label.

So all those are ingredients in the margin, so there are many moving parts to it.

So we would like to tell you that, that is going to plateau at a certain point.

But looking at it the rest of this year, we've given you the guidance that we can for the remainder of this year, and so that's not the expectation for the rest of the year.

And the next question comes from Steven Forbes from Guggenheim.

So maybe a multipart question here on the supply chain optimization initiative that you called out, 1 of the 4 that are live.

So first, can you expand on some of the benchmarks you are looking at when comparing yourself to your peers, as you mentioned?

And maybe just touch on the anticipated time line associated with the review or due diligence process as you come up with your future outlook here.

Sure.

I mean, look, our objective runs the course in supply chain of getting merchandise from our vendors to us, our own merchandise to that we're making ourselves to us, getting it within our network, our pool points, our consolidation centers, getting it to customers, getting it to customers from our distribution facilities, getting it to customers from our regional fulfillment stores, from our local stores.

The objective is to be best in breed.

So we talk about things that we need to get there same day in markets.

How are we going to do that?

We talk about getting things to our customer second day throughout the country as a standard.

We talk about benchmarking certain elements of our furniture.

So when we look at, or excuse me, of our merchandise.

So when we talk about furniture -- that's on my mind.

So when you talk about the furniture, to be able to deliver it; be able to, first of all, communicate to customers, so the expectation when the customers are going to get it, a narrow window that they should expect it; that they should be able to have white-glove handling of it so that we can install or assemble when it gets there; that we can handle returns.

So each of these components, we benchmark against different people and different expectations because there's so many elements to it.

But again, our intention is and we need to be best in class.

And so that's all part of the benchmarking and part of the S-PMO focus on moving it in that direction, which our short-term objectives, which we laid out just a couple of minutes ago, and the longer-term objectives to really just to be best in class across every aspect of our supply chain.

And then as a follow-up and I think it kind of works into it, right, maybe just if you can provide us your higher-level thoughts, right, on your supply chain in its current state and maybe just on 3PL warehouses in their place, right, in Bed Bath & Beyond's future supply chain network, as you think about meeting the consumer expectations, as you talked about in those benchmarks that you're -- that you just laid out.

Sure.

Again, because I think that the expectation is really is speed to customer, in part, and then the other is quality of delivery to customer, but the speed part is getting close to the customers so that we built out a network that we think, again, second-day delivery that's doable for us.

But as we go to what's expected in same-day delivery, it moves to really our capabilities to fulfill from our stores as providing that competitive advantage and our capabilities of doing that.

So it really is that, to a certain degree, we're not cutting new paths here that we're seeing within the industry because a lot of what we've moved towards or that -- what we are doing is not what we would historically have modeled in terms of profitability, but we deem it necessary to do it from a competitive standpoint to be best in class.

So that would be our answer.

And our next question comes from Simeon Gutman from Morgan Stanley.

It's Joshua Siber on for Simeon tonight.

Can you talk about how much of the incremental SG&A that you have in your guidance is related to organizational changes and the hurricanes as opposed to underlying investments in the business?

Yes.

We did include increases in SG&A for the overall expense structure to reflect that accelerated spending associated with the organizational changes and the transformational initiatives as well as some estimated financial impact for Harvey and Irma.

But it's included in our full year model.

It's not something we broke out in particular.

Joshua, as you mentioned, also is that I'd just like to say that we're in meetings all day and that we failed to comment on what's happened with Hurricane Maria, so we do.

We said that as of yesterday, everything was open.

So just to be on the record that our 3 stores in Puerto Rico are closed, and also, that we were impacted by the earthquake in Mexico, where we have 8 stores.

So again, just to bring this up to speed since you mentioned the hurricane, I just wanted to make sure that we didn't misspeak during our comments just a few minutes ago and that we were complete.

Sure.

The $0.08 from Harvey, I mean, how much of that is expected to continue in -- just from the disruption that you've seen in Q3?

So actually, Harvey was $0.02 in the second quarter, just to be [clear].

Oh, sorry.

Yes, you're right.

That's right.

Right.

And we consider the financial impacts for Harvey and Irma already baked into our full year modeling assumptions, into the $3.

Okay.

And then unrelated, can you talk about the speed at which consumers are adopting online shopping versus in-store?

And can you talk about the trends within store visits per consumer?

Well, we can tell you our experience in that -- I think that what we said is that, in our case, it's accelerated, not that it was unexpected, but that the rate that we've seen the deterioration in our in-store shopping from the second quarter to the first quarter, grew.

So that's our experience.

And again, what we said in the first quarter is that we didn't know if it was unique to the first quarter or this is a trend that we should be planning on going forward.

And after the second quarter, that's what we have now built into the rest of our year's plan.

And our next question comes from Kate McShane from Citi.

This is Jeff Small on for Kate.

First, we want to ask about the customer service transformation that you've said is furthest along.

We're curious when you expect to see initial benefit from that initiative and how you'll actually measure the success of that particular initiative.

I can take the first part of the question.

We'll start to see some of the initial benefit in the back half of fiscal 2017.

And I think that we gave numbers around it in our August press release.

We did.

In August 3 press release, I believe we said that we would start to see roughly $7 million in the back half of 2017.

As far some of the other elements, the human capital management, the e-learning systems, some of the things we're doing today with our field optimization in terms of our industrial engineers and the work that we're doing with Accenture, those are in different phases right now and we'll be able to comment on each and every quarter as we move forward.

That's helpful.

And we're also wondering if you can provide any color on your sales results by banner.

We're wondering if any of the nameplates are performing substantially better or worse than the company as a whole.

Well, generally, I would say that, for the quarter, we saw an increased softness in store traffic.

So any concepts with brick-and-mortar locations, they were impacted with the softness in sales from store traffic.

And our next question comes from Michael Lasser from UBS.

This is actually Atul Maheswari filling in for Michael Lasser.

So based on your outlook, your full year operating margin would end up somewhere around 6% level.

Do you think this line stabilizes next year as your cost savings begin to kick in?

Or -- and additionally, what's your view on the long-run margin structure for the business?

We projected out through the end of this year.

Past this year will depend on many factors.

Yes, the initiatives that we were implementing and the efficiencies associated with them will help in the future, but it's also dependent on what environment exists in the future.

So it's not readily easily predicted what the environment will be past this year.

Okay, that's fair.

And just as my follow-up, your share repurchase dollars, that went down quite a bit this past quarter and was also slightly lower in the first quarter.

So is the first half run rate the new norm?

Or could you potentially reaccelerate repurchases to take advantage of some of the movement in your share price recently?

Well, first of all, share repurchases is something -- part of our capital allocation, that's reviewed regularly by the board.

It's a board decision.

And as we discussed in the past, we have 4 priorities, in order, that we use our funds first for investing back into the business in terms of capital expenditures.

We look at acquisitions.

Third is our dividend program, and then remaining cash would be used for share repurchases, which is what you saw in terms of Q1 and Q2 share repurchase buybacks.

In terms of decisions going forward, we are considering our share repurchase program, and it would be a board decision.

And our next question comes from...

No, I'm sorry, just as Sue mentioned, that our objective is to end the fiscal year in as good a cash position as we ended last year, so that's all taken into account in our share repurchase.

I'm sorry.

And our next question comes from Matt Fassler from Goldman Sachs.

This is Rachel Binder on for Matt Fassler.

The first question we have for you guys is to better understand how the onetime items are impacting the P&L in 2Q.

Could you just clarify the impact by line item, including the tax implications?

Sure.

So I think we discussed that we had $0.08 impact related to the store management realignment.

We had a $0.02 impact related to Hurricane Harvey, and we had a $0.01 impact in our tax rate related to the new share-based payment adoption.

Yes.

Could you just give a sense as to how that hit gross margin or SG&A, how each of those impacted?

Yes.

Sure.

So for -- the $0.08 would be in SG&A.

The $0.02 for Harvey was a combination because we -- it's an impact with SG&A, and then the $0.01 obviously hits the tax rate.

My second question is, could you give us some color around how gross margin and SG&A are trending between third quarter and fourth quarter of this year?

We provided our full year modeling assumptions, and we did mention that we would deleverage both in gross margin and SG&A.

But we did not provide color around breaking those 2 pieces out.

But for the full year, we are deleveraging gross margin and SG&A.

And the balance of the earnings we said would be broken down about 20% in the third quarter and about 80% of the remaining earnings in the fourth quarter.

That's correct.

And our next question comes from Seth Basham from Wedbush Securities.

My first question is around differentiated products.

It's obviously a key initiative of yours, Steve, and I'm curious to know what the growth rate in sales is for the 50% or so of products that you classify as differentiated versus the other half.

You know what?

Again, we don't break out the numbers for a lot of reasons.

One is the whole issue with differentiation is that it's in the eye of the beholder, and so that we've always been challenged to say, even internally when somebody calls something differentiated, does the customer think it's differentiated.

So it's critically important that we have enough differentiated products so the customer thinks of us first, they think of us differently, but they think that we're unique.

So again, something like the One Kings Lane private-label furniture would go a lot further perhaps than a towel assortment at Bed Bath that somebody doesn't recognize, or Wamsutta might go more to a greater degree than a name line of towels.

So again, so it's very difficult to put numbers on it and to set those types of objectives.

The objective is really to create more product that really resonates in the customer's mind as being special and a reason for shopping us, and then to present it in a customer way that they see it and that it resonates with them again.

So again, it would be really not fruitful to provide that we've gone from 55% to 62% if the customer doesn't see it.

And we could be at 55% to 35%, especially as we add VDC product, which is not significantly different from other people.

But yes, we could have more special products if it further differentiates us because of what it is and how we show it.

And then secondly, as we think about dynamic pricing, which you've mentioned you supplied to about half of the online-only SKUs, what's the time frame to get to the rest of the online-only SKUs?

And what about SKUs that are also offered in-store, will you be able to dynamically price those at any point in the future?

It's a great question.

And first of all, part of it is that the objective is not necessarily to be at 100% of what's online-only because some of it might be that our competitor might have very little of it.

They might have it for a day low or 3 days low in a long period of time or it might be a blind item that doesn't make sense, or it might be an add-on sale so it might not be important for us to include it in dynamic pricing, or we might choose not to go as high as somebody else in dynamic pricing so that we might choose not to do it if it were lower.

So we might not be, and I don't think 100% is the goal.

It's to do it intelligently.

So we're at a pretty good level right now of our online assortment.

As far as the store, it's a great question again because it is more problematic.

That's why differentiated product is so critical for us in the store and providing those additional services that we provide in the store because it's difficult today for us to change prices on a constant basis in the store for multiple reasons.

One is just handling it.

Another one is just general credibility.

But we are doing today some items in the store, we are dynamically pricing them.

So that would be things that change once a week, but it's a very limited part of what we're doing.

Most of it is focused on online-only product.

And as I said, it may not be 100% for us to feel as if we're right.

(Operator Instructions) And our next question comes from Laura Champine from Roe Equity Research.

I understand that repurchase is a board-level decision, but why would management be recommending share repurchase given the declines that we're seeing in net income?

And more pointedly, in Q2, there was $56 million buyback at higher prices than where the stock's going to open tomorrow.

Did the quarter decelerate as we moved through the months of the quarter in a way that management didn't expect?

Well, again, the buyback is determined in a manner that we don't address it day to day.

We locked in earlier than that.

But however, the second question is not associated with the buyback.

The answer was yes in the sense that when we spoke in the first quarter, we were seeing that we were basically on our April plan for the second quarter.

So it did, that was only, I guess, a couple of weeks into the quarter, but if you ask did it decelerate from those couple of weeks, it did.

And then what was your first question, Laura?

I'm sorry.

The first question is, more generally, why buy back stock at all right now, given the declines in net income and the lack of visibility in the trajectory of the business?

Yes.

Again, it's a great question, and again, I think that it's averaged in.

It is a board decision, it's averaged in.

It's the last thing we do with the capital.

And listen, the big picture is, is that we know our people here.

We know the initiatives we're working on.

We know our capabilities, and we know we're going to succeed.

So that's how we feel.

So again, to average in these things, it could be part of what's the thought process, but we understand the criticism, clearly.

But again, just so you know, it's not keeping us from doing everything, and it's not putting us in a position that's -- will put us in a cash position less than the cash position that we were at the end of last year.

So one can argue either way.

We literally have advocates of doing it more aggressively.

So we hear all sides of the argument.

We understand it.

But as they -- as the board, as they make this decision, that was the conclusion for the quarter.

And our next question comes from Seth Sigman from Credit Suisse.

This is Kieran McGrath on for Seth Sigman.

Just 2 questions.

Firstly, just regarding your real estate strategy.

Given the challenges that you are seeing now from an in-store perspective, coupled with your pretty solid online growth, do you have any updated views on slowing store growth or maybe even further evaluating store closures where it makes sense?

Kieran, we do that.

I mean, we're doing what makes sense.

So trends and current trends in store sales and traffic are taken into account, but we did anticipate this for quite some time.

This has been part of what we've modeled.

I think there's been a net decrease in Bed Bath & Beyond stores.

The other concepts, there are fewer stores that don't cover entire markets, that actually do drive online sales by having them in markets, lowers our advertising expense by having them in markets, by increasing awareness of us.

So from a real estate perspective, we're making, we believe, good decisions.

Similarly, there are -- in retail generally, there are concepts that are treasure-hunt experiences that are growing, that are deep value concepts that are growing, that are creating additional foot traffic.

It's clearly not the norm, but there are categories that continue to impress upon the customers the need or the desire to come to the store regularly and on a frequent basis to find what the customer is looking for.

Obviously, we have not accomplished that with the Bed Bath stores and that we've had a decreasing comp, so -- but that's our objective, and we're moving with a number of initiatives to improve what we're doing.

And I guess that we would ask you to go out and to look at andThat!

in Woodland Park and to tell us what you think about it because that's the third iteration of this concept in terms of the third store that we've done with the improved fixturing, merchandising, lighting, local nature of the store, and it's doing very well.

And obviously, all these things are part of what we're accelerating.

Not only the cutting of the cost, but driving the growth, all the things we're talking about, the operational excellence things that we're driving and everything's centered that's customer centric around why us.

We are trying to accelerate our efforts to do the things necessary to give the customer the experience that they're looking for, to satisfy them and to produce better financial results.

And just a follow-up then is if you can help bridge the prior EPS range of $4.50 to $5, that was characterized as the investment-phase range, with the new $3 EPS.

How much of that does -- is split between incremental investments versus actual and forecast of year-to-date performance?

Could you repeat that question?

I'm sorry, we couldn't hear all of it.

Sure.

No problem.

So the investment phase EPS range that you spoke on previously are $4.50 to $5.

The delta between that and the $3 EPS that you guided for today, what is the drivers of that delta?

How much of the delta is accounted for by incremental investments?

And how much is accounted for by actual performance?

Yes.

I think that, that range was -- I think it was closer to $4, the last time we said.

It's not -- I think that's -- so again, I would have to check, but I think that we indicated to be about 10% down, which took us down to about a $4 range.

So that drop from the $4 range to the $3 range is the question that you're asking.

I think that we gave the breakdown of the impact in the second quarter by some of the things that we're doing.

And as I said, we're accelerating, whether it be items in the SPMO, things we're doing with Accenture, some of the things we've done with IT transformation and some of the things we're doing with onboarding with furniture, the growth of the catalog distribution on a go-forward basis in terms of furniture, things that we're doing to accelerate some of the things that we were doing prior to, that were not in the plans necessarily, to the degree that they are today in terms of accelerating those things are all impacting us in the back half, and that's where we arrived at the $3.

However, the biggest component of it has been, I think, our operations because we went into the year anticipating a comp of what.

Because we're landing now, I think it was negative 2.0 or so for the first quarter.

We were going to see how it was going to be for the second, came in at 2.6.

And now we're modeling the rest of the year somewhere in that range.

(inaudible) relatively flat for the year.

As opposed to relatively flat.

So that's 230 basis points around that number.

A reduction in the comp is the significant component of that reduction from the $4 range to the $3 range.

And our last question comes from Tami Zakaria from JPMorgan.

This is Tami Zakaria on for Christopher Horvers at JPMorgan.

So my first question is you said digital sales of furniture and decor in Bed Bath & Beyond and buybuy BABY stores combined represent only about 13% of total company sales in the category, and you want to quadruple that over time.

So regarding that, what's the current penetration of furniture category?

And where do you expect to see that going over time?

And if you could comment directionally on the margin difference of the category versus other categories you sell in your stores.

Yes.

I think that we said -- I'm not sure if we said it, but I felt we said it a couple of minutes ago, that the furniture category represents, across all our concepts, less than $1 billion.

So -- and I think we also said that we clearly view it as a multi-billion-dollar opportunity.

And as far as the margin opportunity, what it'll mean is -- again, I think that, that remains to be seen.

You'll see some things that we'll be announcing over time that, again, differentiates our assortment, which should allow us to treat our margins differently than other people.

But it happens that most of the furniture that we're adding today is VDC, vendor direct, and that it's dynamically priced, and so the margin structure is more set by the marketplace.

And then as we get better at it, the returns we have to understand better and the component piece of assembling, installation and what the opportunities there are.

So again, I would say that it's a little premature for us to tell you exactly where we think or even -- well, I would say exactly where we would land.

But again, the objective is to build the business in a way that is sufficiently differentiated so that the customer thinks of us for it and that it allows us to obtain the margin structure that we would find satisfactory.

And if I could squeeze one more in.

You mentioned about differentiated products.

So the question is, are those differentiated products designed by you?

Or are those items that vendors design themselves but exclusively sell to you?

Both would be in the category.

There would be a lot of examples of both.

I think that when we defined what we said was differentiated product, part of it was exclusive to us.

And again, that's things that we make and that's things that vendors make for us.

And there's things that vendors make for us with our input and what we want.

So those would be just 2 of the categories in breaking down differentiated product.

And that concludes our question-and-answer session.

I'll turn the call back over to Janet Barth for closing remarks.

Thank you, and thank you all for joining us today.

I'll be in my office tonight if you should have any follow-up questions or comments.

Otherwise, we look forward to speaking with you again on December 20, when we will report our fiscal 2017 third quarter results.

Have a good night.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating, and you may now disconnect.