Bed Bath & Beyond Inc. Reports Results For Fiscal 2020 Second Quarter

Bed Bath & Beyond Inc. (Nasdaq: BBBY) today reported financial results for the second quarter of fiscal 2020 ended August 29, 2020.

Fiscal 2020 Second Quarter Highlights

• Comparable sales increased approximately 6%, the Company’s first comparable sales growth since the fiscal 2016 fourth quarter.  Second quarter comparable sales benefited from significantly strong growth in digital channels of approximately 89%, partially offset by an approximately 12% decline in comparable store sales.
• Net sales were approximately $2.7 billion, a decrease of approximately 1% compared to the prior year period, partially due to the divestiture of One Kings Lane. Net sales from digital channels grew approximately 88%, while net sales from stores declined approximately 18%, compared to the prior year.
• Gross margin increased approximately 1,000 basis points to 36.7% compared to the prior year period, driven primarily by a favorable adjustment to the incremental inventory reserve for future markdowns in the fiscal 2020 second quarter and an inventory writedown in the prior year period.  Excluding these items from both periods, adjusted gross margin increased approximately 200 basis points to 35.9% and was driven primarily by favorable product mix, including lower coupon expense and better optimization of promotion and markdowns; and leverage of distribution and fulfillment costs; partially offset by higher digital channel mix, including higher net-direct-to-customer shipping expense.
• SG&A expenses decreased approximately $31 million or 3.5% compared to the prior year period, driven primarily by lower payroll and payroll-related expenses and advertising, which were partially offset by an increase in professional fees within other expenses, mainly consulting costs related to the Company’s transformation initiatives.  Excluding charges related to severance costs from the prior year period, adjusted SG&A expenses decreased approximately $12 million or 1.4% compared to adjusted SG&A in the prior year period.
• Net earnings per diluted share of $1.75 includes approximately $156 million from special items including favorable impacts from a gain on the sale of PersonalizationMall.com and a gain on the extinguishment of debt, partially offset by unfavorable impacts from special items including non-cash charges related to impairments of tradenames, and certain store-level assets, and the restructuring and transformation initiative costs.  This compares with a net loss of $(1.12) per diluted share for the fiscal 2019 second quarter.
  • Excluding special items from both periods, the Company reported adjusted net earnings per diluted share of $0.50 for the fiscal 2020 second quarter, and adjusted net earnings per diluted share of $0.34 for the fiscal 2019 second quarter. 

Mark Tritton, Bed Bath & Beyond’s President and CEO said, “Our growth strategy is unlocking improved financial performance, and the marked improvement in our second quarter financial results reflects the potential of our digital-first, omni-always transformation and our efforts to build a modern, durable platform for success.  We’ve taken direct action to stabilize our business, including reducing our cost structure, enhancing our financial flexibility, and investing where it matters most to our customers.   At the same time, we have assembled a world-class and experienced leadership team to rebuild our authority in Home and modernize our operations to deliver a truly customer-inspired and omni-always shopping experience.

“During this unprecedented time when our homes have become the center of our lives, our Company continues to respond with agility to the changing needs of our customers.  We are delighted by the continued strong response to our BOPIS and contactless Curbside Pickup service offerings, and we believe the recent launch of our new Same Day Delivery service will make it even easier to shop with us, as we help families across North America unlock the magic of holidays at home.”

Financial Position Update

During the fiscal 2020 second quarter, the Company generated cash flow of over $750 million including operational earnings and working capital, net of capital investments; reduced its gross debt by approximately $500 million or 30% through a bond tender offer and repayment of a bank loan; and further enhanced its liquidity position by approximately $400 million to approximately $2.2 billion through strong cash generation and a new $850 million secured asset-based lending facility.

Outlook

Given the ongoing uncertainty related to the impact of the COVID-19 pandemic, including around consumer behavior especially during the upcoming holiday season, the Company maintains its position of not providing fiscal 2020 financial guidance.  It is closely managing operational costs, including working capital to ensure it can remain agile and adjust to any unexpected changes in the market.  The Company continues to believe it has a strong financial position to manage through these uncertain times.

As previously disclosed on July 14, 2020 in an Investor FAQ Document, Bed Bath & Beyond plans to accelerate its comprehensive restructuring program to drive profit improvement over the next two-to-three years.  It expects to achieve significant annualized improvement in Earnings before Interest, Income Taxes, Depreciation and Amortization (EBITDA) of between approximately $250 million to $350 million, excluding one-time costs.  This is in addition to the expected $85 million in SG&A savings associated with the strategic restructuring program announced in February 2020. Importantly, the Company has assumed reinvestment of between approximately $150 to $200 million of the expected cost savings into future growth initiatives.

Key components of the additional expected profit improvement include:

• Approximately $100 million in annual savings from its previously described Store Network Optimization project which includes the closure of approximately 200 mostly Bed Bath & Beyond stores over the next two years.  These stores collectively generated about $1 billion in annual net sales in fiscal 2019, and many of them were EBITDA negative by the end of fiscal 2019.  The Company expects to be able to transition at least 15% to 20% of these sales to its digital channels or other store locations.
  • The Company continues to believe that its physical store channel is an asset for its transformation into a digital-first company, especially with new omni-fulfillment capabilities in Buy-Online-Pick-Up-In-Store, Curbside Pickup and Same Day Delivery.
• Approximately $200 million in annual savings from product sourcing, through renegotiations with existing vendors.
• Approximately $150 million in annual SG&A savings from continued optimization of its corporate overhead cost structure and reductions in other discretionary expense.
  • As previously disclosed on August 25, 2020, the Company announced that it had executed a workforce reduction of approximately 2,800 roles from across its corporate headquarters and retail banner stores and expects this action to generate future annual pre-tax cost savings of approximately $150 million, which is at the upper end of the Company’s initially stated range of $100 to $150 million dollars in annual SG&A savings described above.  This action was designed to further reduce layers at the corporate level, significantly reposition field operations to better serve customers in a digital-first shopping environment, as well as realign technology, supply chain and merchandising teams to support strategic growth initiatives.

In addition to these cost savings, the Company expects to generate deeper assortment, sourcing and supply chain opportunities as it pursues growth in owned brands.

On a preliminary basis, monthly sales for September show positive comparable sales growth, with  similar store and digital sales as in the second quarter and accelerated BOPIS trends.