Bed Bath & Beyond Inc. (BBBY) Q2 2022 Earnings Call Transcript


Bed Bath & Beyond Inc. (NASDAQ:BBBY) Q2 2022 Earnings Conference Call September 29, 2022 8:15 AM ET

Company Participants

Susie Kim – Head of Investor Relations

Sue Gove – Director and Interim Chief Executive Officer

Mara Sirhal – Executive Vice President, Brand President

Patty Wu – Executive Vice President, Brand President, buybuy BABY

Laura Crossen – Interim Chief Financial Officer

Conference Call Participants

Michael Lasser – UBS

Jonathan Matuszewski – Jefferies

Seth Basham – Wedbush Securities

Justin Kleber – Robert W. Baird

Cristina Fernandez – Telsey Advisory Group

Michael Coppola – JPMorgan


Welcome to the Second Quarter 2022 Bed Bath & Beyond Incorporated Earnings Call. My name is Sheryl and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder this conference is being recorded.

I will now turn the call over to Susie Kim. You may begin.

Susie Kim

Thank you and good morning, everyone. Welcome to our fiscal 2022 second quarter earnings call. Joining us today are Sue Gove, Director and Interim Chief Executive Officer; Mara Sirhal, Brand President of Bed Bath & Beyond; Patty Wu, Brand President for buybuy BABY; and Laura Crossen our Interim CFO.

Before we begin, I’d like to remind you that our fiscal 2022 second quarter earnings release and slide presentation can be found in the Investor Relations section of our website at and as exhibits to our related Form 8-K. This conference call and the slides we refer to may contain forward-looking statements, including statements about or references to our outlook regarding the company’s performance, 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, including the Risk Factors section in our annual report on Form 10-K and our quarterly reports on Form 10-Q. The company undertakes no obligation to update or revise any forward-looking statements.

Additionally, the information we will discuss today contains certain financial measures that exclude amounts or are subject to adjustments that have the effect of excluding amounts that are included in the most directly comparable measure prepared in accordance with generally accepted accounting principles. For a reconciliation to the most comparable measures presented in accordance with GAAP, please refer to the table in our earnings release available on our website and included as an exhibit to our Form 8-K filed today.

I will now turn the call over to Sue.

Sue Gove

Thanks, Susie. Good morning, everyone and thank you for joining us. Before we discuss our second quarter results today, I want to take a moment to pay our respects to Gustavo Arnal. Gustavo was a distinguished leader and dedicated colleague to all of us at Bed Bath & Beyond and we are proud to have known and worked with him over the past several years. His talent and contribution to our business and teams will be missed. His family remains in our thoughts during this difficult time.

The last few weeks and months have redefined us in many ways and I’m grateful for how our teams have demonstrated their immeasurable dedication and resilience. This is an extraordinary and important time for our organization and everyone has fully embraced the necessary changes we are instituting. We are more focused strategically and culturally and our executives have been the pillar of strength and leadership that this company needs to drive results.

Among these leaders is Laura Crossen, who has been named our Interim CFO. Laura tenure and expertise at Bed Bath spans more than 20 years. She has a proven track record and has led many of our teams within finance through a variety of functions and transactions. Most recently, she was instrumental in managing our working capital needs and facilitating our vendor partnerships over the past quarter. She’s risen to every occasion and demonstrated our internal bench strength. I am confident our current leadership team positions us best to deliver on the targets we have established with Laura in her new role.

Our results for the second quarter correspond to the interim update we provided a few weeks ago. While our sales and profit do not yet reflect the aggressive actions we have initiated to change our performance, they do demonstrate sequential progress in several key areas. In the first quarter, we experienced a significant dislocation between sales and inventory that we began to address immediately during the second quarter. Aggressive inventory optimization actions, including accelerated markdowns and strategic promotions led to double-digit improvement in this gap from almost 40% in Q1 to below 30% in Q2.

Although very early we are also seeing signs of progress as merchandising and inventory adjustments begin. For example, in our Bed Bath banner we have seen positive sales trends in seasonal categories and national brands where in-stock positions and visual merchandising have improved. Additionally, our buybuy BABY business continues to hold market share relative to other mass market retailers, despite the absence of child tax credits in a more competitive environment. This is also particularly impressive as BABY lapped high-teens comparisons versus last year. Still our overall results are not acceptable nor demonstrative of our potential. We are moving fast to address a combination of legacy factors that led to these results.

As we shared on our August 31 update, we are embracing a straightforward back-to-basics philosophy that focuses on better serving our customers, driving growth, and delivering business returns. These changes had minimal impact on our second quarter performance, which continued to reflect our prior merchandising assortment, out of stocks, and continued trends in customer traffic from Q1.

On merchandising and inventory, we are making decisions focused on what our customer wants by bringing back popular national brands and introducing new emerging direct-to-consumer brands and rebalancing our inventory by exiting a third of our legacy-owned brands, while supporting the private labels that worked. Mara and Patty will discuss how we are going to offer our customers the brands and products they seek at the values they rely on in time for the holidays.

During this transition period, there remains a great desire to shop our brands as evidenced by the engagement we’re seeing with Welcome Rewards. Since launching this summer, our Cross Banner Loyalty Program has grown to 6.4 million members, including more than 30% in new sign-ups. Welcome Reward members represent more frequent purchases and higher transaction value across all three banners. While we have built out our digital capabilities extensively over the past two years, we continue to invest in customer-facing services to make it even easier to shop. Ahead of the important holiday season, we will be upgrading to a new universal mobile app that connects our three banners together, enabling even easier cross-banner shopping dovetails well with the traction we are seeing with Welcome Rewards.

In addition to regaining market share, enhancing liquidity is a top priority. As you know, we secured more than $500 million of new financing earlier this month. Our ongoing ATM program will also provide incremental liquidity. Organically, the financial changes we have deployed will also increase cash through our business. We have flattened our organization to reflect our more focused priorities driving greater efficiency and productivity.

This in addition to our responsible reduction in indirect and overhead expense is expected to yield approximately $250 million savings in the second half of this fiscal year or $500 million on an annualized basis. We are confident that our current liquidity will enable the necessary strategic plans we have implemented to drive further improvement and increase organic cash generation over the coming quarters.

Finally, working with our supplier partners remains an important focus area and I’m pleased to share that our payables are considerably healthier than in the prior quarter as evidenced on our balance sheet. Support from our suppliers, particularly our largest partners, remains solid and we remain committed to engaging with our vendor community intently.

Plans for our first vendor summit are underway for next month and we will continue to demonstrate consistent and proactive communication. We are executing the strategic and financial actions that will unlock progress in the back half of this year, while also investing in our future such as the new stores we’re opening for our buybuy BABY business. We are a more focused and capable organization with confidence in our ability to achieve our plans and execute our turnaround.

Now I will turn the call over to Mara to provide you with an update on what’s working at Bed Bath & Beyond. Mara?

Mara Sirhal

Thank you, Sue. Since the end of August, our Bed Bath team has come together enthusiastically to return to the core of what we do prioritizing and carrying for our customer. As our financial results have shown off, our customers want us to change and we are executing a clear and more prioritized vision to drive sales and traffic.

As I shared during our August update, our recent shopper survey underscored our incredible brand equity. Almost 90% of respondents pointed to Bed Bath as one of their favorite retailers and more than 80% would still consider Bed Bath & Beyond for a future shopping trip, even if they have not shopped us recently. In that same survey, we learned that product, price, convenience, and need are the key factors our customers care about. Simply put, our priority is to have easily accessible products that are on our customers’ list at compelling values across all price bands. Our teams are leaning in on all fronts to deliver.

Over the past several weeks, we have embraced our new brand-centric organizational construct, bringing together how the customer experiences Bed Bath under one team has enabled us to align our goals and seamlessly coordinate one unified approach instead of having disparate strategies. Centralizing our teams across merchandising, planning, brand marketing, site merchandising and stores has been a big win internally. We are more efficient and equipped to answer the needs of our customers especially in time for the key holiday season. Our survey results highlighted gifting and event prep as key reasons why our customers shop us and we have an important window to deliver on what they are expecting.

As Sue discussed, our omni and digital capabilities have grown immensely over the past several years, enabling a better customer experience by increasing product accessibility and making it more pleasant to shop at Bed Bath. We want to build on this experience at our stores as well. We’ve established three key pillars to deliver on our promise of a reliable and consistent in-store customer experience.

First we will empower our store teams to drive sales by incurring, incentivizing and motivating our associates to sell the inventory they have and offer our customers solutions for their needs. Second, we want to exceed customer expectations, we need to get back to what we are known for from a service level standpoint, our home model will be the cornerstone of how our store associates engage with customers. This includes, H saying hello and being welcoming and engaging in our customer interactions; O, offering to help and find out how they can assist; M, making recommendations of products and services that fill our customers’ needs; and E, promoting an easier shopping experience wherever they shop.

Third, we are going to unlock the potential of our team by motivating and empowering our associates in stores to be more than a transaction center. Our store teams have the ability to create the best customer experience within our four walls and we want to support our teams to do this.

When you walk into our stores today and over the next several weeks and months you will experience a different engagement through visual and merchandising presentation than you did during the first half of the year. Over the summer we’ve jumpstarted the rebalancing of our inventory away from owned brands and resolving the broken stock across our national brands and key destination categories.

As we turn the page into Q3, you will notice improvements, such as a robust harvest and Halloween set, which is currently fully stocked, compared to last year leading our store presentations. As Sue mentioned, while this is a small representation of change and it is still very early, we are seeing encouraging momentum. As the quarter progresses, you’ll continue to see the seasonality come through with better in-stock.

We’ll also be leaning into our Welcome concept. This month we launched our Welcome back campaign where we’re driving attention back to our customers’ favorite national brands. Brands like Calphalon are now leading our first [aisle] (ph) and more of our store is dedicated to our national brands. We are curating an assortment that is organized, intentional, and provides both solutions for our customers. This is not about stocking at high and letting it fly.

We are re-claiming our rightful place as the home category destination through a merchandising and inventory strategy that will be supported by a healthier mix of national and owned brands. Our value messaging will also improve through in-store signage and coupons to promote our pricing architecture and our Welcome Rewards offering, in addition to compelling price points. Our third quarter represents the start of our shift back to national brands across key points of real estate, in addition to activating a strong value message.

As we move into Q4, we will continue improving our inventory positioning. For perspective, our combined inventory receipts in the back half of this year will represent a double-digit improvement in national brands, key items, and products that our customers want versus the plans that drove the first half of this year.

Now, the journey will be gradual as we work towards our longer-term goal of increasing our national brands mix by 20 percentage points. Our inventory balance will improve sequentially based on the receipts that are coming in week-to-week and we look forward to showing you progress with each quarter. We are focused on improving sales trends to fuel future inventory and growth.

In closing, I want to reiterate how ready and prioritized we are to tackle what is immediately in front of us. Our customer is still reachable and we are committed to making our business better through steady sequential improvement by delivering on our back half plans.

I’ll now turn the call over to Patty to cover buybuy BABY.

Patty Wu

Thanks, Mara, and good morning everyone. The back half of fiscal ‘22 will be an important moment for buybuy BABY as we execute our roadmap to accelerate growth and unlock greater value from our brand. Following two years of considerable growth for our category driven by COVID-19 our segment has become attractive for retailers as winning the parent customer has proven to be a compelling proposition.

We are preparing for a return to growth in the back half of this year, particularly as compares start to normalize in the coming quarters. We have been working on several impactful initiatives to cut through the clutter of the noisy holiday market and build our category leadership to expand our customer base and reach. We’re establishing buybuy BABY as a solution platform for parents to extend our relationship with them from prenatal to preschool.

I’m going to talk to you today about several strategies we’re bringing to market now and over the next few months based on the roadmap we outlined last month. We are going to accelerate our business by first aging up with parents and their kids through the best selection of products and brands leading with social commerce, leveraging our stores to guide expectant parents and relaunching and reframing registry for our parents. These strategies will set us apart from the market and magnify the power of buybuy BABY to our valued customers.

In November, we will be launching our first owned brand as an important step towards our age-up strategy, we’ve leveraged the experiences of our Bed Bath & Beyond banner to create a plan that is focused on moving into adjacencies and spaces where we may not have national brand options. We remain dedicated to being a healthy brand and showcasing their innovations at all times. Our customers come to us for our broad selection and guidance and this continues to be our priority. While we’re going to wait until November to unveil and provide more details, let me share a few highlights.

Our first label will offer customers a really great selection of apparel, furniture and decor for infants to toddlers at compelling opening price points. Our products will be in whitespace segments that are additive to the category. So for example, we have developed a high quality winter pram also known as a snow suit that is priced almost 50% below some value-based retailers. We’re also going to be marketing our first owned brand much like a DTC brand by partnering with key influencers to differentiate and highlight our products.

Social commerce will also play a key role in how we promote solutions and provide education to families as a way to drive sales. We recognize that being a first time parent, especially during the holidays can be overwhelming. We want to remove some of that stress for parents during a very busy time of year by offering ideas and solutions through our social media and digital channels. We’re going to be talking to parents through how to celebrate and survive and even thrive during the holidays, with your baby as they prepare for a myriad of firsts, including their first plane ride or rode trip. We’re going to create content that shows parents how to pack and get through security with your stroller or what travel gear you may want to brace for that landing with your baby as they are struggling with the air pressure.

We’re also helping parents with the fun side of holidays as they start creating their own traditions like that first-holiday photo card. The big trend has been wearing matching pajamas with your baby and we’ve got some great options from well-known brands like Burt’s Bees and the Honest Company’s. We’ll also leverage our incredible stores and associates to add to our customer’s experience. We’re going to turn our stores into parenting hubs by bringing product and education together. A few weeks ago we hosted an event with Prago Expo at our Garden City, Long Island store that saw 700 expectant parents come to our store, meet with different suppliers and experience first-hand product demos as they prepare for and celebrate their pregnancies.

At this event, we converted more than 250 registrants and it served as a great example of how we can partner with organizations in our physical footprint. We’ll also be expanding our monthly registry insider event to the rest of our chain based on the successful registry conversion we’re seeing with our current pilot. These are events where expectant parents come to our stores before it opens to meet with other parents and learn from our associates about registry tips and tricks and run product demos of the must-have baby gear and accessory items.

The success we’re seeing with these events is particularly encouraging as we prepare for the launch of our upgraded and further differentiated registry experience. January represents the start of peak registry season and we’re going to capitalize on this timeframe to launch market-leading services that will extend our relationship with parents beyond the prenatal phase.

The new buybuy BABY registry experience will show elevated content and audience engagement on important elements from what the best registry items are to the best healthy parenting and child development tips. We’re also going to be modernizing the digital experience across both the parent and the gifters. Our new registry guide will help parents make better item selections, while also launching gift funds to bring our parents a year’s worth of diapers or time with [indiscernible].

In October, you’re going to see a visual preview of our full launch with a newly designed and upgraded gift box that we provide with every new registry sign-up. This will be followed by baby showers that we will be hosting across our chain to support our curtains-up registry moment in January.

So as you can see, we have continued to work diligently since introducing our plans at the end of August with compelling and differentiated plans for the back half of this year. We’re building on the momentum we’ve achieved over the past two years. As you can see we’re investing in our business to further accelerate and we look forward to sharing with you our progress and our journey.

And now I will turn it over to Laura for the financial.

Laura Crossen

Thank you, and good morning everyone. For the fiscal second quarter total net sales were approximately $1.4 billion, which reflects a decline of 28% and a comp sales decline of 26% versus last year. As Sue discussed these results came in as previously expected and announced on August 31.

As a reminder net sales continue to reflect the impact from our previously enacted store fleet optimization program, which was consistent with last quarter at 2%. By channel, store comp sales were down 28%, while digital sales declined 22% versus last year. Our digital channel remains approximately 40% of total net sales.

By banner Bed Bath & Beyond comparable sales decreased 28% versus last year also similar to last quarter, Buybuy BABY comps decreased in the high teens as they were up against comparable sales in the high teens during this time last year. Both GAAP and adjusted gross margin for the quarter was 27.7%.

On an adjusted basis, supply chain costs remained elevated impacting gross margins negatively by 380 basis points versus last year, which more than offset 100 basis points of higher product margins, due to the continuation of greater owned brand levels within our assortment. Additionally, we saw pressure of 260 basis points from the impact of accelerated clearance activity and 100 basis points of port related supply chain fees. Excluding these two transient costs in the quarter, adjusted gross margin was 31.3%.

As a reminder, the accelerated clearance activity from the quarter was a direct response to the heightened owned brand inventory receipts we began to see in Q1 as the arrival of delayed receipts with long lead times was met with sharply lower demand. If you recall, there was almost a 40 point delta between inventory growth of approximately 13% and lower sales of 25% versus the prior year. The actions we took during Q2 led to a considerable reduction in this GAAP at 28 percentage points.

SG&A dollar expense remains below last year and consistent with last quarter, primarily due to cost reductions and lower rent and occupancy expense following our store fleet optimization program. These results do not reflect the $250 million of SG&A reductions we announced last month, which I will discuss in a moment. Our sales and gross margin performance led to negative adjusted EBITDA of $168 million.

Turning to our balance sheet and cash flow, net cash used in operations was approximately $200 million, which was utilized to support our working capital needs and address vendor payables aggressively as reflected by more than 20% reduction in accounts payable on our balance sheet. Capital expenditures for the quarter were approximately $120 million, which were focused on planned investments in connection with store remodels, new openings related to buybuy BABY, store maintenance, and investments in technology.

We ended the quarter with a cash and investment balance of approximately $0.2 billion with total liquidity of $0.5 billion as of Q2. Since then, we secured more than $500 million of new financing, including a newly expanded $1.13 billion asset-backed revolving credit facility and a new $375 million FILO facility.

Liquidity, as of September 24, the close of our fiscal month was $0.85 billion, after repayments and borrowings that have occurred subsequent to the fiscal ‘22 second quarter. Additionally, the Company’s 12 million share ATM program has launched. Program-to-date, the Company has sold approximately 3 million shares for approximately $30 million.

Now turning to our qualitative expectations for this fiscal year, we are reiterating the outlook commentary we provided for 2022 during our recent strategic update call. We continue to expect comparable sales decline in the 20% range as the rate of decline in the second half of fiscal ‘22 abates versus the first half. This expectation contemplates our trends to-date, which have not changed materially from Q2 given the gradual progress on inventory and merchandising we anticipated.

Adjusted SG&A expense of approximately $250 million below last year for the second half of this year or $500 million on an annualized basis, reflecting cost optimization actions we announced last month related to reductions in workforce, variable costs, and overhead.

And finally capital expenditures of approximately $250 million versus our original plans of approximately $400 million. Based on these guidance parameters as well as ongoing working capital management and the timing of SG&A savings, CapEx reductions, and store closures, we anticipate breakeven cash flow by Q4.

Before we open for Q&A, I would like to thank our entire finance organization for their resilience and support as we’ve navigated the last few unprecedented weeks. We’ve come together to ensure continuity and support for our whole organization and I am especially inspired by our dedication and teamwork this quarter.

Operator, we are now ready for questions.

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Michael Lasser from UBS. Your line is now open.

Michael Lasser

Good morning. Thanks a lot for taking my question. First, I’m sure I speak for everyone on the call, our condolences on Bed Baths’ loss. And then my question is, Sue so now you’ve had more time to get your hands around the dynamics at Bed Bath & Beyond. You just mentioned or the team mentioned that there hasn’t been much change in trend quarter-to-date from what was experienced in 2Q? When do you expect to see a material improvement in the overall sales trajectory of the business? And as part of that what is driving your expectation that cash flow will be breakeven in the fourth quarter, historically you guys have generated free cash flow in the fourth quarter? Thank you very much.

Sue Gove

Yes, and thank you. And so I think first of all, in terms of the trends that we are seeing and Mara talked about this a little bit in her comments around Bed Bath. But we are seeing traction with brands where we have the inventory optimized and we’re certainly making significant progress on the overhang of the legacy inventory that we had in the prior quarter. So, there is steps that are coming through, we are starting to get the inventory receipts flowing and we feel like we’re really well positioned.

In addition, we have launched this welcome rewards program that we’ve talked about and we’re very excited about. The amount of customer interest in that demonstrates to us that our customers are anxious to get back in our stores. The data that we have on our customers, they’ve told us very specifically they want variety, they want value and they want coupons and those are the things that we’re going to be addressing in the upcoming period.

But I’ll let Mara and Patty come back and talk a little bit more specifically about their brands, and then we’ll come back and talk about cash flow.

Mara Sirhal

Thanks, Sue. Yes, as Sue mentioned again, where we’ve been able to invest our inventory in national brand to the level that our customer expects, we are actually seeing positive comps in a handful of those brands. In addition, we have a flex in a subset of doors where we have hurried up our inventory, particularly around key items and the trends in those locations are materially better. So it’s a progress, it’s a work in progress and as we go through the Q3 timeframe, as I mentioned in my comments and Sue did in hers, our inventory and receipt makeup will be heavily tipped into our new strategy and will continue to offer the runway to improve. Patty?

Patty Wu

Yes. Great thanks, Mara. And on the BABY front we’ve got a really exciting second half planned, we’ve been working with our suppliers to get some exciting inventory in for the holidays both exclusive products, as well as program, so we are really excited and encouraged to be sharing that with our customers and we’re going into ‘23 also planned with a really strong innovation pipeline with a lot of great national brands.

And I’ll turn it over to Laura now.

Laura Crossen

Sure. So let me address your question on the Q4 cash flow. You’re correct, historically Q4 is a cash positive quarter for the company. We have contemplated both the inventory transition relative to owned brands into national brands and also contemplated that this season is coupled with a number of moving parts, including our store closure program, which has a number of dynamics and the progression of our national brand inventory build, which we want to continue into the back half in ‘23.

Michael Lasser

Thank you very much.


Thank you. Our next question comes from Jonathan Matuszewski from Jefferies. Your line is now open.

Jonathan Matuszewski

Great, thanks so much for taking my question. Can we get an update on vendor relations? How the conversations evolved since the strategic update a couple of weeks ago, a lot of shifts in the corporate strategy. So just trying to understand the supplier buy in, in terms of the merchandising pivot and everything else? Thanks so much.

Sue Gove

Sure. And, yes, as we’ve talked about in the past we have regular communications and information sharing with our vendor community. We recognize the vital importance of our supplier partners. Our team is continuously working with them and the support is actually very high and enthusiastic particularly with our largest partners. Key point here is, they want us to win and they are supporting our assortment changes that are going to create the best experiences for our customers.

As I mentioned in my comments, we have a vendor summit planned later in October, and we’ll continue that information sharing with them at that time. But again, we’re going to do a little round-robin again and let each of our speakers here talk to what’s going on in their specific area around the vendor relationships.

Mara Sirhal

Great. This is Mara. Thanks for the question Jonathan. I just want to underscore what Sue mentioned is really truly number one, they want us to win, and they are committed to the specialty channel. We’ve heard that time and time again as we work with our partners. How important this channel is for their brands, it’s a really unique space for them to activate within their brand within our store and to our customers and broader, so really important point there.

I do want acknowledge that certainly this is a time where there is an increased focus from vendors on payments and shipments. As Sue mentioned, we’re committed to engaging and communicating with them, every step of the way with a high level of transparency. So we are in communication with them daily and working very collaboratively on both short and long-term opportunities together. And we’re also collectively focused on the items and categories we need to win in the back half and have both collectively prioritize, what we need to do to deliver on that.

I’ll pass it to Patty for BABY.

Patty Wu

Great, thanks, Mara. And, I just wanted to reiterate what Mara was saying in terms of our role with our supplier partners, right? So if we think about BABY, we have a clear and unique role within the marketplace given the human touch that we have with our service and our experience in our stores, with our associates. The other piece is the breadth of selection that we offer and no other retailer out there can bring brands to market in that high-touch way that we can.

And with that, we’ve seen a lot of support and incremental support for the second half of the year, whether it’s the holiday program, and even more importantly some of the registry programs that we’re going to be bringing out at the end of Q3 into Q4. We’ve got a really action-packed exciting assortment of both products and services that are coming that we’re excited to unveil. And then the other piece is, and I mentioned this before, we are doing pretty extensive and very extensive planning as we start to take over ‘23 plans to drive growth not only for our brands but overall delighting our customers.

Sue Gove

Hi, Jonathan. From a vendor payment and management perspective, as you know we’ve increased our liquidity and we have been demonstrating our prioritization of payables relative to our back half preparations enabling us to deliver on our merchandise and inventory strategies that both Mara and Patty have outlined.

Jonathan Matuszewski

That’s helpful. Thank you.


Thank you. Our next question comes from Seth Basham from Wedbush. Your line is now open.

Seth Basham

Thanks a lot, and good morning. My question is on your fourth quarter cash flow guidance for breakeven. Can you bridge us to that a little bit more? How much do you expect in terms of the change in working capital versus change in net income for example?

Laura Crossen

Seth, this is Laura. I’ll take that question. While we’re not getting into that level of detail in the fourth quarter. Clearly, we would expect to have a balance of both operating cash flow, and as I mentioned earlier, a strong interest in ensuring that we transition our inventory sequentially into national brand and it continue with the progression of selling off the targeted owned brand products. So that coupled with our store closure program has a combined effect on the outcome in Q4.

Sue Gove

And I would just add to that, that we intend to build on that in ‘23.

Seth Basham

Yes, okay. So we should probably be thinking about negative income and slightly positive change in working capital to get us to flattish operating cash flow in the fourth quarter?

Sue Gove

Maybe a little more balanced.

Seth Basham

Got it. Okay, and then as it relates to the third quarter specifically you’re expecting negative operating cash flow. I presume just want to confirm that.

Laura Crossen

That the third quarter as expected in the industry and in our business is clearly an inventory build quarter. So from a working capital perspective, we’ll deploy cash into inventory.


Thank you. Our next question comes from Justin Kleber from Baird. Your line is now opened. Justin, your line is now open.

Justin Kleber

Yes. Good morning, everyone, thanks for taking the question. Laura, you mentioned that your product margins were up 100 basis points in 2Q, due to the higher penetration of owned brands. Can you just remind us what the average margin gap is in your business between national brands and owned brands? Just so we have some framework to think about the gross margin headwind as you pivot back to national brands? Thanks.

Laura Crossen

Yes, Justin, clearly from an owned brand perspective, we have seen significant erosion in our margin as a result of the heavy burden to supply chain cost over that owned brand strategy. And as our sales trends demonstrate, we were not offering our customers what they were looking for relative to that prior strategy. What I can say while we are not providing specific plans around our margin is that we know the composition of how we can improve our margin going forward and we’ll come back when we are ready to discuss the quantity of that.


Thank you. Our next question comes from Cristina Fernandez from Telsey Advisory Group. Your line is now open.

Cristina Fernandez

Hey, good morning. I wanted to see if you can share more color around your current or your inventory composition at the end of the quarter, particularly how much progress you made in clearing owned brands and as you look at the total, I guess, how much is owned brands versus core versus some of the new product and how you expect that to change as you move to the third and fourth quarter?

Sue Gove

Hi, Cristina. First, let me address the owned brand progress. Of the owned brand inventory that we targeted and was comprised in our reserve, we’ve made headway in Q2 through about a third of that inventory. Timing of our progress for the rest depends on a variety of factors including our store closure program, but it is our intention to be as clean as possible heading into fiscal ‘23.

Mara Sirhal

Yes. I would just add a comment to that, as I mentioned in my comments during the call is that our second half receipts are precipitously tipped toward our national brand product and key items, which provides a much better mix to align with our new merchandising strategy.


Thank you. And we have time for one more question. And our next question comes from Michael Coppola from JP Morgan. Your line is now open.

Michael Coppola

Good morning, thanks for taking our question. And we appreciate you guys providing the liquidity pro forma for the FILO facility. Could you guys just clarify how much cash you’re sitting on today and how much you kind of want to keep on the books going forward?

Laura Crossen

You know, as we — this is Laura, and thank you Michael, for the question. As we stated in our release, currently we have liquidity of $0.85 billion as of the end of our fiscal September month which was last Saturday. Clearly, we believe, we are comfortable with our liquidity and our ability to drive our performance in the back half.

Susie Kim

Operator, I think we’re done with questions. I’m going to turn the call over to Sue for closing remarks.

Sue Gove

Okay. So, we want to thank everybody for your participation and for your ongoing support of our Company. As you’ve heard today, we’re taking action, we’re implementing plans for our future and we have some exciting things planned.

With that, I’d like to offer today’s listeners an opportunity to experience our enthusiasm first-hand. We want to offer you a free membership to our Welcome Reward Plus program for one year. So if you’ll please reach out to Susie at I know you know that number — that e-mail address probably quite well. Today she is going to take care of getting you set up and again we’re really excited to celebrate the momentum of this program. We’ve seen on our new cross-banner loyalty launch and we’re excited to share that directly with you. So again, I hope you’ll reach out to Susie, and thank you all, and have a great day.


Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for your participation. You may now disconnect.

Source link

Leave A Reply

Your email address will not be published.