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Financial, Retail

Bed Bath & Beyond Inc. Reports Second Quarter Results Delivering Positive Operating Cash Flow

Lower than expected traffic in August and higher than expected freight costs impacted the retailers net sales, which were reported at $1,985 million.

9/30/2021
UNION, N.J., -- Bed Bath & Beyond Inc. (NASDAQ: BBBY) reported financial results for the second quarter of fiscal 2021 ended August 28, 2021.

Mark Tritton, Bed Bath & Beyond's President and CEO said, "While our results this quarter were below expectations, we remain confident in our multi-year transformation. Following solid growth in June, we saw unexpected, external disruptive forces towards the end of the quarter that impacted our outcome. In August, the final and largest month of our second fiscal period, traffic slowed significantly and, therefore, sales did not materialize as we had anticipated. As COVID-19 fears re-emerged amid the on-going Delta variant, we experienced a challenging environment. This was particularly evident in large, key states such as Florida, Texas and California, which represent a substantial portion of our sales. Furthermore, unprecedented supply chain challenges have been impacting the industry pervasively, and we saw steeper cost inflation escalating by month, especially later in the quarter, beyond the significant increases that we had already anticipated. This outpaced our plans to offset these headwinds. These factors impacted sales and gross margin."

Tritton added, "Encouragingly, we've continued to make progress against the fundamentals of our three-year transformation strategy. Our buybuy BABY banner continued to build on its positive momentum from the past several quarters, growing double digits due to strength in apparel and travel gear and increasing market share for the period. We also celebrated the July re-opening of our Bed Bath & Beyond banner's NYC flagship store in Chelsea as part of our comprehensive store remodel program, which is exceeding our expectations. Our higher margin Owned Brands are outperforming our penetration goals across the overall chain, and even stronger in remodeled stores. As a group, we continued to leverage our enhanced digital channel, with significant growth above 2019 at nearly double the proportion of sales. Operationally, we entered the next phase of our supply chain modernization through our partnership with Ryder which is instrumental to our strategy. We are committed to executing over the short, mid and long term, especially during these early stages of our multi-year plan."

"Our financial foundation is strong. We generated positive operating cash flow during the quarter. Our cash balance, coupled with our recently amended asset-based revolving credit facility, provides us on-going capital and liquidity strength of $2.0 billion. We are well positioned to continue our planned investments in our business and pave the way towards a more profitable future. We have the plan, the team and the resources to unlock our potential."

Q2 Highlights

-- Comparable Sales decline of (1)% versus Q2 2020 primarily driven by slower than expected traffic trends in August across stores and digital

-- Bed Bath & Beyond banner Comparable Sales decline of (4)%; buybuy BABY banner growth of high-teens percentage

-- Core Sales decline of (11)%, primarily due to the impact of fleet optimization

-- Gross Margin of 30.3% and Adjusted Gross Margin of 34.0%

-- Adjusted Gross Margin reflects 170 bps of higher merchandise margin versus last year, that was more than offset by freight cost increases of 360 bps and which were greater than anticipated, particularly at the end of the quarter

-- SG&A expense in-line with expectations

-- Adjusted EBITDA of $85 million as a result of Net Sales and Adjusted Gross Margin performance

Fiscal 2021 Second Quarter Results (June-July-August)

Comparable Sales decreased (1)% compared to the prior year period. By channel, Comparable3 Sales grew +3% in Stores and declined (9)% in Digital versus the fiscal 2020 second quarter.
-- Comparable Sales reflects an estimated 10% impact from fleet optimization activity when compared to the fiscal 2020 second quarter.

Net sales of $1.98 billion declined (26)%, reflecting a Core1 banner sales decline of (11)% compared to the fiscal 2020 second quarter. Core1 sales performance versus last year were primarily driven by a decrease in Bed Bath & Beyond banner sales.
-- Net sales included a planned reduction of (15)% from non-core banner divestitures.

Bed Bath & Beyond banner Comparable Sales decreased (4)% compared to the prior year period, excluding the Company's previously announced store network optimization program, which began in the second half of the prior fiscal year.
-- Comparable Sales in key destination categories, which include Bedding, Bath, Kitchen Food Prep, Indoor Decor and Home Organization, declined (6)% compared to the 2020 fiscal second quarter. These categories represented approximately two-thirds of total Bed Bath & Beyond banner sales in the second quarter.

The buybuy BABY banner delivered its third consecutive quarter of positive growth with Comparable Sales increasing in the high-teens compared to the 2020 fiscal second quarter, driven by double digit growth in both stores and digital.

Gross Margin was 30.3% for the quarter. Excluding special items from both periods, Adjusted2 Gross Margin was 34.0%. Results versus last year were primarily impacted by higher freight costs of 360 basis points due to global supply chain challenges throughout the quarter, which were 120 basis points higher than anticipated. These factors offset higher merchandise margins of 170 basis points related to a more favorable product mix from the Company's new Owned Brands and vendor negotiations, as well as a more normalized mix of digital sales compared to last year.

SG&A expense, on both a GAAP and adjusted basis, decreased significantly compared to the prior year period, primarily due to cost reductions including divestitures of non-core assets and lower rent and occupancy expenses on a more efficient store base.

Adjusted EBITDA for the period was $85 million reflecting lower Comparable Sales and Adjusted2 Gross Margins.

Net loss per diluted share of ($0.72) includes approximately $0.76 from special items. Excluding special items, adjusted2 net earnings per diluted share was $0.04. Special items reflect charges such as non-cash impairments related to certain store-level assets and tradenames, loss on sale of businesses, loss on the extinguishment of debt, charges recorded in connection with the Company's restructuring and transformation initiatives, and the income tax impact of these items. Restructuring and transformation initiative charges include accelerated transitional markdowns related primarily to the planned assortment transition to Owned Brands as well as costs associated with the Company's transformation initiatives, including store closures related to the Company's fleet optimization, and the income tax impact of these items.

The Company delivered positive operating cash flow of $75 million. Free cash flow5 was essentially neutral as a result of $76 million of planned capital expenditures in connection with store remodels, supply chain and information technology systems.

Inventory was reduced by approximately $80 million compared to the end of fiscal 2020, primarily related to product transitions associated with the growth of the Company's Owned Brands, as well as store closures related to the Company's fleet optimization activity.

The Company returned approximately $100 million in capital to shareholders through share repurchases in the fiscal 2021 second quarter and $600 million since the program was announced in October 2020.

Cash, cash equivalents, restricted cash and investments totaled approximately $1.1 billion.

Total Liquidity was approximately $2.0 billion, including the Company's asset based revolving credit facility.

Guidance Outlook

As a reminder, Net Sales throughout fiscal 2021 include the Company's Core1 businesses and reflects planned reductions related to the Company's store fleet optimization activity.

Fiscal 2021 Third Quarter Outlook

The Company expects fiscal 2021 third quarter Net Sales of between $1.96 billion to $2.0 billion, which only reflects sales from the Company's Core1 businesses. Net Sales also includes planned sales reductions from divestitures and the Company's store fleet optimization program. On a Comparable Sales basis, the Company expects to be approximately flat compared to the prior year period.

The Company expects to achieve Adjusted Gross Margin in the range of 34% to 35%. This guidance reflects the impact of anticipated greater global supply chain challenges.

The Company expects Adjusted EBITDA between $80 million to $85 million and Adjusted EPS in the range of $0.00 to $0.05 per diluted share for the fiscal 2021 third quarter.

Fiscal Year 2021 Outlook

Based on its year-to-date performance in the fiscal first half of the year, as well as current expectations for the fiscal third quarter, the Company is revising its fiscal year 2021 guidance outlook.

The Company now expects higher fiscal year 2021 Net Sales of $8.1 billion to $8.3 billion. The Company expects comparable sales of flat to up slightly for the second through fourth quarters of fiscal 2021.

Adjusted Gross Margin is now anticipated to be in a range of 34.0% to 35.0% and Adjusted2 SG&A is expected to be approximately 32%.

The Company now expects Adjusted EBITDA to be in the range of $425 million to $465 million and Adjusted2 EPS range of $0.70 to $1.10 per diluted share.

Additional details on the Company's fiscal 2021 outlook and visibility on the third quarter will be provided during its conference call as well as in its investor presentation available on the investor relations section of the Company's website at http://bedbathandbeyond.gcs-web.com/investor-relations.
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