Bed Bath & Beyond inc (BBBY) Q2 2021 Earnings Call Transcript

Bed Bath & Beyond inc  (NASDAQ: BBBY) Q2 2021 earnings call dated Sep. 30, 2021

Corporate Participants:

Susie Kim — Vice President of Investor Relations

Mark J. Tritton — President and Chief Executive Officer

Gustavo Arnal — Executive Vice President and Chief Financial Officer

Analysts:

Susan Anderson — B. Riley — Analyst

Simeon Gutman — Morgan Stanley — Analyst

Chris Horvers — J.P. Morgan — Analyst

Cristina Fernandez — Telsey Advisory — Analyst

Bobby Griffin — Raymond James — Analyst

Brad Thomas — KeyBanc Capital Markets — Analyst

Atul Maheshwari — UBS — Analyst

Seth Basham — Wedbush Securities Inc. — Analyst

Justin Kleber — Robert W. Baird — Analyst

Anthony Chukumba — Loop Capital — Analyst

Carla Casella — J.P. Morgan — Analyst

Jonathan Matuszewski — Jefferies — Analyst

Presentation:

Operator

Welcome to Bed Bath & Beyond’s Fiscal 2021 Second Quarter Earnings Conference Call. My name is John, I’ll be your operator for today’s call. [Operator Instructions]

And now I will turn the call over to Susie Kim, VP of Investor Relations. Susie, you may begin.

Susie Kim — Vice President of Investor Relations

Thank you and good morning, everyone. Welcome to our fiscal 2021 second quarter earnings call. Joining us today are Mark Tritton, our President and CEO; and Gustavo Arnal, our Chief Financial Officer. Before we begin, let me remind you that our fiscal 2021 second quarter earnings release and slide presentation can be found in the Investor Relations section of our website bedbathandbeyond.com 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 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 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 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.

It is now my pleasure to turn the call over to Mark.

Mark J. Tritton — President and Chief Executive Officer

Thank you, Susie and good morning, everyone. After several consecutive quarters of delivering positively on our plans, the second quarter represented disruptive moment along our multi-year transformational journey. While we continue to make significant progress on our long-term strategies, our immediate results met challenges stemming from both macroeconomic forces and internal execution factors. We delivered net sales of approximately $2 billion resulting in a 1% comp decline and reflective of a choppy quarter.

Following the solid growth in June, we saw an unexpected and substantial shift towards the end of the period, which impacted our financial outcome. In August, the final and largest sales month of Q2, traffic unexpectedly slowed and therefore sales did not materialize as we had anticipated. External disruptive forces such as the resurgence of COVID-19 cases and growing Delta fears created challenging and volatile environment. This is particularly evident in large southern states such as Florida and Texas as well as California, which in aggregate represent approximately 30% of our total sales.

From July to August, traffic trends devolved in these state and worsened by double-digit percentages. The rapid decline in traffic was particularly detrimental for us given the inclusion and significance of August in our fiscal quarter versus our competitors. We are cognizant of comparisons to our peers who are on in July and reporting cycle. As a proxy, our comparable sales grew an estimated 24% based on May, June, July further highlighting the importance of the trading month of August on our Q2 performance.

In diagnosing our quarter and addition to the external sources we faced, we also saw some internal execution issues that we are now addressing. There were opportunities where we should have been more effective in allocating marketing resources to stimulate and support traffic in stores and online. In an effort to diversify and shift our customer engagement towards online and social media channels, we overcorrected and be too far from the core fundamental, historical and current traffic drivers. For example, we disproportionately reduce the distribution of our printed circulars which are a continuous and critical store in digital traffic driver for our Bed Bath & Beyond business.

Our recently combined brand and digital teams are quickly correcting cost to rectify these issues at the end of the third quarter and full year. As lower traffic impacted our ability to lead the sales, we operated under unprecedented supply chain conditions that have continued to increasingly tight global trade since last year. As the quarter progressed, particularly in August conditions worsened relative to our full preparation. The speed of industry inflation and lead time pressures outpaced our plans to offset these headwinds. And as a result, we did not pivot fast enough especially on price and margin recovery.

In response, we have leveraged our second quarter experience to increase our agility and swiftly activate offsets to these high input costs and lead times. We’ve taken several crucial steps to improve our second half performance such as instituting more effective margin controls through more targeted pricing and promotional strategies. We are also pursuing even greater supply chain optimization. Our second quarter performance, including the factors I’ve just discussed, have caused us to re-frame our outlook for the full year. The challenges we faced in August, have not abated in September. And surprisingly, the media and Wall Street disposed around worldwide freight shortages and port disruptions, things should have been overly chronicled in recent weeks.

However, we have diagnosed the problems and developed strong plans to change our trajectory recovering by November and delivering a strong holiday is our key focus. Furthermore, despite this difficult business environment and moderating home category growth, our market share within the quarter remained steady sequentially month by month. As expected, we continue to be below last year’s levels, given the planned overall net sales decline due to our strategic closure of 200 stores under our fleet optimization initiatives. We have a new baseline from which to grow, which further emphasizes the importance of executing on our long-term objectives in addition to driving our near-term performance.

Now turning to our key long-term initiatives, our omni always principle remains a cornerstone of our evolution to the Group, we continue to leverage our enhanced digital channel which delivered a significant sales increase above 2019 at nearly double the proportion of sale. We are also building on the underlying foundation of the business. As part of our commitment to enhancing the customer experience, we executed cross-banner browsing across our entire group of content including Bed Bath & Beyond, buybuy BABY and Harmon. We look forward to further enabling cross-banner shopping and checkout soon. Our omnichannel presence continues to grow as well.

During the quarter, we expanded our same-day delivery reach by our new partnership with Roadie, which is in addition to our existing capabilities with both DoorDash and shifts. We continue to make significant progress against our store remodel plan. Our bold new remodels are showing early signs of great success. We currently have approximately 70 stores remodeled out of our plan 130 to 150 to 2021 and they are performing above plan. The July reopening of our imagined New York City flagship store in Chelsea with a celebratory milestone for us on our transformational journey. Our Chelsea store says is a beacon for the overall redefinition of the new Bed Bath and Beyond. We’ve enhanced the customer experience on many fronts, including key national brand shop-in-shops and upgraded mobile shopping capability. Performance at our Chelsea flagship is exceeding expectations on many levels and it is now our most productive stores in the chain per square foot.

Momentum within our own brands is growing in this first year of development. With the second quarter, we’ve now exceeded our own brand penetration goal for fiscal 2021 in total and more than 20% of overall sales well ahead of schedule. Penetration is even higher in our new store remodels. These new higher margin own brands are driving differentiation for Bed Bath and Beyond. In these early stages, we are attracting, engaging, converting new and existing customers and also seeing lower coupon attachment rate. Our next two own brands decided to launch in Early October and November marking our seventh and eighth brand for 2021. Also encouragingly, buybuy BABY was a shining star for the group this quarter. Building on several periods of consecutive positive momentum, Baby comparable sales grew again consistently by a high-teens percentage for the second quarter signaling its fourth consecutive month of share gains versus last year.

This performance has been driven by particular growth in apparel and travel gear similar to trends we are currently seeing across the retail sector. We are proud to be answering the needs of our customers along their parenting journey and plan to build our strength through our key transformational pillars including differentiated product strategies such as own brands. Finally and importantly, our operational transformation remains on track. We ended the next phase of our supply chain modernization through our partnership with Ryder, which we announced at the end of July.

In September, we opened our new Northeast regional distribution center. These developments are instrumental to our end-to-end transformational strategy and will help in the long-term control and protection from supply chain stress, such as those we are facing today.

I will now turn the call over of Gustavo Arnal, our Chief Financial Officer to review both our second quarter financial results and our outlook for the third quarter and full year. Gustavo?

Gustavo Arnal — Executive Vice President and Chief Financial Officer

Thank you, Mike and good morning, everyone. To be along what Mark just discussed, I would like to underscore that we’re acting quickly to offset and navigate the near term macro supply chain challenges, the entire industry is facing, it is also important to understand that given our current size and margin profile, the small relative changes in cost, pricing and margin can have a magnified impact on our earnings results. For perspective, 100 basis points of margin variation, which could stand from 1% in cost changes or 1% of improvement from pricing or product mix are worth $80 million in EBITDA for the year and approximately $0.50 EPS. These exist on the upside, but also on the downside.

As evident in our Q2 results, significantly higher than anticipated and unprecedented freight increases led to our performance falling below expectations. Therefore the actions we are implementing are important as we managed cost pressures specifically pricing, freight optimization and marketing intervention. With these in mind, I will cover our second quarter results as well as our third quarter guidance and revised full year outlook. As a reminder, as expected reported net sales continue to reflect the impact from expected non-core banner divestitures completed last year as well as our ongoing planned store fleet optimization program.

Total net sales were $1.985 billion and represented a small comp sales decline of 1%. Core banners were down 11%, which included a 10% impact from our ongoing fleet optimization program. Our digital channel represented 34% of total net sales. And we’re pleased to see that our digital base continues to be a meaningful portion of our results with double the penetration versus pre-pandemic level. Store comps deliver growth of 3%, given solid performance in June but lower in subsequent months due to lower traffic as the quarter progressed. In our Bed Bath & Beyond banner comparable sales decreased 4% versus last year, while back to call it performance of 12% growth was solid. On top of strong growth last year, we had expected to see even higher growth.

As Mark noted, our buybuy BABY banner deliver exceptional results for the quarter delivering comparable sales growth in the high-teens percentage versus last year, exceeding our expectation. Adjusted gross margin was 34%, 190 basis points lower than last year. This was driven by a 360 basis point drag from increased freight cost compared to last year given the unprecedented supply chain challenges particularly in July and August. This impact far exceeded the significant 240 basis point increase we had built into our plan. For example, we had anticipated container rates to increase more than 100% relative to last year. Yet, we ultimately incurred rate 150% higher as we acted with agility to ensure supply availability.

Increases like these unfortunately offset a 170 basis points of positive merchandise margin expansion particularly fueled by own brand penetration. Worth noting, even with these outsized freight costs gross margin is above 2019. SG&A dollar expense was in line with our original plan. But, therefore higher as a percentage of sales given a lower than expected revenue base late in the quarter. As we continue to navigate, the volatile operating environment for the remainder of the year, we’re focused on managing expenses appropriately, while not sacrificing the strategic investments we must make to support and drive our business transformation. We delivered adjusted EBITDA of $85 million below our expectations, driven by the lower sales and gross margin performance of the quarter.

We reported a GAAP EPS loss of $0.72 per diluted share. These results include approximately $77 million of specialized related to planned restructuring and intensive transformation initiatives. These are excluded from adjusted results to provide a more accurate picture of the underlying performance of our business. As we progress ahead through the initial stages of our transformation, we have planned for these charges to decrease over time. On an adjusted basis, EPS was $0.04 reflecting our lower EBITDA and the sensitivity dynamics I described earlier.

Turning to our balance sheet and cash flow. We continue to demonstrate strong cash and liquidity. We generated $75 million in operating cash flow during the quarter driven by working capital improvement. Consistent with our capital allocation principles, we continue to drive our ongoing transformation initiatives. We invested approximately $76 million of capital in areas such as the store remodels, supply chain and IT system, which led to a neutral free cash flow position. Our cash and investment balance remained strong at $1.1 billion. Solidifying our capital availability further, we improved term and increased our asset base revolving credit facility to $1 billion in August, bringing our total liquidity to $2 billion.

We continue to follow a balanced data driven approach to return cash to shareholders. During the quarter, we executed approximately $100 million in share repurchases were approximately 3 million shares. Program to date, we have repurchased approximately $600 million or 20% of our shares outstanding.

Now, I will discuss our guidance for the third quarter and revised outlook for the full year. First, on the third quarter, which covers the month of September, October and November. So far in the month of September, we have not seen an improvement from the challenging traffic and sales trends we experienced in August. Having said that, similar to last quarter, the final month of this quarter, November is the largest and most impactful. We are committed to being transparent and want to be explicit. November has historically represented nearly half of the sales for Q3 due to the Thanksgiving sales period inclusive of the Black Friday selling period.

Our third quarter guidance take into account September trends, including the supply chain challenges we’re experiencing as well as the importance of the month of November. We are expecting approximately flat comparable sales for Q3. Accordingly, net sales are expected to be in a range of $1.96 billion to $2 billion. Again divestitures and fleet optimization will continue to impact year-on-year comparison. In terms of macroeconomic factors we’re not anticipating an improvement to the unprecedented global supply chain conditions that existed.

We are exercising caution on the near-term pressures related to rising cost inflation and the ongoing tightening of supply availability. This ability across the industry remains complex and any other sudden and dramatic worsening would be difficult to predict or estimated, accurate. We are acutely aware of these factors that are outside our control, which is why we’re hyper-focused on offsetting inflation with the strategic pricing and promo optimization actions. With these factors in mind, we expect adjusted gross margin in the range of 34% to 35%. Given our sales and gross margin expectations, adjusted EBITDA is estimated to be in a range of $80 million to $85 million.

Leading to an adjusted EPS range of $0.0 to $0.05. Based on our performance for the first half of the year as well as our expectations for the third quarter, we feel it is appropriate to revise our guidance for the full year. We now expect net sales in the range of $8.1 billion to $8.3 billion based on comp sales growth of flat to slightly positive towards expecting to fourth quarter. For modeling purposes, this translates to a double digit full fiscal year comp. Adjusted gross margin for the year is now expected to be in a range of 34% to 35% compared to our previous expectation of approximately 35%. SG&A is now expected to be approximately 32% of total net sales. In line with our revised sale and gross margin expectations, adjusted EBITDA is now expected to be in a range of $425 million to $465 million. This translates to an adjusted EPS range of $0.70 to $1.10.

Our balance sheet and cash flow assumptions remain largely unchanged including capex of approximately $400 million, a gross debt to EBITDA leverage ratio of approximately 3 times and plans for a total of $325 million of share repurchase. For the full year or approximately $100 million for the remainder of the year. We have also provided additional assumptions on depreciation and amortization, interest and tax rate in today’s presentation to assist with EPS model. Despite the backdrop of the current operating environment, our guidance reflecting immediate mitigation plans as well as fundamental processes and strategies that are stronger today than in prior years.

We have pivoted quickly to improve traffic across all channels and implement strategies that can offset the cost increases that we are experiencing. Additionally, we should benefit from our ongoing initiatives including the increasing penetration and growth of our new own brand, better market-based pricing, more effective data driven promotion and marketing strategy and supply chain and freight optimization.

Despite the near-term turbulence that has led to update our guidance today, we’re confidence on the systemic progress we have and will continue to make on our transformation. Even on a lower store and revenue base, particularly when considering our divestitures our core profitability for 2021 largely exceed our profitability in 2019. Our gross margins are projected to be approximately 100 basis points, 200 basis points higher. We are offsetting stranded overheads from divesture.

Core EBITDA is anticipated to be flat or up to nearly 10% higher, again on a smaller more streamlined basis. This implies that earnings per share will have expanded by 1.5 times to 2.5 times further enabled by our commitment to shareholder returns through our share repurchases. We are a healthier, more profitable enterprise today than we have previously been and are better positioned to overcome the short-term volatility we’re currently experiencing.

I will now turn the call over to Mark for some closing remarks.

Mark J. Tritton — President and Chief Executive Officer

So, as you can see, we are a Company executing a comprehensive turnaround, while simultaneously navigating ever-changing macro business conditions. I want to thank our organization for the perseverance, diligence and progress that is evident daily. One quarter does not define or derail a multi-year strategic plan. The steps we are taking will get us back on track to achieve our near and medium-term goals. As always with turnarounds, our path will be dynamic, but we are confident and committed to our three-year goals and beyond.

Our foundation is strong strategically, operationally and financially. As Gustavo discussed our cash balance and liquidity provide us ample resources above and beyond our already robust plans. With that strategy in play and the hard learnings from Q2, we are well positioned to continue delivering on our transformation. We have the plan, the team and the capital to unlock our potential.

We will now take questions.

Questions and Answers:

Operator

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] And our first question is from Susan Anderson from B. Riley.

Susan Anderson — B. Riley — Analyst

Hi, good morning. Thanks for taking my question. I’m curious on the own brands. So it sounds like they definitely did well in the quarter, reaching the 20% penetration. Well, that’s a huge positive. I’m curious, are they impacting the top line at all given they would be lower ticket versus branded product that you would normally sell in their place. And then also maybe if you could just talk about how much they helped to the gross margin in the quarter.

Mark J. Tritton — President and Chief Executive Officer

Yeah. Thanks, Susan. Look we are experiencing some transition in opening price point, because it’s a completely new addition in our business. So with that and clearance markdowns, we did see AUI [Phonetic] slightly lower and that was somewhat expected, but it is adding to that profitability, disproportionately adding to that profitability that we said 170 basis points of increase in margin bodes well for now and as we grow both our brands and the rest of our initiatives unfortunately offset by some of those freight charges we saw. So we’re very positive with the foundational strategy, how it’s implemented. And we see only further growth from that initiative.

Susan Anderson — B. Riley — Analyst

Great. And then if I could just add one more, I guess just on the traffic front, I’m curious, just your thoughts around increasing store traffic kind of during the slower shopping times and then also, I’m curious what your plans are for holiday to drive traffic into the stores and also the products.

Mark J. Tritton — President and Chief Executive Officer

Yeah, look at one of the critical missteps we had during the quarter season [Phonetic] was really that we called back key vehicles that had been traditionally strong traffic drivers for both digital and stores. And engaging our customers, even with coupons, and that was really the reduction in circular which was dramatically cut and we didn’t get clarity on that too much later in the quarter and had a real impact on traffic.

That couples with the COVID issues that we saw particularly in key states that we were correlating the increase in the Delta variant growth as creating risk and concern for customers was kind of a double dip, that was within the quarter. So we’re looking for issues that are systemic or one time, and we feel like that we can address both of those by readdressing our investments in marketing appropriately. And we’re starting to do that as well as reaching out to our customers, engaging in them in those critical geographical state.

In terms of the holiday period, we feel versus the — particularly the fourth quarter of last year and the end of third quarter, we had a lot more tools in our tool belt to be able to challenge that fees and really drive growth. We’ve got assortment. We’ve got inventory management. We’ve got a revised marketing plan. We’ll have a better balance of our digital and store business. We’re at 40% penetration in the fourth quarter last year and it was an unusual time and then we’ve really added an awful lot of ease and convenience opportunities for our customers to engage with us. So we feel strongly about our plans today.

Susan Anderson — B. Riley — Analyst

Great. That’s really helpful. Thanks for all the details. Good luck the rest of the year.

Mark J. Tritton — President and Chief Executive Officer

Thank you.

Operator

Our next question is from Simeon Gutman from Morgan Stanley.

Simeon Gutman — Morgan Stanley — Analyst

Hey, everyone. And Mark, a high level question is, when you came to the business, there were some execution issues. This is right pre-COVID and you started fixing some things, then COVID happened. You accelerated a lot of change. The category had a big positive shift. And it looked like things were going in the right direction. And then there were stimulus. You’re very early in your turnaround and I wanted to ask whether it may just be a year or two until we start seeing more positive change. I think there’s a lot of things that are obscuring the environment, especially with stimulus and the category doing well and you just started launching new brands. And I remember a target, it took a year, if not too for the strategy to really blend. So, curious if we’re setting the expectations a little too high here and maybe the turn and what your engineering may just take a bit longer to materialize.

Mark J. Tritton — President and Chief Executive Officer

Look I appreciate the comments, Simeon, it’s definitely true, it is an evolutionary transformation and it is extensive about we are making significant strides in that and again in terms of setting the bar high. I think that we believe we could have hit those goals. We’re just seeing some mid-term issues here in terms that the Delta variant and it’s effect on the business and supply chain pressures. And as we outlined some things in terms of our execution, we just didn’t get right. So I think that there is a baby steps of this transformation with two quarters into a 12 quarter transformation plan. I agree with you that we’re going to see greater momentum sequentially as we move through this is just a near term pain point for us. But I appreciate the comment very much.

Simeon Gutman — Morgan Stanley — Analyst

Yeah. And then, can you tell us where you are, I guess, it may be an inning of the brand launches of the — what you would call it, the transformation that you’re architecting, what stages that so we can appreciate the timing a bit better.

Mark J. Tritton — President and Chief Executive Officer

Yeah. Look, I’m not your sports guy, and I get thrown [Phonetic] on that one, so I reframe it quickly to say, there’s kind of a couple of key stages business establish and re-establish, stabilize, optimize and naturalize. And we have just launched and are back to launch several additional own brands in our first year design, developed, define and launch eight brands within 2021. So this year is definitely our establishment year. And so we are getting traction with those brands while we’re engaging with new and existing customers. We’re seeing a lot of positive signs there. We only see that growing. And I’d say we’re now at our opening stages with evolutionary stages to follow.

Simeon Gutman — Morgan Stanley — Analyst

Okay, thanks, everyone, good luck.

Mark J. Tritton — President and Chief Executive Officer

Thank you.

Operator

Our next question is from Chris Horvers from J.P. Morgan.

Chris Horvers — J.P. Morgan — Analyst

Thanks, good morning. So I think my first question is about September. Delta infections have moderated and you’re hearing rebounds in the back half, September and in categories like airlines and restaurants. So the commentary that September is not getting better. Is it that the other states are deteriorating, and the big three are improving or do you think that perhaps the home furnishings category is moderating?

Mark J. Tritton — President and Chief Executive Officer

We’ve definitely seen data around home furnishings moderating. I think that you were up against some big and particularly in the kitchen appliance area. Some big LY comparisons with Q2 even going through into September. We are seeing some buoyancy in other markets and that’s definitely around the market didn’t exist last year when performing like apparel and footwear and there is a diversification of spend there including travel. So I think the mid term spend is moderating out. We’ve seen traffic and surge on home furnishing slightly suppressed versus our expectation. That’s total industry. We see that really sort of settling down more into the end of the third and through the fourth quarter.

Chris Horvers — J.P. Morgan — Analyst

Got it. And then maybe could you share what August and September comps were more specifically and then understanding November is a big part of the — biggest part of the quarter, what — like what changes, such that you can get back to a positive comp to flatten out the entire quarter?

Mark J. Tritton — President and Chief Executive Officer

Well, I think one of the key changes — now, I’ll let Gustavo weigh in on some of the more specifics, but one of the big changes in the back end of the third quarter is really readdressing out drivers towards key traffic and really engaging the right amount of customers again in our key venues like circular and email in the right way which we recognized was a self-inflicted wound. So that’s completely different in its approach from what we’re seeing in Q2.

Gustavo Arnal — Executive Vice President and Chief Financial Officer

Gustavo? Yeah. Hi, Chris. To your question on August and September in the month of August, we saw mid-single-digit to high-single digit comp decline and that’s what brought the quarter down to minus 1%. For the month of the September, we’re seeing so far similar trend, again the plans that we have in October and November is will give us the confidence to deliver on what we’re projecting out for the third quarter.

Chris Horvers — J.P. Morgan — Analyst

Understood. Thanks so much.

Operator

Our next question is from Cristina Fernandez from Telsey Advisory.

Cristina Fernandez — Telsey Advisory — Analyst

Yeah. Good morning. I want to see if you could expand on the mitigation efforts that we have in place, but maybe more details on what are you doing to offset some of the supply chain costs and what areas of the business you have more flexibility to right-size the expenses of the investments.

Gustavo Arnal — Executive Vice President and Chief Financial Officer

Hi, Cristina, Gustavo here. Look, we’re taking several actions to mitigate the impact on gross margin. As you saw, it was a significant herd year-on-year and we had planned for a big portion of that just was higher. So when you look sequentially from the second quarter into the third quarter, we’re actioning pricing interventions. We’re also doubling down in our promo and promotional optimization and the team is also looking at optimizing freight growth, looking for alternate port to minimize the impact from freight. So those are two, three of the critical intervention to improve margins along with what Mark has described in terms of revenue.

Cristina Fernandez — Telsey Advisory — Analyst

And then the other question on, can you talk about your inventory flow with the supply chain challenges we’re seeing and goods taking longer to arrive? How do you feel about the flow of inventory, the seasonal goods, will you have them in time here for in November and the holiday season?

Mark J. Tritton — President and Chief Executive Officer

Yeah, I mean, we definitely saw through the quarter, Cristina, like I’ll an acceleration of pressure there. Lead times and flow moving out 30 to 45 days. And we see that really continuing into the first half of 2022 and we’ve taken steps to correct that. Our in-stock rates are very solid. We kind of solid. We are kind of at the same in-stock rate in September pretty much that we were in June. So our teams have been working with the key national brand and id remembering that now, while 20% of our penetration is own brand. 80% is great national brands, so our partnerships, they come into play. We’re seeing some couple of categories. The lagging due to raw material availability. And of course some of the shipping and freight issues, in general, in stock, rate are looking good. And then if you talk about recovery in the end of the Board, we did have some critical out of stocks last year that we’ve built plans around to recover and that’s one of our upside opportunities. We’re still taking into consideration, these lead time drags that are industrywide.

Operator

Thank you. Our next question is from Bobby Griffin from Raymond James.

Bobby Griffin — Raymond James — Analyst

Good morning. Thanks for taking my questions. I guess first, Mark, I just want to talk about some of the underlying drivers in gross margin, in particular, BOPIS and now that stores are reopening. We’re moving a little bit more towards normal. How is the BOPIS share of e-commerce right now? Is it staying pretty sticky or have you seen any meaningful changes in that as stores reopened and all that stuff?

Mark J. Tritton — President and Chief Executive Officer

Yeah look, they have remained steady and strong, Bobby. The other thing is we’ve added an awful on same-day delivery opportunities, which has really helped us and the customer is really leaning into. And so we feel very strongly that the ease and convenience that we’ve created throughout the last 12 months and most recently is also one of our opportunities and strength going into this fourth quarter, it’s going to be our fight for getting the goods to the customer and for the customer and we think we have the right menu to provide that. But we’re very happy with how our customers are engaging digitally without and using by focus some day delivery.

Bobby Griffin — Raymond James — Analyst

Okay. And then as a follow-up, Gustav, just quickly on SG&A, it looks like if we take the midpoint dollar wise of the prior guidance and the mid-point of the new guidance of SG&A on dollars, it ticked up about $50 million. I was just curious, is that labor or what’s some of the underlying drivers of the net dollar increase in the SG&A guidance?

Gustavo Arnal — Executive Vice President and Chief Financial Officer

Yeah, Bobby, a big portion of that, the largest portion of that is some updates we’ve made on our depreciation and amortization estimate. So no significant impact on EBITDA on that front. We feel good on how we’re managing our SG&A. And if you compare to 2019 post, all of the divestitures we’ve eliminated, and we have plans to eliminate all of the stranded overhead. So no significant movement there. We have seen some inflation to your question. And we’ve been working to offset to the best of our ability.

Bobby Griffin — Raymond James — Analyst

Thank you. I appreciate the details. And best of luck on your financial goals [Phonetic].

Gustavo Arnal — Executive Vice President and Chief Financial Officer

Thanks.

Operator

Our next question is from Brad Thomas from KeyBanc Capital.

Brad Thomas — KeyBanc Capital Markets — Analyst

Hi, good morning. Thanks for taking my question. The investor deck highlights a long term to your gross margin target of 38%. And Gustavo and Mark, I was wondering if you could just talk a little bit more about the drivers of that and your confidence in getting to that with some of the underlying initiatives you have that are obviously very, very positive versus this backdrop, where we are seeing a lot of inflationary pressures.

Gustavo Arnal — Executive Vice President and Chief Financial Officer

Thank you, Brad. Look, we were very intentional showing 38% gross margin by 2023 as we said in Investors Day. Because we continue committed to that. We continue to see in the line of sight of that. Our algorithm has not changed in terms of driving own brand penetration, optimizing costs to get at least to that level. What we’re seeing now in the second quarter is look significant freight cost increases, well above of what we had anticipated. We had anticipated 240 basis points. We got 360 basis points. We’re still projecting some sequential increase in freight costs as we go from Q2 to Q3. But that’s temporary. In the long run, as we recover it with price. We were — we could have been faster in our price recovery in the second quarter. We recognized that, but that’s taking hold now in the third quarter, in the fourth quarter. So our mid to long-term plan remains intact and we feel good about the transformation.

Mark J. Tritton — President and Chief Executive Officer

I’d just add to that Brad, I think that the sum of the path of that three year plan really comes to fruition sequentially as Gustavo mentioned. For example, as we see in our remodel stores, they are more profitable. As we go into saying higher own brand penetration and those shopping environments really contributing to higher sales. So the sum of the parts come to fruition as we move through ’22 and beyond and we feel very confident about that 38% number.

Brad Thomas — KeyBanc Capital Markets — Analyst

That’s great. Thank you. And Mark, if I could just follow up quickly on the competitive environment, it seems that the consumer’s relatively healthy, the competitive environment seems to be a bit more benign in terms of promotions. I was just curious if that aligns with your observations in your data on competitors and perhaps if that creates a backdrop where you could have some opportunities if you get a little more selective and targeted with some marketing promotions.

Mark J. Tritton — President and Chief Executive Officer

Yeah, we do, Brad. I mean, the data we look at the moment is, as we’ve talked about is taking into consideration, we have had share declines, but they had been natural and accounted for based on the store closures. So we had about an 80% drop in our revenue out of those. We — about 20%. And as our share has been stable and sequential that tells us the customer believes and is still shopping up and we have category authority that we can ignite further. I do think in the interim based on these pressures that you see with COVID, we are seeing some shift to interim shift to single point destination shopping. So food and essentials driving choices at the outset. We think of that is a moment in time. And we think there’s further opportunity to grow with the right targeted marketing as you say.

Brad Thomas — KeyBanc Capital Markets — Analyst

Very helpful. Thank you so much.

Operator

Our next question is from Jenna Giannelli from Goldman Sachs. We’ll go to our next question, Michael Lasser from UBS.

Atul Maheshwari — UBS — Analyst

Good morning. This is Atul Maheshwari on for Michael Lasser. Thanks a lot for taking our questions. So on the guidance, which is implying really an improvement in trends over the balance of the third quarter into the holidays. I just want to better understand as to what’s peeked into that guidance. You did cite a slowdown in the category. So are you expecting the re-acceleration in the category for the balance of the year? And are you also expecting supply chain pressures to ease?

Mark J. Tritton — President and Chief Executive Officer

So we’re not expecting supply chain pressures to ease. We just accommodating them better into our plans. But for us, we see category growth and opportunity in the back quarters. We also see that we can rectify some self-inflicted wounds that really impacted our traffic drivers in Q2 and that’s rectified in the back end of Q3, Q4. We feel like we’re better positioned with inventory despite the challenges that we’ve seen. Our assortment is stronger. The margin profile is stronger and we have a suite of over engagement to make it easy and convenient for customers to shop that we didn’t have last year. So we have some upside potential in that. And it’s really — it’s a different environment than the one we’re facing now or that we competed with in Q4 of last year, outside of the fact that we do see supply chain pressure continuing, pricing cost and lead time and a bill accountability for that.

Atul Maheshwari — UBS — Analyst

Okay. And then as my follow-up just circling back on free care. Largely peers have been calling out freight as a pressure point, but it just seems like the magnitude of the impact is significantly more from Bed Bath. See, why is that the case? And there’ll be of why were not corrective actions just raising prices or some of the other cost out measures that others are taking? Why were they not taking over the year?

Mark J. Tritton — President and Chief Executive Officer

Yeah. Let’s break it down. So we actually are announcing a quarter that is inclusive of an August month for that our competitors who are pre-announced, have not commented on. And we’ve seen a rapid change between the June, July and August month on those freight pressures and delays, which I think are going to be well chronicled as their volume reaches out and share that for Q3 results. We, as we stated did take very assertive action to incorporate freight as a pressure point in our business, 240 basis points. But as we saw it accelerate in the July to August period even further that again we are noting in our August results that others have not, there is pressure across the board, and you will hear more about that from others.

We did take a number of pricing intervention. I actually think that we weren’t agile enough and we paid the price for that. And that’s something that we’re also correcting but then fourth quarter, which should help us going forward. So I just wanted to dispel the myth that we were sitting here dormantly and not reviewing any of those impacts. We have an apples and oranges and visibility to that that we’re sharing you today compared to other. Thank you.

Atul Maheshwari — UBS — Analyst

Got it. Good luck with the rest of the year. Thank you.

Operator

Our next question is from Seth Basham.

Seth Basham — Wedbush Securities Inc. — Analyst

Thanks a lot and good morning. I’d also like to touch on freight, if you don’t mind. Just regarding how much of your inbound ocean freight through you or through suppliers is contracted. And what the outlook is there for freight costs over the next year?

Gustavo Arnal — Executive Vice President and Chief Financial Officer

Yeah. Seth, we’re not going to get into the portion of what’s contracted, what’s not contracted. We built our estimates looking at import freight, container costs, inbound freight, and then outbound freight. We’ve seen increases across the board. It’s been much, much more pronounced in the latter part of the quarter to Mark’s point around August, particularly in import costs. And looking ahead, looking forward, we are seeing the cost now. We expect them to remain high, though again, we look to optimize and where we cannot optimize the cost, recover with pricing. Just gotten significantly tougher in the last couple of months late into the quarter.

Seth Basham — Wedbush Securities Inc. — Analyst

Okay. And as it relates to your agility to change pricing to represent what’s happening with freight costs, are you concerned Mark that price increases will impact demand? How do you feel about the competitiveness of your pricing? Did competitors move up on price and you stay behind? And why didn’t volume improve, if that was the case?

Mark J. Tritton — President and Chief Executive Officer

Yeah, look the data we’re showing is that we were actually hyper-competitive on price both in terms of mix and that first wave opportunity. So our pricing index was actually below our competitors during the quarter. And I think that’s 2 points. Seth, one is that we did enter into a lot of new price points and a lot of new growth areas for us that really drive a lot of units, and we saw a very strong unit share across the board in the market. And we did not react fast enough to those prices. We’re going to absorb those through and we think that is going to be a natural competitive environment. This is a new base plate, so we’re going to be competing on an equal footing that have been slightly behind and slightly slower in some of the pressure we involved and that we don’t see going forward for third and fourth.

Seth Basham — Wedbush Securities Inc. — Analyst

All right. Great. Thank you.

Operator

Our next question is from Justin Kleber from Baird.

Justin Kleber — Robert W. Baird — Analyst

Yeah. Good morning, guys. Thanks for taking the question. I wanted to first ask just on the category disclosures in the deck, the destination categories lagged the others for the first time I think that you guys have been reporting those numbers. Is that just a function of easier comparisons? Are you seeing more of an impact within the destination categories as you transition to the own brands?

Mark J. Tritton — President and Chief Executive Officer

Yeah, it’s a double dip here. I think there are some key areas like kitchen food prep that you see that were really impacted because of the size and the belt and the strength of last year. You’re seeing areas like in decor down that are actually in very strong transition as we move into our room reset for those spaces, so that’s a moment in time. And I think the other parts of the decline were really down to us not reaching out to the customer in an effective way with the right girth and strength during the quarter. So probably three key factors that have affected that which we believe is a moment in time. We’ve also seen some suppression in some of these categories versus LY because of the strength of home category. But we’re doubling down on our efforts to improving our own performance in each of those categories.

Justin Kleber — Robert W. Baird — Analyst

Okay. Thanks for that, Mark. If I could just follow-up on the BEYOND Plus, the trajectory of enrollment you’re seeing there. I know right now the membership fees being subsidized. So maybe talk about the rationale behind doing so, and how that influences signups. And then just more broadly, thinking back to the Investor Meeting last October there were some discussions around piloting a new loyalty program. Just curious if is there anything you can share on that front? Thanks.

Mark J. Tritton — President and Chief Executive Officer

Yeah. We’ve seen a lot of stability in the BEYOND Plus membership profile. It is a strength for us. It does pay dividends, but we are continuing to look at a different menu for everything from registry to loyalty to credit card, because we think we can engage with the customer in a refreshed way. Our new leadership under Rafeh Masood is taking that under his belt. We’re not in test pilot mode, we’re still financing that, but we look forward to introducing something in ’22.

Justin Kleber — Robert W. Baird — Analyst

Thank you.

Operator

Our next question is from Anthony Chukumba from Loop Capital.

Anthony Chukumba — Loop Capital — Analyst

Good morning. Thanks for taking my question. So I understand the point about the fact that you do have the August quarter end, so there are some trends that you saw that some of your competitors did not see. But I guess, I’m just trying to understand where you guys are from a market share perspective because, obviously that the home — the housing market is as strong as it’s been in quite some time and you sell products for the home. So I would have thought that the rising tide will lift all boats. So we would just love some perspective, maybe if you can address this on a — looking at the three months comparable to the — to just the other retailers, where you stood from a market share perspective? Thank you.

Mark J. Tritton — President and Chief Executive Officer

Yeah, look, market share for August is only just leaching in now, it is a slight lag, but we’ve been able to review that. What we saw over the period of time, there’s like a slight decline, it’s very moderate growth across the sector and a declining growth by month within our June, July and August period. What we mentioned earlier, Anthony, is that we’ve seen stability in each of the key categories in terms of our share, that does involve a level of understood decline because we’ve exited a number of doors and reduced our overall growth sales profile. So we are seeing sales stabilization and getting our strategies in place to really build back share growth as a key strategy. So expected share decline, market relatively stable and flat out ship per month very, very sequentially stable. But we’ve got opportunities to ignite that further going forward.

Anthony Chukumba — Loop Capital — Analyst

That’s very helpful. Good luck with the rest of the year. Thanks.

Mark J. Tritton — President and Chief Executive Officer

Thank you, Anthony.

Operator

Our next question is from Carla Casella from J.P. Morgan.

Carla Casella — J.P. Morgan — Analyst

Hi. One question. Your capex guide implies a big back half pickup. Can you talk about the sequencing of that or maybe any major projects where that we could use lumpy capex?

Gustavo Arnal — Executive Vice President and Chief Financial Officer

Yes. Hi, Carla. It’s in line with our plan in terms of accelerating our store remodel. I mean, we’re halfway through the store remodel program this fiscal year as we accelerate and get into the crux of the ERP an IT system implementation as well as some of the supply chain plans as we start up our RDC. So it’s the capex profile by semester is in line with our plan.

Mark J. Tritton — President and Chief Executive Officer

Yeah, I just say it’s been pretty consistent along, Carla. I think that what you’re seeing is slight hockey stick there because we do have a period that we go dark to focus on our key holiday period and that was built into our plans from day one and then we resumed things like store remodels, IT and supply chain. So full year remains the same as planned.

Operator

Our next question is from Jonathan Matuszewski from Jefferies.

Jonathan Matuszewski — Jefferies — Analyst

Great. Thanks for taking my question. The first one was just on back-to-school. It sounds like it was solid for you guys, but just below expectation. So curious, how much of this shortfall do you think was maybe tied to some execution missteps versus potentially just the consumer not spending as much for the occasion, potentially across all retailers and the industry. Just thoughts there.

Mark J. Tritton — President and Chief Executive Officer

Yeah, I think that’s a really good call, Jonathan. I think that’s the right summation. We were up 12%, but we had higher plans and we expected a better outcome. And so we’ve learned a lot from that and we think that our offers were solid. We can improve even further. But we have to do a better job of outreach to the customer through marketing that we’ve discussed. I think the second part of it is, I think that the spend in the quarter was lighter and we actually were watching that. And we’ve signaled that in July that we’re seeing a delay and we thought was going to materialize much stronger in August and beyond, but it didn’t. And we saw a lot of facts and figures around that there was super high deferment into key discretionary categories like apparel and accessory that didn’t occur last year, and therefore people are getting those bumps and growth was home was fairly moderate. So plus 12% on a last year plus 21% [Phonetic] is good. We could have and should have gained more growth, and therefore more share. That’s an opportunity for us going forward.

Jonathan Matuszewski — Jefferies — Analyst

Great. And then just a quick follow-up on some of the pricing actions. I think you made a comment that, maybe you guys didn’t pivot quick enough on price during the quarter. I think you did reference, multiple pricing interventions during the quarter. So just trying to understand, did you try and get incrementally promotional to drive traffic or did you kind of raise prices to offset the freight headwinds? Just trying to understand kind of where some of the issues resulted in terms of pricing?

Mark J. Tritton — President and Chief Executive Officer

Yeah, I would say it’s very different to that. Jonathan, I think that we had a high rate of clearnce activity as we transitioned our rooms and our assortment that hit us in the quarter. But more importantly, we are not more promotional. And we don’t intend to be more promotional, we tend to be more targeted with our promotions. And again, we’ve been doing that well over the last year and we’re doubling down on that. I think the opportunity for us that we didn’t exercise in full is the market started moving if we look at price scraping and ensuring that we’re in line with the market, we were under our competitors in some key categories, because we hadn’t moved fast enough to adjust our pricing accordingly based on some cost inflation as well as freight inflation. And those started coming through thick and fast and a lot later than we expected with the velocity. We are taking that into consideration as we build in our plans for third and fourth and the actions that we’ve taken.

Operator

[Operator Closing Remarks]