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Bed Bath & Beyond Inc. (BBBY) Q1 2021 Earnings Call Transcript

BBBY Earnings Call - Final Transcript

Bed Bath & Beyond Inc. (NASDAQ: BBBY) Q1 2021 earnings call dated June 30, 2021

Corporate Participants:

Susie A. Kim — Investor Relations

Mark J. Tritton — President and Chief Executive Officer

Gustavo Arnal — Executive Vice President and Chief Financial Officer

Analysts:

Peter Benedict — Robert W. Baird — Analyst

Steven Forbes — Guggenheim Securities — Analyst

Unidentified Participant — — Analyst

Christopher Horvers — J.P. Morgan — Analyst

Michael Lasser — UBS — Analyst

Carla Casella — J.P. Morgan — Analyst

Kate McShane — Goldman Sachs — Analyst

Bobby Griffin — Raymond James — Analyst

David Lance — Wells Fargo — Analyst

Jonathan Matuszewski — Jefferies — Analyst

Jenna Giannelli — Goldman Sachs — Analyst

Cristina Fernandez — Telsey Advisory — Analyst

Seth Basham — Wedbush Securities — Analyst

Presentation:

Operator

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

I would now turn the call over to Susie Kim. Susie, you may begin.

Susie A. Kim — Investor Relations

Thank you, and good morning, everyone. Welcome to our fiscal 2021 first quarter earnings call. On the call with us today are Mark Tritton, our President and Chief Executive Officer; and Gustavo Arnal, our Chief Financial Officer.

Before we begin, let me remind you that our fiscal 2021 first quarter earnings release and the slide presentation can be found in the Investor Relations section of our website at bedbathandbeyond.com and as exhibit to the Form 8-K we filed ahead of this call.

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 quarterly report 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 this 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 Tritton.

Mark J. Tritton — President and Chief Executive Officer

Thank you, Susie, and good morning, everyone.

Our first quarter results demonstrate continued momentum in our transformation as we progressed towards the goals we outlined last quarter, and most importantly, at our Investor Day. 2021 marks the first year of our three-year transformation following the groundwork we laid in 2020, a year of historic and necessary change for this organization against the backdrop of unprecedented challenges due to COVID-19. We took bold steps to build a stronger foundation through talent and team, financial capital and strategy, which enabled us to begin changing the trajectory of our business last year.

As our first quarter results prove, we continue to deliver profitable growth as we reestablished our authority in home, we captured market share and unlocked our Group’s potential. For Q1, we delivered our fourth consecutive quarter of comp sales growth and achieved gross margin that exceeded our expectation. We continue to execute quarter after quarter, and we are pleased to be raising our full year guidance outlook today. Gustavo will discuss our financial performance and outlook in more detail shortly.

In summary, we have started the new fiscal year in a position of strength, and are clearly on track to accomplish our 2021 goal as part of our three-year growth plan. I wanted to touch on some of the important highlights from the quarter that underscore our progress.

We are accelerating growth through our Digital First, Omni-Always focus. Net sales of approximately $2 billion for the quarter were comprised of 38% digital penetration at similar size levels to our strong performance last year even as stores recovered with customers returning to in-store shopping. This digital penetration is nearly double our 2019 levels, making digital a new strength for our organization. This growth, on two-year basis, was 84%.

We’re continuing to improve the customer experience; most recently, expanding our same-day delivery capabilities in both the U.S. and Canada. Through our partnership with DoorDash, same-day delivery is now available in additional 3,000 zip codes in the U.S., and 47 cities across nine Canadian provinces. This follows the successful launches of our BOPIS and contactless curbside pickup services during 2020. Our stores continue to be an operational strength to Bed Bath & Beyond during the quarter. In Q1, 31% of our digital demand was fulfilled from stores, with BOPIS representing 14% and shipped-from-store and the same day delivery accounting to 17%. Our footprint plays a vital role in our Digital First, Omni-Always strategy.

We are also enhancing the customer experience with Bed Bath & Beyond banner upgrades and remodels through our previously announced store remodel program. While we have already upgraded and refreshed the entire store fleet with signage and assortment curation, we also initiated 26 full remodels during the quarter, which was our targeted quarterly goal as part of our 130 to 150 store remodel plan this year. Ultimately, we will remodel 450 stores over three years, representing approximately 60% of our store revenue base. Early data from our remodel shows positive indications that sales and margin growth are exceeding our plans across both our prototype A and B upgrades in our pilot Houston market.

As New York City returns to its original strength, we are excited about the upcoming unveiling of our flagship Chelsea store in New York as the city fully reopens this summer. We have transformed this store with new concepts, fixtures, open sightlines, revised merchandise and a customer-centric layout for easy and convenient focus and checkout directly in the city. As far our assortment, we continue to differentiate Bed Bath & Beyond with a curated mix of important national brands and the addition of our Owned Brand portfolio.

As planned and previously discussed, we successfully launched our Nestwell, Haven and Simply Essential lines during the quarter. And this month, we also announced our next launches of Our Table and Wild Sage. Our sixth brand, Squared Away, we’ll launch this July. We have now reached our first half goal to launch six of eight Owned Brands ahead of schedule. Furthermore, our Owned Brand penetration is currently at a high-teens percentage, almost double last year’s levels. We are well on our way to our 20% goal for 2021 and 30% by 2023.

At our buybuy BABY banner, we returned to strong growth in Q1 with net sales increasing more than 20% versus last year when stores were still open. More importantly, sustaining its return to positive comp growth BABY delivered a low single-digit comp on a two-year basis. Our goal to be the partner of choice to new parents is resonating, and we are confident of buybuy BABY’s bold trajectory towards our 2023 goal of more than $1.5 billion in sales.

Finally, we are modernizing our infrastructure to further support our strategy and pursue greater operational efficiencies by enhancing our supply chain and technological foundation. The first phase of our end-to-end supply chain transformation is underway with the construction of our Northeast distribution center. As part of this endeavor, we are currently finalizing an agreement with a third-party logistics partner to begin establishing our new store replenishment approach.

We’ve made progress towards reinventing our financial, inventory management and merchandising capabilities through our technology transformation. We selected Oracle as our enterprise resource planning provider last quarter, and the next component of our IT roadmap is progressing with the appropriate designing and planning for our full ERP migration.

We are making great strides in all aspects of our transformation and customers are also recognizing the evolution. Our active customer base increased sequentially versus last quarter. Even more exciting, half of these active customers are shopping omni and digital, double 2019 levels. These customers shop more frequently and with a larger basket size. We are also paving the way for a market share rebound. In Q1, we recaptured market share on a year-over-year basis, with significant gains in our key categories of Bed, Bath and Kitchen. We also experienced sequential monthly improvement, particularly in the Bed category.

As our results show, we have made meaningful progress with our transformation in just the first quarter of our three-year journey. We have confidently [Phonetic] achieved each milestone along our transformation thus far, and I must thank our team’s incredible associates for their work in defining and driving these results. We are stronger, more agile company than ever before, and we are well on our way to building long-term growth and unlocking greater shareholder value.

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

Gustavo Arnal — Executive Vice President and Chief Financial Officer

Thank you, Mark, and good morning, everyone.

I’ll provide additional perspective on our strong first quarter results, and also on our second quarter guidance, and improved full year outlook. Let me start by saying that our first quarter performance was better than our expectation on several levels as we delivered on our fourth consecutive quarter of growth.

Core sales growth of 73% came in higher than our guidance of 65% to 70% growth. This was a stronger-than-expected recovery from our COVID-related store closures last year. Gross margin of 34.9% was also ahead of our 34% guidance, driven by strong Owned Brands penetration assortment and better channel mix. Given these positive start of the year, we’re raising our full year outlook for sales and EBITDA, and at the same time, reintroducing guidance for adjusted EPS.

Looking more specifically at our first quarter results, as a reminder, reported net sales continue to reflect the impact from non-core banner divestitures completed last year, as well as our ongoing store fleet optimization program. Total net sales were $1.95 billion. This represented 73% growth from Core banners.

Worth noting, we believe that while first quarter growth rates are not fully comparable due to last year’s COVID closures, for transparency and analysts’ modeling purposes, we estimate comparable sales growth of approximately 86%. This excludes an estimated 13% negative comp sales impact from our store fleet optimization program. This impact was more pronounced this quarter due to last year’s lower COVID impacted revenue base. Versus 2019, on a two-year stack basis, comparable sales grew 3%, fueled by significant digital growth of 84% and offsetting store sales reductions of 20%.

As Mark described, our Digital First, Omni-Always strategy remains an important component of our performance. Our digital channel represented 38% of total net sales for the quarter, doubling versus the penetration rate in 2019 and creating a sustainable strength in our business. For consistency and comparability, our sales perspective by banner or category will be rooted in core net sales comparisons versus last year and on comp sales on a two-year stack versus 2019.

In our Bed Bath & Beyond banner, net sales increased 96% versus last year, and delivered 3% comp growth on a two-year stack basis. Our key destination categories of Bed, Bath, Kitchen, Indoor Decor and Home Organization grew 100% versus last year, recapturing strong market share. And on a two-year stack comp basis, sales grew 7%.

Our buybuy BABY banner delivered another strong quarter. Versus last year, growth exceeded 20%. Recall, our BABY stores remained open in the base period. Also growth continued versus 2019 with comps in the low single digits.

Adjusted gross margin expanded to 34.9%, ahead of our guidance of approximately 34%. Gross margin expanded significantly versus the prior year as a result of strong recovery from our stores, the normalization of our digital mix and the faster penetration of Owned Brands. We are on track for a full year guidance of 35% gross margin.

SG&A was lower than last year and remains on track to our full year plan. During the quarter, we made a strategic and incremental marketing investments to fortify the launch of our Bed Bath & Beyond Home, Happier campaign and added investments to accelerate our Owned Brand launches. These actions drove additional profitable growth with strong returns.

For the quarter, we delivered adjusted EBITDA of $86 million, within our guidance range. Our EBITDA performance illustrates how our healthy top line and strong gross margin enabled us to increase marketing investments in an agile and effective way.

GAAP net loss for the quarter was $0.48 per diluted share compared to a net loss of $2.44 last year, a pivot back to profitability of approximately $2.00 per share. On a GAAP basis, net income includes approximately $56 million of costs, such as charges related to our restructuring and transformation initiatives. These special items are excluded from adjusted results to provide a more accurate picture of the underlying performance of our business.

On an adjusted basis, EPS was $0.05 versus a loss of $1.96 last year, also a positive pivot back to profitability of about $2.00 per share.

During the quarter, we managed our liquidity and cash consistent with our capital allocation principles. We reduced inventory in our Core banners by more than $100 million versus the prior quarter, an approximate 6% reduction, enabled by further assortment curation. We continue to transition product in preparation for the introduction of our Owned Brands, as well as from seasonal selling and store closures associated with our network optimization program.

We continue to invest and transform our business. Capital spending accelerated this quarter. Given seasonality, free cash flow was an investment of approximately $100 million, in line with our expectations. Our cash balance remained solid at $1.2 billion, and even stronger on liquidity at $1.9 billion, including our ABL.

In addition to funding our transformation initiatives, we continue to follow a financial roadmap with a balanced data-driven approach to prioritize shareholder return. As a result, during the quarter, we repurchased approximately $130 million or 5 million shares. Program to-date, we have repurchased approximately $0.5 billion, or 17% of our shares, at an estimated average price of $24. This puts us well on track towards our $1 billion goal by fiscal 2023 and ahead of what we communicated at our Investor Day in October.

Finally, I will discuss our guidance outlook for the second quarter and full year. Based on our strong performance for the first quarter and our current expectations for the second quarter, we’re raising our full year guidance outlook. I’ll first discuss Q2, which covers the month of June, July and August. In the month of June, we have continued seeing growth versus last year, as well as on a two-year stack basis. For the balance of the quarter, July and August are important months when considering the July 4th holiday and the back-to-college season. Taking these factors into consideration, we estimate comp sales growth of low single digits. Net sales are expected to be in a range of $2.04 billion to $2.08 billion. As a reminder, divestitures and fleet optimization will continue to impact year-on-year comparison.

Driving adjusted gross margin improvement will continue being an acute area of focus for us. Accordingly, we expect adjusted gross margin to improve sequentially versus Q1 and be in the range of 35% to 36%. This will be enabled by higher Owned Brand penetration, a more favorable assortment mix and continued cost savings. Additionally, this guidance reflects the ongoing impact of higher industry-wide freight cost versus last year.

In terms of adjusted EBITDA, we’re guiding to a range of $150 million to $160 million, and an adjusted EPS range of $0.48 to $0.55.

And as Mark and I mentioned, we are raising our full year outlook for fiscal ’21. We expect higher net sales in the range of $8.2 billion to $8.4 billion. We’re also raising our comp sales growth expectation for the second through fourth quarters of the fiscal year, which are fully comparable periods as previously discussed. We now expect to deliver low single digit comp growth compared to robust sales performance during Q2 through Q4 of last year.

We are reaffirming our full year adjusted gross margin of approximately 35%. As the year progresses, we will continue to focus on driving progress via higher penetration of newly launched own brands, product sourcing savings from negotiated vendor contracts and more effective data-driven promotion and markdown strategies. Historically, given category mix, gross margin in the latter part of the fiscal year tend to be somewhat lower than in the earlier part of the year.

For the full year, SG&A is expected to be approximately 31% of total net sales. On a year-over-year basis, savings will continue to be driven by favorable impacts from store closures and last year’s cost restructuring.

And finally, we’re raising adjusted EBITDA to a range of $520 million to $540 million. This translates to an adjusted EPS range of $1.40 to $1.55.

On our balance sheet and cash flow assumptions, we are reaffirming our guidance of approximately $400 million in capex, a gross debt to EBITDA ratio below three times, plan for a total of $325 million in share repurchases for the full year or approximately $200 million for the remainder of the year.

We have also provided additional assumptions on depreciation and amortization, interest and tax rates in today’s presentation to assist with EPS modeling. We’ve also included the previously provided breakdown of core sales on a historical basis.

We continue to operate in a rapidly changing environment as it relates to both societal health and economic recovery. We continue to monitor the penetration of the COVID-19 vaccine, particularly as it relates to customer demand and traffic patterns, both in-stores and online. Inflation continues to be a key area of review as we remain vigilant on raw materials, freight and labor variability facing many industries.

We’re establishing a consistent track record of performance, while also driving a fast-paced and comprehensive strategic transformation. By the end of this year, we will have driven a 25% increase in EBITDA versus 2019, with a healthier, more focused and growing portfolio of Core banners. And over the same period just two years later, our EPS will be three times higher, given our disciplined capital allocation and share repurchase program.

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

Mark J. Tritton — President and Chief Executive Officer

Exceeding our plans for the first quarter is yet another positive step during the early stages of our three plan. We are proving that our strategy is clear and our ability to execute is strong by delivering on our transformation plan quarter-after-quarter. We continue to fortify our position as a Digital First, Omni-Always retailer and I am confident that our team and our initiatives will enable us to become a more successful enterprise, benefiting all our stakeholders for years to come.

This year will not only mark our 50th anniversary as a business, it will also be an important inflection point in Bed Bath & Beyond’s history. We are reinventing ourselves as an authority at home and repositioning this iconic company to unlock our potential for a new future of sustainable growth and profitability.

We will now take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And the first question comes from Peter Benedict from Baird.

Peter Benedict — Robert W. Baird — Analyst

Hi, guys. Good morning. So couple of questions. First, look, a lot of noise in the market here over the first quarter, but I’m just wondering if you could maybe expand a little bit on your share gains. How you’re kind of thinking about that? How you’re measuring that? It sounds like you think you gained share in a number of these core categories. So, that’s kind of my first question. I don’t know, Mark, if you can maybe build off on that.

Mark J. Tritton — President and Chief Executive Officer

Yeah. Thanks, Peter. Good morning. We’ve been tracking our market share. Obviously, we took a hit last year in the subsequent quarter because of the store closures. And so, we have been looking at not only how we can perform in an equivalent market, but what is the share gain ratio look like. And we see a couple of things that, Peter, is preliminary. Clearly, we’re now back to our 2019 levels of share, because we have less doors and we’re operating as a leaner organization. But what we saw was our rebound was very, very strong, and actually exceeded that of a number of our competitors who were also closed at the same time. So, I would say to you, that as a specialty retailer in the home and baby space and health and wellness, we regained really strong share there that we’re going to be building up quarter-by-quarter and sequential growth by month as we’ve tracked it.

Peter Benedict — Robert W. Baird — Analyst

Okay, thanks. Next question just on kind of inventory and how you’re managing that kind of in-store versus online and in-stock levels. Just kind of curious — I know you mentioned there is a new store replenishment process, I believe, it’s on tap. So, maybe — can you just talk about that as you’re kind of transforming the merchandise assortment in the stores and just any timeline or metrics around that would be helpful.

Mark J. Tritton — President and Chief Executive Officer

Yeah. We’re really pleased with our progress here, Peter. I think, prior to us implementing the full technology suite that’s going to help us and enable us with the use of AI to manage our inventory at DC and in-store at digital level, we’re seeing the curation of the merchandise first at store level and then the exit of underperforming brands and labels to make way for a cleaner assortment punctuated by our brands. That’s resulted us in being in-stock at about 95%, and definitely even high in some of our key items, which is one of our highest statistics in many years. So, our in-stock levels are healthy.

I think this is important to note, as we curate the assortment mix, as we noted, we were up for the quarter, but our inventory was down over $100 million, or 6%. So, we’re doing more sales on less inventory. We’re getting that inventory faster to the customer than ever before. And this is prior to us implementing a full suite of inventory management tracking systems and new supply chain. So, we see those being net benefits as we progress through the three-year plan, but the fundamentals of what we put in place is working well for us.

Peter Benedict — Robert W. Baird — Analyst

Okay, great. And I guess maybe lastly one for Gustavo. Just on the free cash flow, negative $100 million this quarter, but just — how are you thinking about that? And as we cadence throughout the rest of the year, what’s your kind of view on free cash flow for ’21 based on the updated guidance? And maybe any of the puts and takes there would be helpful. Thanks so much.

Gustavo Arnal — Executive Vice President and Chief Financial Officer

Sure, Peter. So, our free cash flow in the first quarter came in line with our expectations as we accelerated our capital investments in line with our three-year plan. Relative to the balance of the fiscal year, we’re not guiding to specific free cash flow number, but I will say that we are definitely planning for positive free cash flow. We have a strong plan in terms of EBITDA, a strong plan in terms of further inventory optimization, and we’re fully funded in our restructuring cost and marketing spending. So, all of that will be sufficient to fund our $400 million of capex in the year. So, look for positive free cash flow as the year progresses. We typically see the first quarter slower than the balance of the quarters for seasonality. So, we’re feeling good about that.

Operator

Our next question comes from Steven Forbes from Guggenheim Securities.

Steven Forbes — Guggenheim Securities — Analyst

Good morning. Maybe, Mark, just a follow-up on the Peter’s question about market share. Curious if you could provide maybe a brief overview on how you view the Company’s performance right across these top five destination categories. What I mean by that is, as we look at what you’re trying to tell us here in the exhibits you’ve been providing, right, and all the data you been providing, what is the big takeaways, right? Like, what are you really trying to tell us about share? What gives you confidence that share gain should build? How are the legacy customers engaging with these categories versus the new customers that you acquired during COVID? Just any sort of context that helps us increase our own conviction, right, that the business is positioned to return to share capture.

Mark J. Tritton — President and Chief Executive Officer

Yeah. It’s a great question, Steve. I think what we see happening is that we are doubling down on those core areas that we discussed: Bed, Bath, Kitchen Storage and Indoor Decor. We are investing in those. We’re curating our inventory. We’re clarifying our price. Our price equity in the market is very strong. And we really trading in an omnichannel way, which means customers are viewing us online, shopping in-store or purchasing through digital. All that is adding up to a strong bounce back to share recovery for us in those key areas. And we are seeing both existing and new customers follow that trend. We are seeing slightly stronger baskets and average transaction value from a digital customer, but we’re seeing real strength in those areas.

One of the things we’ve been looking at, Steve, is the two-year stack. And I think it’s interesting to note that while we saw over a 100% growth in our top categories, it was interesting scenario like kitchenware that really did boom in Q1 last year, but we’re seeing double-digit comps in that category on 2019 numbers, which means that trend is sustained, people are still cooking, still buying and they still thinking about Bed Bath & Beyond in that equation. So, we see that having our full omni channel suite of stores and digital back and operational in this quarter has really brought us back to share growth, and we’re going to continue that transformation quarter-by-quarter.

Operator

Our next question comes from Simeon Gutman from Morgan Stanley.

Unidentified Participant — — Analyst

Hey, good morning, guys. This is [Indecipherable] for Simeon. Two questions. First one, Mark, just on the Owned Brands and engagement around that, could you just maybe share some of the KPIs that you guys are tracking to gauge your success there, whether that be POS data or just store traffic trends that you could share once you’ve introduced those brands into a store?

Mark J. Tritton — President and Chief Executive Officer

Sorry, wrong mute button. Great question. I think for us, definitely, it’s around our sales targets and plans and the penetration rate overall. And we’re seeing a lot of curiosity and a lot of engagement with these brands. And so, for us, we are seeing our penetration rate on Owned Brand increase rapidly. As we said, we [Technical Issues] that from our 2020 number — and actually the 2019 number. So, we’re probably around 9% static. We’re seeing that in the high teens.

And we had declared that our goal for the full year was a 20% penetration rate by the end of the year. So, we’re very early off to a great start. We have exit of Owned Brand product that is aged, as well as the introduction of new. The customers respond really really strongly. We look at our number of digital metrics here, as well as social media engagement, and all of those have been extremely positive.

Operator

Our next question comes from Christopher Horvers from J.P. Morgan.

Christopher Horvers — J.P. Morgan — Analyst

Thanks. Good morning, everybody. So you reached the 34.9% gross margin in the first quarter. So, a few questions there. One, do you think the sort of clearance activity in this — from the store closures and the Owned Brand transition is done such that there wouldn’t be any deductions going — add back going forward? And just longer-term, if we center on that 34.9%, you haven’t introduced all of the private label brands and Owned Brands that you plan to, so how are you — how does that 35% in 1Q inform how high you think the gross margin could be over the long term?

Mark J. Tritton — President and Chief Executive Officer

Yeah. Thanks, Chris. As we introduce the Owned Brands, we have both exit in clearance and markdowns, as well as the introduction of the high margin products. I would say to you it bodes well, but we will continue to see a transition on markdowns and introductions as we introduce the next three brands into key rooms and categories through Q2 with more stabilization in the second half. We’ve been really clear about that that we saw that the stronger margin potential in the second half than the first, although we do see Q4 traditionally being a little softer versus — the rest of the year versus our annualized rate. So the good news is that we see early positive upside. We had all along and we’re very pleased to come above our guidance, so that we are in a transition phase, an establishment phase, and then we’ll stabilize that in the second half. So, we think that will be positive. But again, we’re in the early stages of our transformation. I think, an over dec — we see sequential growth in margin. I think over declaration of that would be not prudent. So, we continue to monitor it carefully.

Operator

Our next question comes from Michael Lasser from UBS. If you’re on mute, please unmute yourself.

Michael Lasser — UBS — Analyst

Good morning. Thanks a lot for taking my question. It’s a two-parter. The first part is, so your core categories, your destination categories, if you look at on a two-year arithmetical stack were up 107%. The other categories, which represent a little over a third of the business, were only up on a two-year stack 88%. I know you’re focused on the core categories, but the other categories are still important. When do you think you can get all of them working together simultaneously?

And the second part of the question is, your quarter overlapped with the period of the distribution of some sizable stimulus. How much do you think that contributed to your performance during the period? Thank you so much.

Mark J. Tritton — President and Chief Executive Officer

Yeah. Thanks, Michael. Yeah, I think — we’ve got areas like personal care for us, luggage, some ancillary categories that are underperforming versus those other core categories. Again, our investment has been in the core, that’s driving more of our attention and activity, and that’s the first cab off the rank. I think what we’ll see is more stability in the second half with that. We’re starting to see some early signs of return to that. We really want to see encouraging store traffic, because that is more of a store-based business than a digital business. So, we’ll see that balance out in the second half.

I think in terms of the overall stimulus package, what we see — what we saw in the quarter that for us, I think it provide overall consumer confidence. But in terms of the driving the majority of the sales, we think that is more based on some of our initiatives and our engagement and then the incremental activities we had, like Owned Brand launches. And so, I think everyone is benefiting to a certain degree, but we see our strategic factors driving that. So, for us, versus a lot of our competitors, we see more stability in the trend rather than getting trips and traffic through food and other areas that were benefited from the stimulus package, which we’ve seen through the data that we don’t participate in.

Operator

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

Carla Casella — J.P. Morgan — Analyst

Hi. You have kind of [Phonetic] relatively large cash balance, and you gave some comments around cash flow, but can you talk about your priorities for that cash flow?

Gustavo Arnal — Executive Vice President and Chief Financial Officer

Yeah. We — hi, Carla. Gustavo here. We remain focused on our capital allocation principles. I mean, first and foremost, invest in the business that we’re doing, maintaining a strong balance sheet and improving our debt-to-EBITDA credit ratios, and returning capital to shareholders as we’re doing with share buybacks. So, we will continue being agile on our cash balance and our cash flow, and accordingly to our principles.

Mark J. Tritton — President and Chief Executive Officer

Yeah, Carla, I’d just add in there that like we’re at the very early stages of our transformation. We have a lot of things in play: brand investments, technology, supply chain, remodeling our stores, and upgrading to digital. What we will continue to look to do is where we have free cash flow or additional free cash flow, how can we look to deploy that against accelerating our efforts in the transformation. But as yet, we’re steady as she goes and we’re watching those plans evolve. Great news is we’re in the right position to be able to review and invest as we move forward.

Operator

Our next question comes from Kate McShane from Goldman Sachs.

Kate McShane — Goldman Sachs — Analyst

Hi, good morning. Thanks for taking my question. I just wanted to go back to the store comp, which was down 20% versus 2019. I just wondered if you could maybe contextualize what your expectation is specifically for store comp in your guidance? What you think drives the improvement specifically to the store? And is the solution really the completion of a fleet optimization?

Mark J. Tritton — President and Chief Executive Officer

Thanks, Kate. Yeah, a couple of things there. I think that we still see upside in the return to stores. I think we’re tracking this by region and seeing that there is different levels of components, and therefore, traffic that are generated in specific stores. I would cite the Northeast, which is a very strong part of our business historically. That is, I think, more reticent than other areas like the South to return to stores. And so, for us, great news is that as an Omni-Always retailer, we’re balancing that out. And I think there has been a permanent shift in the mix and how our customers operate between those, which is great, and we’ve reflected that in our operating plans. So, I think our return to strength there and traffic is really generated by a number of different things. We believe that the back-to-college period will be a really interesting pivot and to return to a new normal, and we see that brings multi-generational traffic, both new and existing customers in the store. And when they do, they will be experiencing the new Bed Bath & Beyond, whether it is assortment or whether it will be remodel.

In terms of the remodel, the traffic doesn’t clearly rely on that as a singular strategic lever, but we are seeing in our preliminary data that the sales lift, margin lift and even down to the Owned Brand penetration lift, and traffic and transactions have increased above our existing plan where we’ve completed those remodels. Now we’re in the early stages. So, we will be sharing more at the Q2 probably around the statistics there, but I think it’s a multifaceted pathway to full traffic recovery that we’re embarking on as we speak.

Operator

Our next question comes from Bobby Griffin from Raymond James.

Bobby Griffin — Raymond James — Analyst

Good morning, everybody. Thank you for taking my questions. Mark, I just wanted to maybe circle back on the composition of the comps a little bit and understand it’s still blurred between digital and stores, but if you look at it on just a transaction basis, where transactions include store and digital. And then, can you maybe give some color on transactions versus ticket, and what’s the bigger driver there versus FY ’19?

Mark J. Tritton — President and Chief Executive Officer

Yeah. Good morning, Bobby. We’re actually seeing transaction and value growth in both areas. And again, it is definitely void by digital. We’re seeing that the store trips per year are now stable against 2019 statistics. And what we are seeing is a change in behavior that when customer shop, they shop bigger and less frequently, but that’s relatively stable for us. So, I think people come in, they’re building a basket, and they’re going out the door. We’re seeing the change in that. We’re going to continue to monitor that early on, because we’re seeing — our brand penetration and the price value equation really resonating with customers, which is helping to build the basket, but it’s early on and we want to continue to monitor that through the year.

Operator

Our next question comes from [Speech Overlap] Pardon me.

Gustavo Arnal — Executive Vice President and Chief Financial Officer

Yeah. Bobby, what I would add to that real quick is that we see a larger proportion of our customers being omni. And as Mike said in the remarks, the frequency of their purchase, it’s more frequent and their ticket is larger. So, that’s where we feel that our Digital First, Omni-Always strategy is really, really, really driving our business.

Operator

And our next question comes from Zach Fadem from Wells Fargo.

David Lance — Wells Fargo — Analyst

Hi, this is David Lance on for Zach. Thanks for taking our questions. Just two questions for you. Could you provide some color on the state of the coupon and how its usage is trending?

And then second, the 34.9% Q1 gross margin is 40 basis points above 1Q ’19 levels. And so, I was wondering if you could help us bridge the gap there.

Mark J. Tritton — President and Chief Executive Officer

Yeah. I’ll take the first part and Gustavo can pick up on the second part for you, David. I think in terms of coupon, we continue to see — this is a major part of our business and something we celebrate, but we are using more strategically and surgically. So, what we’re seeing is that the allocation and redemption are slightly down as per our plan. And that is mostly to do with store-based traffic changes, but also to how we’ve managed that and balanced that gives great everyday prices. So, it’s definitely resonating with customers and we are seeing then a growth in our Beyond Plus membership, which slightly offsets that.

Gustavo, the gross margin bridge?

Gustavo Arnal — Executive Vice President and Chief Financial Officer

Yeah. David, I’d say two things about our gross margin versus 2019. It is above 2019 by about 50 basis points and we feel good about that, because that expansion is in spite of having two times the digital mix penetration and also in spite of the significant shipping cost increases that we have seen over this period, which we will start tapping in Q3 or Q4.

Operator

Our next question comes from Jon Matuszewski from Jefferies.

Jonathan Matuszewski — Jefferies — Analyst

Hey, good morning, guys. Thanks for taking my question. First one is just on the remodel. It looks like the 26 recent ones are exceeding internal sales estimates. You’re going to be doing over 100 more for the remainder of the year. So, is your updated annual sales guide contingent on those initial expectations for remodeled store productivity? And if so, is that fair to assume maybe some bias above the midpoint of your updated sales range if the next several dozen remodeled stores do as well as the initial ones? That’s my first question. Thanks.

Mark J. Tritton — President and Chief Executive Officer

Yeah. Thanks, John. Look, I think you’re absolutely right. What we’re seeing with the plan for the stores is that we actually plan for a disruption ratio, we’re actually performing better than that. As we open in four, eight, 12 weeks sequences, we’re seeing that the sales, gross margin, Owned Brand penetration and trips and transactions are all above our estimates. Now, that’s important to note, because our original remodel plans had a very healthy ROIC. And so we’re exceeding that base both from the sales, then the return on invested capital level.

Our current plans for the full year, with only 26 of these completed, does not include a revision of our original estimates on the upside of what these remodels will be going in. Really looking for ongoing proof-of-concept and consistent deliverables to share and to change that trajectory, but we’re very hopeful that we’ve got some positive on the cards that we can utilize through the year, but not reflected in current plans.

Jonathan Matuszewski — Jefferies — Analyst

Quick follow-up on omnichannel. I think you’re expanding the same day delivery capabilities with DoorDash. Curious if you’ve had a chance to take a look at kind of the customer utilizing these services, whether it skews more towards new or existing customers. And obviously, it may be early, but is there any discernible trend you can see so far in terms of after customers engage with your brand through this vehicle, anything interesting to call out? Thanks so much.

Mark J. Tritton — President and Chief Executive Officer

Yeah. I mean, we’re tracking not only the upside potential of what the introduction BOPIS originally meant to our business, which is creating more stickiness with our customer, and that definitely has brought new customer, but it is a feature being used by existing customers. Both in our agreement with Shipped and DoorDash, our goal is to get goods to our customer faster and create more joy there. That’s actually happening and that’s happening with new customers, as well as existing. And I think people being really, really excited about the ease and convenience of shopping at Bed Bath & Beyond compared to years gone by.

An early indications is that customer is becoming sticky. We’re looking at the age profile of that. More to follow, we want to collect more data on it. But we are seeing repeat purchases and repeat engagement as people become really happy with what that service delivers and staying tuned because we’re going to be sharing more on how we’re going to be expanding that kind of delivery timeframe as well as that proximity. That’s a constant focus for us in that last mile.

Operator

Our next question comes from Jenna Giannelli from Goldman Sachs.

Jenna Giannelli — Goldman Sachs — Analyst

Hi, thanks for taking my question. First one is just on marketing investment. Given the better top-line gross margin, you took up marketing in the first quarter. Is that something that we can extrapolate as true for the balance of the year? I guess, I’m just curious on the underlying guidance raise granted it’s up, but does it also include increased marketing investment than originally planned for the rest of the year? Thanks.

Mark J. Tritton — President and Chief Executive Officer

Yeah, it does include that for the rest of the year. Although what I would outline, Jenna, is that in Q1, we did have some exceptional circumstances, holistic investment in our brand launches that will continue through more into Q2, and then we’ll see in half two, that really balancing down more of a maintenance perspective. So some incremental investment. We had our customer value proposition and a clear state of intent through our marketing campaign Home, Happier that we wanted to resonate with the customers. And so there is some in-the-quarter moments there that will show some sustainable investment, which is back to be into our future growth. And then there is some kind of more seasonal or quarter-based activity that will dissipate over the year.

Operator

Our next question comes from Cristina Fernandez from Telsey Advisory.

Cristina Fernandez — Telsey Advisory — Analyst

Hi, good morning. I wanted to ask on the private labels. Can you share, I guess, your early learnings so far which of the brands you’ve launched had more impact and what categories? And then also from a customer perspective, what is the feedback you’re getting as far as like pricing or the aesthetic of these new private label brands versus the national brands they replaced?

Mark J. Tritton — President and Chief Executive Officer

Yeah. Thanks much, Cristina. The — look, I mean, I’ll go straight to the consumer piece in saying that what we’re seeing is the customer online is providing reviews that are incredibly high. There is a great deal of satisfaction and excitement from the customer about quality value esthetic, and that average actually exceed our average digital rating across the board. So, we’re very happy with that in each of the brand.

I think, in real powerhouses, what we seeing very early on is out of the three that we launched in the quarter, there was two kind of bigger brands inside the mix. One was Nestwell, because it covers multiple categories in Bed and Bath. And also, two, Simply Essential being a completely incremental business for us, which is opening price points. But all three brands have done very well. I think, Nestwell is probably the original standout, because it is featuring in our top 10 brands of sales per day, exceptionally highly and often is in the number one and two slots. So the adoption from the customer has been very, very strong and great repeat purchasing and word of mouth.

The visual presentation in store, the storytelling online, we’re getting really good feedback and a lot of people are feeling very engaged, understanding what these brands are, and that the value is very crisp and very clear in both how we’ve articulated and how they can value that against the competition. So, all great so far and really excited about how these brands will play in this back-to-college period, particularly Simply Essential, we think will have a more of a shining moment in back-to-college even more so than it’s May launch.

Operator

We have time for one more question. That question comes from Seth Basham from Wedbush Securities.

Seth Basham — Wedbush Securities — Analyst

Thanks a lot, and good morning. My question is, first, on the destination categories. Most of them performed quite well. But why did Bed — why did Bath and Indoor Decor lagged versus 2019?

Mark J. Tritton — President and Chief Executive Officer

Yeah. I think for us, Seth, the issue was that probably had one of the largest product changes inside of this as we exited a lot of product. It was within our plan, and so we see this as a quarterly anomaly as we look to regain share that we exited a number of brands which were very dominant in the assortment prior to remix within Nestwell and Haven with other brands coming through the year. So it was the category that we knew were going to take the biggest hit with exit. So, AUI [Phonetic] was slightly off because we had markdown product in there in higher mix. We think that that is not representative of subsequent quarters. So that’s more of a transformation and adjustment category than others.

Seth Basham — Wedbush Securities — Analyst

Got it. And related to that [Speech Overlap] I’m sorry. Go ahead.

Mark J. Tritton — President and Chief Executive Officer

No. So, in Indoor Decor, ultimately, we saw some real boom in the Indoor Decor area, and we see further opportunity there. We’ll — a lot of our investments in that space are really focused on the second half of 2021. So, stay tuned.

Seth Basham — Wedbush Securities — Analyst

Got it. And relatedly, when it comes to the markdowns, last quarter, your delta between adjusted and reported gross margin was 130 basis points, this quarter was 250 basis points. How should we be thinking about that delta for the subsequent quarters this fiscal year?

Gustavo Arnal — Executive Vice President and Chief Financial Officer

We see this — hi, Seth. We see this as a transition and it should start coming down as we move into Q2 and Q3 [Speech Overlap].

Seth Basham — Wedbush Securities — Analyst

Fair enough. And by next fiscal year, should we be clean with no adjustments?

Gustavo Arnal — Executive Vice President and Chief Financial Officer

No adjustment related to markdowns. There might be some related to — but minor related to supply chain or that sort of restructuring, where, clearly, fiscal ’21 is the major year of restructure.

Seth Basham — Wedbush Securities — Analyst

Thank you.

Operator

I will now turn the call over to Susie Kim for final remarks.

Susie A. Kim — Investor Relations

Thank you for participating on our call today. Should you have any further questions, please contact us at IR@bedbath.com. Have a wonderful day.

Operator

[Operator Closing Remarks]

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