Bed Bath & Beyond Inc. (NASDAQ: BBBY) Q2 2020 earnings call dated Oct. 01, 2020
Corporate Participants:
Janet M. Barth — Vice President, Investor Relations
Mark J. Tritton — President and Chief Executive Officer
Gustavo Arnal — Executive Vice President, Chief Financial Officer & Treasurer
Cindy Davis — Executive Vice President, Chief Brand Officer; President, Decorist
John Hartmann — Executive Vice President, Chief Operating Officer; President, buybuy BABY
Analysts:
Peter Benedict — Baird — Analyst
Steven Forbes — Guggenheim Securities — Analyst
Brad Thomas — KeyBanc Capital Markets — Analyst
Michael Lasser — UBS — Analyst
Simeon Gutman — Morgan Stanley — Analyst
Kate McShane — Goldman Sachs — Analyst
Bobby Griffin — Raymond James — Analyst
Christopher Horvers — J.P. Morgan — Analyst
Curt Nagle — Bank of America Merrill Lynch — Analyst
Seth Basham — Wedbush Securities — Analyst
Presentation:
Operator
Welcome to the Bed, Bath & Beyond’s Fiscal 2020 Second Quarter Earnings Call. [Operator Instructions]
At this time, I would now like to turn the conference over to Janet Barth, Vice President of Investor Relations. Please go ahead.
Janet M. Barth — Vice President, Investor Relations
Thank you, and good morning, everyone. Welcome to our fiscal 2020 second quarter earnings call. On the call with us today is President and CEO, Mark Tritton; Chief Financial Officer and Treasurer, Gustavo Arnal; Chief Operating Officer and President of buybuy BABY, John Hartmann; and Chief Brand Officer and President of Decorist, Cindy Davis.
Before we begin, let me remind you that our fiscal 2020 second quarter earnings release and slide presentation can be found on the Investor Relations section of our website at www.bedbathandbeyond.com, and as exhibits to the Form 8-K we just 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. The company undertakes no obligation to update or revise any forward-looking statements.
Additionally, the information we will discuss today contains certain financial measures that exclude amounts or are subject to adjustments that have the effect of excluding amounts that are included in the most directly comparable measure prepared in accordance with generally accepted accounting principles. For a reconciliation to the most comparable measures presented in accordance with GAAP, please refer to the table in our earnings release available on our website and included as an exhibit to our Form 8-K filed today.
It is now my pleasure to turn the call over to Mark.
Mark J. Tritton — President and Chief Executive Officer
Thank you, Janet, and good morning, everyone. We are pleased to share our results with you today. We believe this was a pivotal quarter for our organization, with strong sales and profit growth as well as enhanced financial strength through high cash flow generation within the quarter of $750 million coupled with effective expense and debt management.
We achieved strong top-line growth and delivered second quarter comparable sales of 6%, the first positive quarterly comp since the fourth quarter of 2016. Additionally, we delivered improvement in gross margin even with the increased strength of our digital business. Our strong results flow through to the bottom line with adjusted EPS of $0.50, the strongest adjusted quarterly earnings reported in over two years. While we will detail our overall second quarter performance today, we are most excited to share how this quarter served in a wrong way to our three year plan that will share at our Virtual Investor Day on October 28.
During our call today, Gustavo Arnal, Chief Financial Officer and Treasurer will review our second quarter financial results. Then Cindy Davis, Chief Brand Officer and President Decorist will speak about the quarter from a commercial and customer perspective. And then John Hartmann, Chief Operating Officer and President, buybuy BABY will do the same for our operations. We will then take questions.
As we’ve said before, we are confident in our financial position and our ability to manage through these very uncertain times. We’ve taken further action to build a strong financial base, including reducing our cost structure, enhancing our financial flexibility and investing where it matters most to our customers as we strengthen our authority in the home space.
As you’ll hear from Gustavo, we remain focused on ensuring liquidity and optimizing costs, including actions to improve cash flow generation. With such a strong cash and investments balance now of $1.5 billion plus our IBL, we have approximately two times more liquidity than debt outstanding on our balance sheet. We also drove significant improvement in several other key performance metrics, including adjusted gross margin, which increased 200 basis points year-over-year.
With a sharpened focus on driving a better curation of product mix and curated data-driven management of markdowns and promotions, including coupons, we delivered significant adjusted gross margin expansion, while also driving continued strong comp growth in our digital channels of 89%. We’ve also seen these actions and trends continuing throughout the month of September.
By the end of the second quarter, our digital sales represented approximately 32% of total sales, benefiting from our enhanced omnichannel capabilities, including Buy-Online-Pick-Up-In-Store and Curbside Pickup, which now represent over 15% of total digital sales and growing. Together with our ship-from-store capabilities, our stores have totaled approximately 36% of our total digital orders in the second quarter. These expanded fulfillment capabilities are favorably impacting our gross margin and will continue to further enhance the overall profitability of our digital business.
During this unprecedented time when our homes have become the center of our lives, we are well placed as customer spend more on their home and lifestyle. We see this trend continuing, and we’ve been responding with agility the changing needs of our customers, both in terms of our merchandise and service offerings. We are delighted by the continued strong response to our new BOPIS and Curbside services this quarter and the recent launch of our new same-day delivery service this week, making it even easier to stop.
These new services are contributing to customer growth as we gained approximately 2 million new online customers in the quarter, including approximately 800,000 who are completely new to Bed, Bath & Beyond. These new customers are purchasing from our core higher margin product categories, including bedding, bath, kitchen food prep and cleaning and home maintenance. From a merchandising perspective, we are pleased with our performance during this very different back-to-college season, which has actually fortified our authority in this important life stage.
As you’ve heard me say before, prior to the COVID-19 pandemic, we plan to lean heavily into the back-to-college moment to showcase our new brand strategy and element of our enhanced customer value proposition. In the wake of the pandemic, we quickly mobilized and were able to adapt our plans to the changing market conditions, but at the same time, staying true to the spirit and intent of our college campaign. We have a highly successful back-to-college season, achieving sales growth of 21% compared to last year. Cindy will provide some more details on this in a few moments.
In addition to our commercial success this quarter, we also strengthened our operations, investing in and improving core proficiencies essential to rebuilding the foundations of our business. Our diverse senior leadership team of highly experienced retail expert is now in place. And we’re pleased to be joined by several new next level leaders to accelerate the transformation even further. John will talk more about this as well as the operational investments we are making in areas such as technology to further power our growth.
As we focus our efforts to optimize growth opportunities within home, baby, beauty and wellness, we remain highly committed to reviewing our non-core assets. We completed the sale of PersonalizationMall.com in early August with net proceeds of approximately $245 million. And we continue to believe there is significant value that we are not through further asset sales, which we are continuing to review. In framing our second quarter results against the backdrop of an abnormal first quarter, we have built a strong financial base and developed a blueprint for delivering long-term success. Our transformation journey has begun, and the early stage of our growth strategy are unlocking improved financial performance.
I will now turn the call over to Gustavo to review our second quarter results in detail. Gustavo?
Gustavo Arnal — Executive Vice President, Chief Financial Officer & Treasurer
Thank you, Mark, and good morning, everyone. Our second quarter performance showed solid comparable sales growth as well as strong gross margin expansion and EBITDA increase. At the same time, we unlocked significant cash flow generation. And with this, we strengthened our balance sheet and our financial flexibility with even greater liquidity and a meaningful reduction in gross debt.
During this quarter, we generated more than $750 million in cash, including over $500 million from operational earnings and working capital improvements net of capital investment and coupled with approximately $245 million in proceeds from the sale of PMall. We capitalized on this strong cash flow generation by purchasing approximately $300 million in principal value of our bonds at a significant discount and also by paying down a bank loan of $236 million. With these actions, we reduced our gross debt by over $500 million or 30% from $1.7 billion at the end of the first quarter to $1.2 billion at the end of this quarter.
Importantly, we had a pivotal point in our financial position by moving from a net debt position of over $500 million at the end of the first quarter to a net cash surplus position of $300 million at the end of the second quarter. We ended the quarter with $1.5 billion in cash and investments, well above our debt. Further, as shared during our first quarter earnings call, we secured asset-backed lending facility in June. Together with our cash balance, our liquidity is strengthened $2.2 billion, which is approximately two times higher than our bonds outstanding.
Turning now to our sales results. Total comparable sales grew 6%, benefiting from a significant increase in digital comp sales, which were up 89%. For some context, sales from our digital channels represented about one-third of total sales this quarter. Our strong digital sales performance has been driven by further expansion of our BOPIS and Curbside Pickup services. BOPIS-generated sales represented 15% of total digital sales in the quarter, tripling its penetration from the last quarter when the service was first introduced. Net sales in the quarter were $2.7 billion, a decrease of 1% versus last year, partially due to the divestiture of One Kings Lane.
In looking at the monthly progression of sales, recall that we began or phased approach to store reopening from May through June, and by early July, virtually all stores were opened. Encouragingly, we delivered positive comparable sales in each month of the quarter. Digital comp growth was consistently above 80%, which offset the sales decline in stores. Starting in June, our comparable sales were positive and reported net sales were down 7%. In July, comp sales were also positive with reported net sales growth of 2%. In August, comp sales were again positive with reported net sales growth of 1% despite the impact from divestitures during the quarter. Importantly, monthly sales for September, and on a preliminary basis, also show positive comparable sales growth with similar store and digital sales as in the second quarter and accelerated BOPIS trends.
I’ll now continue to review our second quarter financial results. On a GAAP basis, we reported net earnings per diluted share of $1.75 compared to a net loss per diluted share of $1.12 in the prior year period. Our GAAP reported net earnings include favorable impact of approximately $230 million pre-tax, which are excluded from adjusted results. These includes gains from two special items; a $190 million gain on the sale of PersonalizationMall.com and a $77 million gain on the extinguishment of debt from the bond tender. These gains were partially offset by other special items with a net unfavorable impact of approximately $37 million, including non-cash charges mostly related to impairments of trainings and certain store level assets as well as restructuring and transformation initiative costs.
On an adjusted basis, our net earnings per diluted share were $0.50, an increase of 47% compared to adjusted earnings per diluted share of $0.34 last year. Consistent with our prior disclosures, the following references to our quarterly results will be on a non-GAAP basis to better represent year-on-year performance of the business.
Moving to gross margin. Our gross margin increased 200 basis points to 35.9%. This was driven by approximately 150 basis points of favorable product mix, including lower coupon expense and optimization of promotional markdowns coupled with distribution and fulfillment cost leverage of 190 basis points. As expected, these benefits were partially offset by the impact of channel mix of 135 basis points from the larger proportion of total sales from digital channels. Our company’s management team will remain focused on gross margin and ensuring we have a healthy gross margin progression over time.
We’ve said last quarter that gross margin was abnormally low due to the significant impact from store closures. Our second quarter gross margin shows a return to a more representative base and reflects the benefit of our efforts to unlock our potential growth by optimizing product margin with an increased proportion of digital sales.
Moving to SG&A. SG&A as a percentage of net sales was 31.5%, a decline of approximately 10 basis points compared to the prior year period. This was behind the decrease in payroll, advertising and payroll-related expenses, partially offset by an increase in professional fees to support the company’s transformation. Considering the unprecedented impact from COVID-19, we have taken decisive steps to reduce cost, further simplify our operations and support our teams to emerge from this pandemic in an even stronger position.
In August, we implemented our organizational realignment, which included a workforce reduction of approximately 2,800 roles as part of our previously announced restructuring plan. This action is estimated to generate future annual pre-tax savings of approximately $150 million, which is at the upper end of our initially stated range of $100 million to $150 million in annual SG&A savings. And as you’ll hear from John in a few minutes, the next phase of our restructuring plan includes a store optimization project, which is already underway. Our solid top-line performance coupled with EBITDA margin expansion drove significant EBITDA growth of 36%. This pivotal improvement shows that our efforts to transform the business and build a modern durable business model have already begun.
Turning now to some balance sheet and cash flow statement items. We continue to carefully manage working capital this quarter with ending inventories of $2 billion. On a sequential basis, inventories were lower by approximately $200 million or more than 8% compared to the end for the first quarter. Our capital expenditures in the quarter were $37 million with 60% of the expense related to technology projects to improve our omnichannel capabilities. These include inventory and warehouse management capabilities such as advanced allocation logic and replenishment strategies to improve customer experience.
We do expect to ramp up our capex spending from these current levels in subsequent years in support of our digital-first, omni-always transformation. We will share perspective on our future capital allocation plan at our Investor Day later this month. While our share repurchase and quarterly dividends remain suspended, we remain committed to return capital and expect to share our perspective during Investor Day.
In summary, our second quarter performance demonstrates our financial agility and discipline as we transform our business. We clearly see a pathway and expect to deliver significant EBITDA growth and value creation. We will share our multi-year financial roadmap at our upcoming Investor Day on the 28, along with the transformation and strategic growth initiatives already underway.
I will now turn the call over to Cindy Davis, our Chief Brand Officer and President of Decorist. Cindy?
Cindy Davis — Executive Vice President, Chief Brand Officer; President, Decorist
Thank you, Gustavo. In second quarter, we delivered a plan that was both inspired by and inspiring to existing and new customers alike. We created and communicated compelling value and made it easy with our omni-always approach. By sharpening our focus on the key drivers of gross margin, product mix, pricing and promotion and channel mix, we were able to deliver growth in both comp sales and margin with the potential to unlock significant expansion going forward.
Digitally, we saw exciting growth in the second quarter with more than 180 million visits to our sites, representing a 52% increase over last year. In addition, we grew our online conversion to 4%, an increase of 33% versus the prior year period. Our new mobile app was launched 20 million times during the quarter, which contributed to 130% increase in demand from our mobile channel.
From a customer standpoint, we gained approximately 2 million new online customers this quarter, and 42% of these customers were new to our brand. These new customers are enhancing our overall customer profile as they are six years younger on average than our existing customers and less likely to use coupons. In addition, over 1 million of our in-store shoppers became omnichannel customers, shopping online with us for the first time this quarter. Omnichannel customers are highly engaged, shopping with us three times more often and spending two times more per year than single-channel customers.
Customer response to our new BOPIS and contactless Curbside Pickup services has been strong, generating over $120 million in sales during the quarter and earning us a five star rating on over 80% of these orders. BOPIS and Curbside are great solutions for our customers and benefit us financially with respect to gross margin since BOPIS eliminates the shipping expense usually associated with the digital order. This is key, since our digital penetration grew to approximately 32% from approximately 18% in the prior year, but it is what has enabled these results. Our customer-inspired, data-driven, omni-always, fully integrated approach that gives us the most confidence about our ability to sustain this momentum. There is no better way to illustrate this than by looking at our successful back-to-college campaign, which drove a 21% increase in college product sales, May 1 through September 8. We are pleased with these results, especially during what has been a most unusual back-to-college season.
Bed, Bath & Beyond has long been known as a destination for college. And this year, we developed an even stronger plan to serve the college market. We started with insights, monitoring data and customer response, especially reopening plans for major colleges and universities across the country and then pivoted our plan as the season unfolded. Given the uncertainty of the back-to-college season this year, we brought back our college saving task that offers students 20% off their purchases all the way through September 30. Over 500,000 students signed up for the College Savings Pass this year, driving over 400,000 transactions with an average basket size 14% larger than other college transactions.
We created an integrated merchandising and marketing plan with better curated assortments, more competitive pricing and strong value communication, both in-store and online. We modernized storytelling in our marketing and on our site as well as increased targeting to drive higher levels of engagement. As a result, we doubled our return on ad spend goal from digital media, while increasing ad recall, brand lift and favorability significantly above industry norms. And our two hour Buy-Online-Pick-Up-In-Store and contactless Curbside Pickup services were available for students and parents at their home store or in their college town, making it easier than ever to shop with us.
From a product perspective, top trending categories in our college assortment this year were kitchen electrics, up more than 160%; kitchen housewares, which is up nearly 250% and drinkware and smart wear [Phonetic] categories, which were up more than 650%. Throughout the season, we keep our finger on the pulse of the college market. As many schools announced plans for remote learning, we heard from those parents and students alike that they were disappointed to miss out on yet another milestone, the transition from high school to college. Armed with these insights, we launched our College-from-Home campaign in August, adding inspiration to the value and ease of our back-to-college experience. We tapped our online interior design team at Decorist to develop a variety of room designs to help inspire students to create their own perfect dorm room at home.
Despite the unprecedented COVID impact on our business over the past six months, Bed, Bath & Beyond remained a key college destination this year. And according to research we recently conducted, the college season may not be over yet. In fact, the data shows that 32% of students surveyed said they will be going to campus for the first time in 2021 and they have shopping to do. We will be ready to meet their needs with inspiration, value and ease.
As we look forward to the important holiday season, this year will be one like no other. We are prepared for customers to shop earlier and have expanded our omni services with same-day delivery leveraging our store footprint to allow them to shop whenever wherever and however they want. We have robust plans under our house strategic framework and our five key pillars to rebuild our authority in the home space. I look forward to speaking with you again later this month at our Investor Day when we dive deep into each one of these pillars. We are excited about our growth plans and the positive impact we are already seeing in our results.
With that, I will turn the call over to John Hartmann, our Chief Operating Officer and President of buybuy BABY. John?
John Hartmann — Executive Vice President, Chief Operating Officer; President, buybuy BABY
Thank you, Cindy. And to add to your conversation on the pivot and focus on our customer, let me provide an update on our buybuy BABY business. On a directional basis, our U.S. and Canadian buybuy BABY business made up approximately 10% of the company’s total net sales in the second quarter, including strong sales from digital, which represented more than half of total BABY sales. Growth in digital was supported by favorable customer response to our new BOPIS and Curbside Pickup offerings and our Big-Deal BABY sale event, which was held in August.
Digital orders fulfilled by our stores represented about one-third of total BABY sales in the quarter with BOPIS representing a third of total store fulfilled orders. Top performing BABY categories during the quarter were apparel, safety and playroom, which helped us drive a more favorable product margin. During the second quarter, we opened our 128th BABY store and subsequently opened another store in September. We expect to open three additional stores by the end of the year for a total of 132 BABY stores. As the leading baby specialty retailer in North America, we are committed to expanding our buybuy BABY store network to support our digital presence and omnichannel strategy and look forward to sharing our vision and growth strategies for BABY at our upcoming Investor Day.
From an operations perspective, we took bold steps in nearly every area of our operations this quarter to evolve our base and build momentum for change. I will highlight a few of these areas today. In real estate with our previously communicated store network optimization project, in strategic sourcing with our indirect sourcing initiative and in technology with our migration to cloud computing. But first, as you’ve seen in the media, we have really powered up the team over the past two months with the addition of several senior leaders, including Wade Haddad, SVP of Real Estate and Construction; Juan Guerrero, Chief Supply Chain Officer; Scott Lynn Bloom, Chief Technology Officer; and Anu Gupta, Chief Strategy and Transformation Officer. These next level leaders will help further advance and fortify our transformation initiatives underway.
In real estate, we have begun executing on our store network optimization plan to develop the right network of stores to serve our customers as we rebuild our authority and establish a truly omni-always shopping experience. We recently confirmed that the first one-third of the 200 Bed, Bath & Beyond store closures that we previously announced will occur by the end of calendar 2020. As part of this process, there will be store closing sales in the weeks leading up to the close to work down in-store inventory. In addition, a comprehensive sales and marketing program has been established to drive sales to our other stores and digital channels. As we said previously, we expect to be able to transition at least 15% to 20% of sales from these planned store closures to our digital channels or other store locations.
Our store network optimization project is not simply to close stores, but to reshape and truly optimize our store footprint. Our physical stores are a strategic asset for us as we transform as a digital-first company. Market data shows that our current store base addresses 80% of the domestic market. This is especially important as we further leverage our stores with new omni fulfillment capabilities in BOPIS, Curbside, and now, same-day delivery. Following this work, we will lean into a store remodel program next year that has been developed to have a clear and positive ROI and deliver a truly omni-always and inspirational shopping experience. I look forward to sharing more on these growth plans at our Investor Day. This is an important step in our multi-year program to build a modern, durable business model and to invest where it matters most to our digital-first customers.
Another area we are focusing resources is strategic sourcing. Our newly formed procurement organization will drive anticipated savings by designing and implementing centralized spend control and vendor management processes across all areas of indirect spend. This recently launched initiative will deliver substantial savings in fiscal 2021 and beyond. These savings exclude the impact of any potential future sale of non-core assets or any changes to our real estate lease agreements.
From an operations perspective, at the core of our transformation is technology. We have initiated an end-to-end modernization of our technology infrastructure to deliver a more agile, responsive and customer-inspired shopping experience. Today, our digital platform is supporting substantial digital growth and strong customer adoption of new services like BOPIS and Curbside.
Recently, we announced a new multi-year collaboration with Google and supported by Deloitte to accelerate our omni-always transformation. Through this expanded relationship, we will deploy a range of platform solutions to further personalize our omnichannel shopping experience for our customers, enhance fulfillment capacity and optimize merchandising planning and demand forecasting. By combining our unique data and insights in the home, baby and beauty and wellness markets, with the exceptional platform capabilities and expertise that Google with their cloud capabilities provide, we will deliver a more agile, responsive and customer-inspired shopping experience, making it even easier to feel at home with Bed, Bath & Beyond.
As we build our omni-always capabilities, we will have a strong foundation of systems to support our long-term growth objectives. Our near-term technology roadmap includes a new enterprise resource planning system including core merchandising and further supply chain improvements, such as optimizing processes for omnichannel forecast, replenishment and allocation. The result will be noticable improvements for our customers, while lowering our overall inventory investment. I look forward to sharing more details with you on these important investments when we get together again at the end of the month at our Investor Day.
Mark, I’ll turn it back over to you now for closing remarks.
Mark J. Tritton — President and Chief Executive Officer
Thank you, John. We’ve been making bold pivots to reconstruct, renovate and restore our company even despite the impact of a global pandemic. We’ve said we would assemble a world-class and experienced leadership team, and we’ve done that. We’ve said we will reduce our cost structure and drive financial strength and discipline, and we are doing that. We’ve said we would take a smarter, more efficient approach to gross margin and management of our business, and we’re doing that. And we’ve said we would lead with a digital-first omni-always perspective, and we’re doing that. We’ve said we would modernize our engagement to regain our authority in the home space to acquire new customers, and we’re doing that. We’ve said we will review and optimize our asset base, and we have done that and expect to do more.
We’re excited to share the details of our growth plans for the future at our Virtual Investor Day on October 28 starts at 9:00 AM. And during this meeting, we will provide a full review of our three year strategic goal, our multi-year financial plan incorporating anticipated cost savings and reinvestments, key performance metrics that will track the progression of our transformation journey and a comprehensive capital allocation framework to building long-term shareholder value. And our strong performance this quarter, including solid comp sales growth, gross margin expansion, increased cash and liquidity and debt reduction gives us the confidence that our transformation is underway.
With that, we will now take your questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] And our first question is from Peter Benedict from Baird.
Peter Benedict — Baird — Analyst
Hey guys. Good morning. Two questions. First, just on the e-commerce fulfillment dynamics, can you maybe frame some of the savings you think you’re getting from the store base fulfillment relative to a traditional DTC? And then — and also related to that, kind of how the economics, maybe the same-day partnership that you announced with Shipt and Instacart kind of plays into the e-commerce profitability? That’s my first question.
Mark J. Tritton — President and Chief Executive Officer
Yeah. Good morning, Peter. Thank you. Let me start, maybe John can support. So in terms of the economics, we’ve talked about it, about 36% of our orders currently in growing are being fulfilled by store with a large chunk of those being BOPIS and Curbside, which for us economically equate to an in-store sale from a profit margin perspective. And our store fulfilled were actually able to create speed and agility to get customers their goods much faster from the store base. And we’re continuing to work on the cost structure on the store fulfilled versus DTC cost as we rapidly moved into this phase of fulfillment during the COVID environment.
In terms of the same-day order fulfillment — sorry, the direct-to-customer fulfillment through same-day, that is really equivalent to an in-store sale as well. The customer nominates to spend a nominal fee basically for the cup of — cost of a cup of coffee to get the order shipped, and that’s at $4.99. And we cover the cost of goods, but the shipping cost is covered by the customer.
Peter Benedict — Baird — Analyst
Okay, that’s great. Thank you. And then — sorry, go ahead.
Mark J. Tritton — President and Chief Executive Officer
No, go ahead.
Peter Benedict — Baird — Analyst
Okay. Just to — and then my other follow-up was just around kind of where you guys are in establishing category roles from a merchandising standpoint? Just kind of curious, which categories are going to see the most impact when you have these own brand introductions next year? And how you kind of plan to communicate all of this to consumers? Now a lot of this may come out, I guess, at the investor meeting, but just what can you help us with here on that front? Thank you.
Mark J. Tritton — President and Chief Executive Officer
Yeah, Peter, definitely looking forward to sharing deeper details of our own brand and category trajectory for 2021 and beyond. But what I will tell you is we’ve done a deep amount of research and understanding. The strength of that category is currently on the opportunities that lie ahead. And it’s no surprise that they really fall into the bed, bath, kitchen and storage and all the areas, and there are areas that we’ve been doubling down in Q2 and we’ll for the third and fourth quarter, but we’ll really expand those and double down our own brand opportunities as we kind of launch throughout 2021. So more to follow on that, but we have clear category definition of goals. We’re tracking discovery, ease and convenience and trips and traffic in each of the categories and have a very distinct plan.
Peter Benedict — Baird — Analyst
Okay, great. Well, thanks so much. And I look forward to the meeting in a few weeks. Thanks.
Mark J. Tritton — President and Chief Executive Officer
Thanks, Peter.
Operator
Our next question is from Steven Forbes from Guggenheim Securities.
Steven Forbes — Guggenheim Securities — Analyst
Good morning. Maybe somewhat of a follow-up as we look at the building blocks of the gross margin walk in the presentation. The 190 basis points of distribution fulfillment leverage, can you sort of help us better understand the drivers of that? Is that what you referred to as sort of the change in or shift in the mix of fulfillment methods relative to last year? And I don’t know if you have the ability or want to quantify the differences in fulfillment cost across those different methods, but it would be — it would help us sort of better understand the BOPIS Curbside opportunity as it continues to build here?
Gustavo Arnal — Executive Vice President, Chief Financial Officer & Treasurer
Hi, Steve. Gustavo here. So clearly we’re really focused on driving each of the components of our gross margin, fulfillment costs being one of those. And for your specific question of 190 basis points, that includes benefit of scale and deleveraging some of our costs, distribution costs, labor costs. And we expect to continue improving on that to offset the channel mix impact, which we’re planning for, by continue driving BOPIS. You heard Cindy in her remarks talking about how BOPIS is one of the key elements we will be focusing on. So we’re very pleased by the progress we made in gross margin year-on-year, not only by leveraging fulfillment costs, but also by improving product mix. And with that, we more than offset the anticipated digital channel mix. Does that help?
Steven Forbes — Guggenheim Securities — Analyst
Yeah. No, I think — I don’t know if you can sort of talk about the differences in regions or if there’s any sort of range of penetration mix, right? So 15%, if we look at across hardlines, retail or obviously your broader retail subset. I mean, do you have certain regions that are running at higher penetrations or where do you sort of expect BOPIS Curbside to go over that two year to three year time horizon?
Mark J. Tritton — President and Chief Executive Officer
What we’re focused on is ensuring that we have a very responsive supply chain, which is part of the reason we’re talking about supply chain reinvention. So we will satisfy what our customers want and we will get to the digital channel mix that our customers demand and the BOPIS mix that our customer demands. In Investor Day we can show more perspective on how we see that playing out and how we plan to address the — optimizing the fulfillment cost of the different route to markets, whether it is from store, direct from vendors, direct-to-consumer, same-day delivery, etc., okay?
John Hartmann — Executive Vice President, Chief Operating Officer; President, buybuy BABY
Yeah. Steve, I would just say also, this has become a new customer norm, we’ve just begun the journey with BOPIS. We’re seeing that 15% penetration increase on a regular basis and we expect to see that being a real strength during the third quarter and fourth quarter. We are building this into our plan as a sustainable part of our mix. So look forward to sharing more at the Investor Day.
Steven Forbes — Guggenheim Securities — Analyst
If I can, just a quick follow-up, Mark, for you. If we look at this second quarter performance in the margin profile and then think about the profit improvement plan, obviously, a really strong quarter relative to what you sort of are guiding people to for that two year to three year time horizon in a margin profile. Is there anything to call out here that’s somewhat transitory in nature or as we think about the third quarter here, should we just expect sort of a build in the profitability of the underlying business?
Mark J. Tritton — President and Chief Executive Officer
No, I think what you’re seeing, Steve, is the discipline that we’ll be deploying moving forward. I mean, when we used the word modernize, I’d say a bit through at our discussion this morning, I think it really does go to what we’re doing in gross margin in terms of merchandise mix, doubling down on careful curation and usage of promotions and coupon, how we’re communicating and engaging with our customer and then offering these new services, which are easy and convenient but help us in our profit margins. So I think what you’re seeing is the substructure of the disciplines that we’ve now applied to our business, best practice and applying those through the third and fourth quarter and beyond. And you’re going to see further evidence of that as we go into the Investor Day where we layer up even more opportunities for gross margin growth through sourcing and our own brand, etc. So we look forward to continuing that discussion with you.
Operator
And our next question is from Brad Thomas from KeyBanc Capital Markets.
Brad Thomas — KeyBanc Capital Markets — Analyst
Hi. Thanks so much for taking my question. I was wondering if you could talk a little bit about the competitive environments in which you are participating in? And how you’re thinking that may evolve here as we move into October and the holidays, particularly as you’re seeing retailers pulled forward holiday promotions and Prime Day falling in October now? Thank you.
Mark J. Tritton — President and Chief Executive Officer
Yeah. I think we’re really pleased, Brad, to be in an environment where it is truly competitive. Our stores are open, we’re firing on digital and we’re able to compete actively versus how we could in the first quarter. I think it’s a competitive environment. And what we’re really pleased with is how the customers really lend in, both current and new to their relationship with Bed, Bath & Beyond. I think relationships and engagement are going to be very important. There is no doubt that this will be our third and fourth quarter unlike no other. I think customers, we’re seeing from our data points will begin to shop earlier for value and for the holidays, and we’re adjusting accordingly, like many retailers.
So we think it’s going to be competitive. It’s going to be different. We are agile and flexible and we’ve built our plans accordingly and are ready to roll. So we’re looking forward to getting into it up. As we’ve said, with the first signs we’ve seen through the month of September have been encouraging, but the rubber really hits the road from Thanksgiving onwards when we see that change in shopping pattern and behavior.
Brad Thomas — KeyBanc Capital Markets — Analyst
Very helpful, Mark. And a follow-up on some of the monthly cadence that you disclosed, which I think was very helpful. Thank you so much. Wondering if you could share a little more color on what you were seeing from a traffic perspective?
Mark J. Tritton — President and Chief Executive Officer
Yeah. From a traffic perspective, obviously, our overall sales results, great omnichannel traffic, and I think that’s cleared the door for us. Digital sale can be represented by someone buying digitally, picking up in stores. So the power of our omnichannel sales is really driving our results. So overall traffic was good. I think we’re still seeing some tentativeness specifically in certain regions about a return to shopping and we think that that will grow and we’re seeing data that suggests customers getting more comfortable with shopping in store. We’re not back to normal circumstances at all, but I think this is where the power of accelerating digital and balancing out to become truly omni-always has really leaned into our favor. So we’re meeting the customer where they are, when they are ready and what they need. So I think that we are seeing traffic differentials, but we see ongoing trends changing and we’re going to be watching on this.
Operator
And our next question is from Michael Lasser from UBS.
Michael Lasser — UBS — Analyst
Good morning. Thanks a lot for taking my question. Presumably, August was the best top months within the quarter. Your commentary suggest that the September was equal to the full — the comp trend in September was equal to the full second quarter. Suggesting that September has slowed versus where August trended, why do you think that’s the case?
Mark J. Tritton — President and Chief Executive Officer
We’re seeing stability against the quarter and against the trends that we’re evolving through the month of August, both at store and digital levels down to our margin and BOPIS right. So we are seeing a stability in that. We won’t comment any further on our Q3 results, but wanted to ensure that we were not saying there was just a one moment in time based on home being important in the industry and with the customer mindset. This is developing a pattern with our customers that we feel very comfortable with.
Michael Lasser — UBS — Analyst
So Mark, just want to clarify because there probably will be a lot of discussion about this. When you say stability versus — in September, do you mean stability in September versus August or stability in September versus the entire second quarter?
Gustavo Arnal — Executive Vice President, Chief Financial Officer & Treasurer
Hey, Michael, Gustavo here. What we mean, stability is consistency in the growth rates. So we’re seeing growth rates in September that are similar to the growth rates we’ve seen in the second quarter, both on a digital growth basis and comp basis. And to your question about trends within the second quarter, because as Mark said, we don’t want to get into too much specific into the third quarter other than saying the results we’re seeing so far, again consistent in terms of growth, is we saw consistent growth in digital in each and every one of the three months in the second quarter; June, July, August, we saw digital growth north of 80%, as I said in my prepared remarks, and we’re very encouraged by that.
Michael Lasser — UBS — Analyst
Okay. And then two more gross margin. To what extent do you think that you’re able to lower your coupon expense because the overall environment will be — was just less promotional. So how much of that factor in? And as part of the gross margin, how much should we incorporate the fact that shipping and freight costs are going to be going up considerably into the fourth quarter and probably in the next year as we calibrate our models moving forward? Thank you so much.
Mark J. Tritton — President and Chief Executive Officer
Yeah, Michael. I mean, again, there is going to be pressure on I think timeframes in terms of shipping and moving forward. I think we’ve calibrated that into our go forward plans. We feel good about that. In terms of the gross margin costs, we feel really solid that in terms of the coupon, yes, the market was less promotional in total and we accounted for that. But for us, we’re embarking on a journey on how we use our resources more effectively and strategically. So coupon for us is a strength and it’s an opportunity used correctly. So in the careful curation of it, testing and iterating, as we do through Q2, we see real upside benefits to how we use the coupon. And so it was more about our strategic intent than it was the market dynamic, but both of them worked in our favor.
Operator
And our next question is from Simeon Gutman from Morgan Stanley.
Simeon Gutman — Morgan Stanley — Analyst
Thanks. Good morning, everyone. I have a first a short-term and then a medium-term. My short-term is SG&A dollar growth in Q3. How to think about it if you’re able to share given that I guess store expenses will be more fully ramped up by that quarter?
Gustavo Arnal — Executive Vice President, Chief Financial Officer & Treasurer
Hi, Simeon. Gustavo here. Look, we are not going to provide a specific guidance in our P&L components beyond our actual results, Q3. What I can say is we’re fully committed to continue driving SG&A down as we saw in the first quarter, we also saw some deleveraging in the second quarter. And keep in mind that some of the restructuring interventions that we’ve announced recently are going to start ramping up into the third and the fourth quarter. So we’re committed to continue optimizing our cost structure and to see more of that to come.
Simeon Gutman — Morgan Stanley — Analyst
And then the more efficient promotions and markdown management, I assume that’s also helping the ticket on the top-line. Is that a meaningful lift or is it more impactful to the gross margin line?
Gustavo Arnal — Executive Vice President, Chief Financial Officer & Treasurer
[Speech Overlap] through the growth margin line. We’re becoming much more discipline on how we look at our data, how we optimize promotions, as Mark said, how we manage coupons. You’ll see that more reflected in the gross margin line, which is part of the 150 basis points product mix, gross margin improvement driver.
Operator
And our next question is from Kate McShane from Goldman Sachs.
Kate McShane — Goldman Sachs — Analyst
Thank you. Good morning. Thanks for taking my question. I wondered if I could go back to the comp question earlier, you did mentioned that you’ll be closing the 200 stores by the end of the year, is there a way to quantify the store comp of those 200 stores and how big the gap is between their performance and the rest of the fleet?
Mark J. Tritton — President and Chief Executive Officer
Okay. That really pertains to how we’ll be performing in the third and fourth quarters. So we won’t be sharing that data today, other than we feel really comfortable that the 63 stores that we’re closing have been built into our plans. We’ll have accelerated sales based on closure sales, which will be advantageous there, and we can absorb that inside the size of our fleet, and we’ve got comfortable plans there.
Kate McShane — Goldman Sachs — Analyst
Okay. Thank you. And then my second question is just on inventories. I wondered if you could update us on the quality of inventory in the store? How you feel about in stocks going into the back half of the year?
Mark J. Tritton — President and Chief Executive Officer
Yeah. We’re definitely trading on leaner inventory, which is partly by design and partly based on the sales accelerating and availability of inventory. I think the industry overall is buckling down ensuring that we get the right levels of inventory for the third and fourth quarter. We have our plans in place. We’re working closely with our vendor base. We feel that the quality of the inventory is very, very strong. We continue to chase and replenish as much as possible for our key items. We are hyper-focused on our top-performing items going into the third and fourth quarter because we know last year that was one of our Achilles’ heels. And we think that we have a better promotional cadence which will help us get through with better quality and size of inventory. So we’re operating leaner and better with the right inventories that bodes well for the future.
Operator
And our next question is from Bobby Griffin from Raymond James.
Bobby Griffin — Raymond James — Analyst
Good morning, everybody. I appreciate you taking my questions. I guess, Mark first, in the slide deck you called out the potential for additional asset sales on some non-core assets. If those sales went through on the other non-core assets remaining, would that potentially unlock further savings than you’ve already kind of detailed in that initial restructuring plans?
Mark J. Tritton — President and Chief Executive Officer
The asset sales we’ve factored into our forward plans in terms of if there was any action there, which we’re not declaring here today, Bobby, but yeah, we think that we’ve factored in the SG&A going forward. There will be a bit of a non-issue really because we’ve already taken action within inside each of the assets to date and that was part of our restructuring plan so that they banked. So anything that comes forward in terms of asset sales will just be a net benefit in terms of cash flow.
Bobby Griffin — Raymond James — Analyst
Okay. That’s helpful. And then just — go ahead, I’m sorry.
Mark J. Tritton — President and Chief Executive Officer
Over to you.
Bobby Griffin — Raymond James — Analyst
Okay. Yeah, I just – and my last one, just a modeling question on kind of the spread between comps and net sales, look like kind of roughly seven points this quarter. I would assume — is it safe to assume that’s going to widen a little bit as we go through the store closures? And to help us tune up our model, should we think of that seven points plus in store closures through the next three or four quarters to keep us in line with how things are trending?
Gustavo Arnal — Executive Vice President, Chief Financial Officer & Treasurer
Hey, Bobby, Gustavo here. Let me address that — understand completely the context of your question, and it is very important one. We’re paying more and more attention to comp growth as we continue reshaping the portfolio of the company both in terms of concerts and stores. So let me address it in two parts. First, in the second quarter, the big difference between store comp and reported sales, think of it during the month of June, first on the total quarter, we had reported sales on stores down 18% and comp store performance down 12%.
So you’re seeing that six points delta into the stores. And part of it is driven because in the month of June, remember in the month of June, we were starting opening gradually our stores. So that big delta is primarily driven by the month of June, where in June, store sales were down close to 25%, while store comp — store-only was down mid-single-digits. So looking forward, we are looking as part of the program that John is leading in optimizing the 200 stores, 63 come in this fiscal year, we will be closing the stores that are less productive. Now it’s very hard to predict what’s the impact on comp growth going forward, but rest assured that we will provide our perspective as we report our results each quarter. Hopefully that helps?
Operator
And our next question is from Christopher Horvers from J.P. Morgan.
Christopher Horvers — J.P. Morgan — Analyst
Thanks. Good morning. So first a question about how you’re prioritizing the store closings. I know you’re basing the stores on sort of historical performance, but prior to this year, you really didn’t have a true omnichannel platform. So how you’re prioritizing these first 63? Are they sit in the most EBITDA negative stores or these were more of the most adjacency and closest to another Bath & Beyond stores? Just trying to understand those 63. And then on the 200, do you think as you build omni, you might revisit the overall closing target?
John Hartmann — Executive Vice President, Chief Operating Officer; President, buybuy BABY
Yeah, Christopher. This is John. Thank you for your question. Look, we’ve undertaken a very deep analysis around our network and we focused in on several key areas, the first is unprofitable stores. The second is stores that are too close to one another. And the third is where we have lease arrangements that are burdensome to the profitability of the stores. So we’ve undertaken a deep analysis to identify the stores that should be closed. And from there, this first — roughly third we’ve announced we’ll be closing by the end of the year.
Christopher Horvers — J.P. Morgan — Analyst
Got it. And then two one-off questions. Based on prior disclosure, it looks like e-commerce mix actually goes down in the third quarter. I’m not sure if that’s true in September giving back-to-college, but if you’re holding e-commerce trends consistent and store comps consistent that would suggest deceleration relative to 2Q. So just trying to see if there is a nuance there? And secondly, in the first quarter, you did have a benefit from an accounting change of about 200 bps in gross margin year-over-year. So was trying to see what that benefit was in this quarter as well? Thank you.
Gustavo Arnal — Executive Vice President, Chief Financial Officer & Treasurer
Sure. Hi, Chris. Gustavo here. First, on your question on the trends throughout the quarter, as mentioned before, we have seen consistent digital sales growth of above 80% in each one of the month in the second quarter and we continue seeing that trend in the month of September. So we feel pretty good about that. Your question about the accounting change, it was an adjustment and refinement on how we record some of our fulfillment costs into gross margin, specifically to make it numeric that has no impact on total EBITDA. On gross margin, in the second quarter, the impact was 150 basis points, okay? As anticipated, in the first quarter, it was 300 basis points. So it was less than half given that our revenues are doubled more or less quarter-to-quarter.
Christopher Horvers — J.P. Morgan — Analyst
Understood. Thanks very much.
Operator
Our next question is from Curt Nagel from Bank of America.
Curt Nagle — Bank of America Merrill Lynch — Analyst
Good morning. Thanks very much. Maybe I’ll just ask — just stick to one question on capital allocation. So looking at the quarter, you guys had substantially improved EBITDA and arguably too much cash on the books with 300 net against debt, more cash on the coming from free cash flow and asset sales potentially. So where do we stand in terms of reengaging the buyback? Are we still restricted? When could we expect you guys back in the market?
Mark J. Tritton — President and Chief Executive Officer
Yeah. Hi, Curt. Thanks for recognizing the strong fiscal position, it’s definitely what we’ve been building towards. You can see us coming at the end of the month and having a real clear point of view on full three year plan in terms of capital expenditure and allocation. That will provide real clarity on how we intend to use our liquidity and cash strength to generate strength for our business and modernize as well as return to shareholders. So we look forward to sharing more then.
Curt Nagle — Bank of America Merrill Lynch — Analyst
Okay. Maybe I’ll just sneak one more quick one. In Q2. Mark, in terms of merchandising mix. So kind of looking back to the back half of last year things were a bit messy to say the least, out of stock, not having the right our inventory. How much of a difference do you think you guys can make with some of your new early merchandising plans in the back half in terms of comps and perhaps better margin?
Mark J. Tritton — President and Chief Executive Officer
Yeah. I mean as we kind of detailed through the quarterly results back then, there were some self-inflicted wounds. And I think this team has moved with agility and skill around a different strategic mindset. So I think as you saw in the back-to-college period, you saw us representing clear value on end caps and clarity and alignment between digital and stores. You saw us in stock of key items. You saw us have really meaningful promotions that were targeted specific customers. And to the best of our ability post — coming out of the whole blip of COVID, really getting back to in stocks of the items that our customers wanted.
We’ve built a robust plan for the third and fourth quarter to focus on our top items being in stock to curate that promotional plan and to be a meaningful storyteller to the customers about their needs, and I think it’s going to be a very different than fourth quarter. So we really look forward to using the blueprint of how we’re managing inventory, focus on best sellers and key items, our promotional cadence, clarifying and communicating great price value and using our omnichannel services to really bring are very different than the fourth quarter.
Operator
And we have time for one more question. And last question is from Seth Basham from Wedbush Securities.
Seth Basham — Wedbush Securities — Analyst
Thanks a lot. Good morning. Thank you for taking my question, and congrats on a great quarter. My first question is just on some of the underlying improvements you made in gross margins which have been very strong in a short order of time. As we think about the go forward plan here in the back half of the year, you’ve elaborated on some of the drivers being sustainable. And I know you’re not providing financial guidance, but is there anything that you did in the second quarter that we should think about not being sustainable in the back half of the year in terms of the gross margin year-over-year performance?
Mark J. Tritton — President and Chief Executive Officer
Hi, Seth. Thanks for the question. No, we think that the efforts we undertook in Q2 are very sustainable and are a good runway to our efforts in the third and fourth. The mix becomes rebalanced, we’ve doubled down on meaningful promotions and curation of promotions and our coupon. We’re ready for the promotional period, we’re ready for the gift giving period. Our stocks are looking better, as I just mentioned. I think that — and then also, we see a ramping up of the BOPIS penetration rate as well as the addition of same-day. So there’s some really good levers there that just were non-existent in three, four, last year that are going to be in play and we already have proof of concept and green shoots on from Q2 that we see prevailing into third and fourth quarter.
Seth Basham — Wedbush Securities — Analyst
That’s great perspective. And then lastly, as it relates to some of the new customers that you’ve acquired, can you talk to the repurchase activity you’ve seen from them thus far relative to prior cohorts of new customers? Are you seeing them more sticky? And do you think that’s a positive driver going forward?
Mark J. Tritton — President and Chief Executive Officer
We’re seeing them engaged and we’re definitely collecting more data and engagement with them. And what we’re seeing in that is a younger customer who may not have as much discretionary income, but they are very focused on their honor. So we’ve seen key areas like home decor really fly and kitchen areas. So they’re investing early and we think they’re going to invest quickly. We’re going to be connecting with them, engaging them and looking at them for long-term value and engagement.
Operator
Thank you. And ladies and gentlemen, that is all the time we have for today for questions. And I will now turn the call back over to Janet Barth for closing remarks.
Janet M. Barth — Vice President, Investor Relations
Thank you, and thank you all for participating in our call today. Please feel free to contact me or Felix with additional questions or comments on our quarterly results. We look forward to speaking with you again later this month at our Virtual Investor Day on Wednesday October 28. The online meeting will start at 9:00 AM Eastern Time. Registration details for the meeting will be available soon. Have a great day, and stay safe.
Operator
[Operator Closing Remarks]