Bed Bath & Beyond (BBBY) Q3 2021 Earnings Call Transcript

Bed Bath & Beyond (BBBY)
Q3 2021 Earnings Call
Jan 06, 2022, 8:15 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Bed Bath & Beyond fiscal 2021 third quarter earnings conference call. My name is John. I'll be your operator for today's call. [Operator instructions].

Please note, the conference is being recorded. And I will now turn the call over to Susie Kim.

Susie Kim -- Vice President of Investor Relations

Thank you, and good morning, everyone. Welcome to our fiscal 2021 third quarter earnings call. Joining us today are Mark Tritton, our president and CEO; and Gustavo Arnal, our chief financial officer. Before we begin, let me remind you that our fiscal 2021 third quarter earnings release and slide presentation can be found in the investor relations section of our website at bedbathandbeyond.com and as exhibits to our related Form 8-K.

This conference call and the slides we refer to may contain forward-looking statements, including statements about or references to our outlook regarding the company's performance, our internal models, and our long-term objectives. All such statements are subject to risks and uncertainties that could cause actual results to differ materially from what we say during the call today. Please refer to our most recent periodic SEC filings for more detail on these risks and uncertainties, including the risk factors section in our annual report on Form 10-K and our quarterly reports on Form 10-Q. The company undertakes no obligation to update or revise any forward-looking statements.

Additionally, the information we will discuss today contains certain financial measures that exclude amounts or are subject to adjustments that have the effect of excluding amounts that are included in the most directly comparable measure prepared in accordance with general accepted and launching 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 Tritton -- President and Chief Executive Officer

Thank you, Susie, and good morning, everyone. We hope you had a safe, healthy holiday season during these turbulent times. During this first year of our comprehensive transformation, our most recent results demonstrate the complexities of executing a long-term turnaround plan while managing a business in a highly unpredictable current short-term environment. Unprecedented macro forces continue to permeate operating conditions, leading to a near-term versus long-term bifurcation in our performance.

While we effectively offset higher freight costs than being at the core and global supply chain pressures, increasing inventory disruptions impacted our ability to meet demand during the holiday season. These conditions led to sales that demonstrated near-term volatility despite progress on our multiyear transformation. We continue to execute our long-term strategic initiatives to modernize our infrastructure and enhance our agility in any future operating environment. More specifically, during the third quarter, our revenue momentum was below our expectations with net sales of $1.9 billion and a 7% comp decline.

As shared with you previously, we experienced a slower start to sales in September and October. In preparation from the holiday season and against the backdrop of the challenging supply chain environment, we fortified our plans to secure the right breadth and depth of product. Overall, our inventory position remained healthier with greater relevancy compared to last year. And in November, we drove improvement and arrested comp decline.

Unfortunately, despite strong customer demand, operational challenges such as vendor constraints, locked inventory once in our position, and a currently illiquid legacy infrastructure impacted our ability to drive further improvement in sales trends. Issues in receipt flow and on-shelf availability affected our top 200 items such as kitchen appliances and personal electronics, as well as our key categories such as bed and bath. The customer experience was compromised as strong demand wasn't met with strong product availability. This resulted in approximately $100 million in lost sales versus demand or a mid-single-digit impact to the quarter and an even higher impact on December.

Operational issues were not limited to our inventory. We also took steps during the quarter to rebalance our marketing resources and correct the disproportionate reduction of our printed circulars, which are a key traffic driver for our business. As context, a disproportionate amount of our sales are generated from our circular at stores and are a key trip driver. While we're able to activate additional plans for distribution in October, paper supply and labor issues for print vendors impeded our ability to reach more scaled circulation.

Timely delivery of these sectors by a vendor was also an issue that prevented a retained historical levels of circular distribution and further impacted our ability to drive traffic and generate sales. Yet amid somewhat normalized conditions, we converted traffic and met demand successfully, both in-store and online. For example, we delivered a high single-digit sales comp in the U.S. over the Black Friday to Cyber Monday period, underscoring Bed Bath & Beyond as a top destination for customers.

We're also pleased to see customers return to brick-and-mortar shopping this year as our U.S. stores delivered mid-single-digit sales comps over this five-day holiday period. During the quarter, we delivered gross margin of 35.9%, well above our plans, despite sharp increases in inflation and active freight and supply chain cost pressures. Stemming from our experience last quarter, once we diagnosed the freight cost pressures that impacted us in Q2, we swiftly implemented pricing actions, promotional optimization and product mix plans to achieve margin recovery and were surgical in our approach on a surface basis to also ensure we remain competitive with the market and still remain so.

We also optimized our promotional activity, increasing our regular price penetration throughout the quarter versus last year, despite the highly competitive retail month of November. As added by our high gross margin performance, we have an arsenal of preplanned promotions that we can now use strategically to drive engagement with our customers profitably. Coupon exclusions, less clearance discounts and event-driven coupons during peak shopping periods are just some of the examples of how we can diversify our value message without being more promotional in totality. These decisive actions and strategies led to an adjusted gross margin rate, not only exceeding expectations significantly, but above our 2020 and 2019 levels.

As you know, this is a key financial barometer of our three-year transformation strategy. Our own brands continue to produce higher merchandise margins at increased penetration rates. Despite the supply chain-related inventory environment, we launched the final tool of our eight total planned owned brands for fiscal 2021. Studio 3B and H For Happy, enables our customers to home happier with options for modern and contemporary key items to assist with everyday moments of their seasonal celebratory needs.

In accordance to our long-term strategy, all our own brands helped to create lifelong memories and are a key cornerstone of our three-year profit algorithm. We are pleased to see progress continue quarter after quarter in just the first year of launching this key initiative. Our progress is even more evident in our newly remodeled stores they are growing faster than the chain with Own Brands penetration. And accordingly, overall product margin range higher as well.

Just as we delivered on gross margin during the quarter, our holistic focus is on elevating our top and bottom line performance as we continue to transform. In the near-term, we anticipate conditions to remain complex, and we are defining solutions to navigate each quarter. We're implementing plans that will enable sales acceleration over the near and medium term, and we will constantly leverage marketing to assist us in strengthening and driving traffic further. Our No.1 priority is to continue to change our current systems and processes to unlock inventory in a faster and more efficient way to meet demand, above and beyond our mid- to long-term investments to improve our top in-stock positions.

We are working with our vendors to target constrained inventory and improve flow to both DCs and stores. Concurrently, we must enhance our ability to fulfill our store demand once inventory is within our position from shipping containers to warehouses to stores. In the near-term, we've created new transfer processes that increase third-party logistics capacity and decreased warehouse holds to assist with flow. We're also adding digital supply chain capabilities to automatically shift inventory sources between our owned vendor direct and marketplace availability.

Our legacy infrastructure undermined our response times to offset the holiday inventory impediments as visibility was limited ahead of our planned supply chain efforts. To create a more nimble-operating model, enablement through better tool to process is our basis of our ongoing supply chain and technology transformation. This reformation will help us mitigate misalignment in supply and demand, and prevent interruptions to our plans in the future. We believe these work streams will add the necessary reinforcement to alleviate constraints in fiscal '22 and beyond.

Given our largely seasonless and therefore, resilient inventory, the short-term disruptions we're experiencing will therefore normalize the supply chain imbalances eventually improve with our enhanced plan. As always, we will monitor broader category demand and our market share to inform our operational plan. We continue to [Inaudible] most to our business. Recently, we've seen two trends persist.

First, overall market growth continues to normalize in the post-COVID environment compared to the high demand environment last year. Secondly, despite the total market decrease in nesting dynamics from 2020, NPD data in the bed, bath, and the kitchen category still show our market share is sequentially stable. We're narrowing the gap in declines versus prior year and in fiscal 2022, we expect our market share to stabilize further given the conclusion at our store fleet optimization initiatives. Furthermore, our customer acquisition strategy for the Bed Bath banner gained traction during the quarter as evidenced by our BEYOND+ loyalty program.

We grew from 1.8 to 2.2 million members after one of our largest new subscriber events in November leading to one of our most successful membership acquisition quarters of BEYOND+ in years. We will leverage this momentum throughout 2022 as we support plans for a new loyalty program later this year. Spanning all our new program designed to reestablish us as the preferred channels for our customers' home and baby needs while building authority, trust, and long-term value across our ecosystem of banners. Another key highlight for the quarter was the continued improvement in overall growth of our buybuy BABY banner.

Baby continues to deliver double-digit growth with additional benefits to the total group, as more than 65% of our new digital universal card capabilities are seeing cross shopping between Bed Bath and Baby as well as Harmon. As a result of our targeted efforts to improve this business since last year, we are on track to achieve approximately $1.3 billion in sales at our Investor Day goals, all while improving profitability and market share. We achieved these results even before the initial strategic transformation of this business, which is planned to begin in the new fiscal year. We now intend to expand own brands to Baby in 2022 as we look at margin optimization strategies, given sales results in the businesses that have now stabilized.

Of course, we will continue to drive base sales through selling new partnership opportunities that combine the power of the Bed Bath & Beyond and buybuy BABY offering. For example, Baby is an important cornerstone of our recently announced Kroger partnership as well as our own digital marketplace. Finally, as you saw in today's announcement, we are always committed to managing our business responsibly and responsibly. We are extending our SG&A expense optimization measures of approximately $100 million annualized for next year that will explore areas such as further store fleet optimization, fixed cost, and discretionary savings opportunities.

We will ensure an appropriate expense to sales ratio that reflects our current business, while not at the expense of our long-term initiatives. During this first year of our three-year transformation, there has been no shortage of activity, from our new omnichannel and merchandise initiatives to the reformation of our supply chain and technology. We are paving our path toward greater profitability and growth for the future. We are focused on plans to deliver gross margin expansion with sales stabilization and growth through both immediate action plan and our unwavering execution of the transformational initiatives we outlined at our Investor Day.

Now on to Gustavo Arnal, our chief financial officer, who will review our third quarter financial results and our outlook for the next quarter and full year. Gustavo?

Gustavo Arnal -- Chief Financial Officer

Thank you, Mark, and good morning, everyone. I would also like to underscore our commitment to the long-term transformation we're making, despite the shorter-term headwinds we currently face. As I look back over a year ago, we have overcome several challenges and we recalibrated our business with agility. For example, as freight cost increases began in 2020, it was hard to have predicted the breadth and depth of the developments that have materialized since then.

Despite this, our gross margin expansion underscores that as an organization we can and will adapt quickly as we navigate our ongoing transformation. Further, we're managing our business responsibly. In addition to SG&A expense optimization, we also remain intent on utilizing cash according to our capital allocation principles, which includes supporting our transformation initiatives and returning excess cash to shareholders. Earlier this quarter, we announced intentions to complete our 1 billion three-year share repurchase plan ahead of schedule, underscoring our ongoing confidence in our turnaround, and our commitment to maximizing capital deployment.

Let me now review our fiscal third quarter results, which cover the period ended on Saturday, November 27, 2021. Given the Saturday of the Thanksgiving weekend was the final day of our quarter, I will also discuss certain calendar metrics to provide greater insight into our holiday trends. This will include our calendar November, and our Black Friday to Cyber Monday performance, as well as the trends we saw in December, particularly in the context of our fourth quarter outlook. As a reminder and as anticipated reported net sales continued to reflect the impact from expected noncore banner divestitures completed last year as well as our ongoing planned store fleet optimization program.

Total net sales were $1.9 billion, representing a 14% decline in our core banners, which included a 7% impact from our ongoing fleet optimization program. For the fiscal third quarter, comparable sales were down 7% versus last year, and down 4% versus 2019. As Mark discussed, we saw sequential improvement within the quarter. And in fiscal November, our comp sales were down mid-single digits.

Encouragingly, on a calendar November basis, we saw flat comparable sales in the U.S. and growth of low single digits in U.S. stores. Comparable sales grew high single digits over the Thanksgiving to Cyber Monday period.

For the fiscal quarter, store comps were down 5% and improved sequentially each month, reflecting a return to stores following last year pandemic-related traffic. This was most evident in November where store comps were down just slightly overall and positive in U.S. stores. Our digital channel represented 35% of total net sales, a similar penetration rate to 2020.

Despite a 9% decline in sales compared to the strength we experienced last year through the pandemic, our digital business continues to be very important, particularly when compared to 2019. By banner, Bed Bath & Beyond comparable sales decreased 10% versus last year, and 5% versus 2019. Buybuy Baby continued to deliver strong results with mid-teens comparable sales growth versus last year. Adjusted gross margin was 35.9%, 50 basis points higher than last year, and 360 basis points above 2019.

We're pleased to have driven 320 basis points of merchandise margin expansion, primarily from our own brands and successful pricing actions that more than offset 270 basis points of increased freight costs compared to last year. SG&A dollar expense was in line with our internal plans, although higher as a percentage of outcome of sales, given our lower-than-expected revenue base in the quarter. As I touched on last quarter, we're committed to enabling our long-term transformation through the investments while remaining focused on managing expenses appropriately. To ensure SG&A alignment with our overall performance, we're initiating further business optimization plans to target $100 million of annualized expense savings across areas such as fleet optimizations, fixed costs and discretionary spending.

These savings will materialize starting next year, and we will share more details next quarter with the context of our fiscal 2022 plan. We reported adjusted EBITDA of $41 million, driven by lower sales during the quarter. GAAP EPS was a loss of $2.78 per diluted share, which reflects approximately $2.53 of the special items for the quarter. These were predominantly driven by $1.82 associated with the accounting effects of a noncash income tax charge related to a valuation allowance against certain of the company's deferred tax assets.

The valuation allowance does not impact the company's ability to utilize any deferred tax assets in the future. I would like to note that during the third quarter, there were significantly lower adjustments to gross profit and specifically, there was only a 30-basis-point difference between our GAAP and adjusted gross margin of 35.9%. As I shared on our Q1 and Q2 calls, we plan for these adjustments to decrease over time as we continue to progress through the initial stages of our transformation. On an adjusted basis, excluding special items, EPS was a loss $0.25 reflecting our lower sales and therefore EBITDA.

Special items are excluded from adjusted results to provide a more representative picture of the underlying performance of our business. Turning to our balance sheet and cash flow. During the third quarter, consistent with the seasonality of our business, we reported the use of approximately $300 million of operating cash flow, equivalent to the increase of predominantly nonseasonal inventory as we prepared for the holiday period in anticipation of the challenging supply chain environment. Additionally, in accordance with our capital allocation principles, we invested approximately $83 million of capital in store remodels, supply chain, and IT system.

Our cash and investment balance at the end of the quarter was approximately $600 million and total liquidity at quarter end was $1.5 billion. More currently, post quarter, our recent pro forma cash balance was $700 million, even after share repurchases. This was driven by positive operating cash flow of more than $200 million in December, as expected. We remain committed to returning cash to shareholders by following a balanced data-driven approach.

On November 2nd, we announced the advancement of our $1 billion three-year share repurchase program with the acceleration of our 2022 and 2023 plans. Accordingly, during the quarter, we executed approximately $120 million in share repurchases or approximately 5 million shares. Program to date in the third quarter our repurchase activity has taken our total share count from 127 million shares to 96 million shares, more than a 24% reduction in our shares outstanding. I will now discuss our fourth quarter and full year outlook.

We continue to actively monitor the development of the COVID-19 environment, particularly given the surge in cases related to the Omicron variant. We're guiding based on our current visibility, including quarter-to-date times. Our sales in December followed a highly volatile pattern unlike any prior year, ranging from low single-digit growth to double-digit decline, depending on the week of the month due to the pull forward of retail business as customers shopped earlier as well as on-shelf availability of inventory. Taking these into account for the fourth quarter, we're estimating a comparable sales decline of high single digits.

Net sales are expected to be approximately $2.1 billion. Again, divestitures and fleet optimization will continue to impact year-on-year comparisons. Based on our ability to offset increased freight costs, we expect adjusted gross margin in the range of 32.5% to 33%. Given our sales and margin expectations, adjusted EBITDA is estimated to be in a range of 80 to $100 million, leading to an adjusted EPS range of zero to $0.15.

As a result of our third quarter results and expectations for Q4, we're updating our full year guidance to the following: We now expect net sales of approximately $7.9 billion. For modeling purposes, this translates to a high single digit comp for the full fiscal year. Adjusted gross margin for the year is now expected to be in the range of approximately 34 to 34.5%, also an expansion versus last year and 2019. As a result of our sales assumptions, SG&A is now expected to be in the range of 34% of total net sales.

However, please note, our dollar assumptions have not changed. In line with our revised estimates, adjusted EBITDA is now expected to be in the range of 290 to $310 million. This translates to an adjusted EPS range of negative $0.15 to $0.00. Our balance sheet and cash flow assumptions include positive operating cash flow by year-end, capex of approximately $350 million and plans for a total of approximately $625 million in share repurchases.

By next quarter, we expect to have accelerated our $1 billion share repurchase program. We have also provided additional assumptions on depreciation and amortization, interest and tax rate in today's presentation to assist with EPS model. As Mark discussed in detail, we're activating strategies to pivot our near-term results, so we're positioned well for fiscal 2022, particularly as we anniversary many of the dynamics we faced this year. We look forward to sharing our plans and expectations for the new fiscal year next quarter.

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

Mark Tritton -- President and Chief Executive Officer

If anything has remained constant since I first joined this company, it is a reminder that we are executing a full-scale transformation and simultaneously running a business in a highly unpredictable environment. That said, as aspects of our third quarter results demonstrated, we are diagnosing issues, implementing solutions, and delivering on the long-term structural transformation quarter by quarter to ensure sustainability for our three-year goals. While we continue to face challenges, we are improving our ability to respond to any macro forces. This past quarter, it was evident in our pricing strategy, our customer acquisition strategy, our Baby business and more than 250 million customer visits to our group of banners in store and online.

We look forward to unlocking further progress in the areas of our business that require greater support. While we have concluded just the third quarter of our multiyear plan, we continue to execute our strategic transformation by reforming our legacy business to achieve our long-term goals. We remain in the very early stages of our multifactor transformation that is foundationally changing Bed Bath &Beyond to become a digital-first omni-always retailer, target a more productive store fleet that is optimized, and revitalized through our remodels, change our product principles to offer customers a more inspirational merchandise assortment through our mix of national brands and unique owned brands, and to the needs for every moment in light through our buybuy Baby and Harmon brand, all enabled by our modernized supply chain and technology capabilities. As we prepare for 2022, we look forward to operating in a normalized environment with a base of business upon which to grow.

We will now take your questions.

Questions & Answers:

Operator

Thank you. [Operator instructions]. And our first question is from Steven Forbes from Guggenheim Securities.

Steven Forbes -- Guggenheim Securities -- Analyst

Good morning. Mark, I wanted to focus maybe start on the category performance. Curious if you could expand on the pricing and promotional plans that were implemented during the quarter. Can you just provide some color on how to respond to these changes, right? And if you noticed any difference in customer behaviors among loyalty members versus non-loyalty members?

Mark Tritton -- President and Chief Executive Officer

Yes. The pricing changes were begun at the end of Q2 and really implemented in both through Q3 and consistently through Q4. So sequential changes. We've been monitoring those prices as well as our average basket competitors, and we see that through price scraping, etc., we're in line with the market.

And our customer, we think, is responding accordingly. So we've seen no tension with the price increases. And so that's created a stable environment where we're a little behind our competitors in terms of price increases, we've now caught up and that's obviously assisted that margin issue. In terms of the customer response between loyal customers and general customers, we're actively engaged in a customer acquisition strategy.

Our target was actually 0.5 million customers, and we've actually achieved that over the arc of Q3 in December, to introduce them to be BEYOND+ and create a long-term value through some stickiness and engagement. So we're at the beginning of that process, but some good engagement there. Our real issue in the quarter was around connecting with our regular customers with key assets like circular, which just was a deficit to our traffic generation, specifically affecting stores.

Steven Forbes -- Guggenheim Securities -- Analyst

And maybe just a quick follow-up for Gustavo. You reiterated the share repurchase commitment here during the quarter despite sort of what transpired here. So I don't know if you could just help us better understand the conviction why that's sort of the right use of capital right now? And maybe just provide some color on where you see free cash flow for the year as a whole? I think you mentioned positive operating cash flow, but any color on free cash flow as we think about sort of modeling the next couple of years here.

Gustavo Arnal -- Chief Financial Officer

Sure. Good morning. Look, there's two key principles that guide our share repurchase decisions as the discussions between Mark and I and the board. The first one is in terms of capital allocation, ensuring that the business is funded and ensuring the right liquidity, and we have that.

We have continued funding the capital investment needs in the business and we continue having strong cash balance and strong liquidity. Beyond that, we don't see share repurchase as a short-term intervention. This is about the long-term and we continue to see the intrinsic value of our stock in long-term, much higher than where we are today. Look, when we're done with $8 billion share repurchase program, we would have taken out more than a third of the company shares outstanding, probably at an average of close to $20 a share.

Long-term, there's more potential. On your question around free cash flow and operating cash flow, as you said, we continue projecting operating cash flow -- positive operating cash flow for the fiscal. The fourth quarter is crucial on that. Free cash flow might be slightly negative just because of the prevention we took in terms of increase in inventory ahead of the holiday season, and therefore, our operating cash flow is slightly lower than initially as anticipated.

Operator

And our next question is from Christopher Horvers from J.P. Morgan.

Christopher Horvers -- J.P. Morgan -- Analyst

Thanks. Good morning. First, a near-term question. I'll follow up with something more long-term.

So can you talk about where you are more specifically on a quarter-to-date basis, recognizing that there's been a lot of volatility and also the fact that you have stimulus coming up. So where are you quarter-to-date? And sort of what are you baking in for the balance of the quarter to get to the guide?

Gustavo Arnal -- Chief Financial Officer

Yes. So look, quarter to date through December 31, we are at high single-digit comp decline, and that is consistent with the guidance that we're providing for the full quarter. I think we said in the prepared remarks, the month of December was very volatile. There were weeks that we saw growth, there were weeks that we saw a decline.

And clearly, the consumer pattern here in terms of purchasing habits earlier or later as well as the challenges we're seeing on supply chain availability of fast rotating and key retention items. It is a challenge that we can navigating too. So the quarter guidance is consistent with the trends that we see quarter to date.

Christopher Horvers -- J.P. Morgan -- Analyst

Understood. And then as you think about the new 100 million cost savings plan for next year, just I wanted to understand, is that something that executes over the year? I know you'll give us more details on the fourth quarter call. But what drives the urgency for another cost-out plan? Is it that the investments that you have to make are coming in higher than you originally thought? And if so, where are they? Where do you see the pressure? Is it wages? Is it technology? Is it supply chain infrastructure that you need to reinvest in? And ultimately, do you think any of that $100 million does drop to the bottom line versus being completely reinvested?

Gustavo Arnal -- Chief Financial Officer

Sure. Look, it's not about urgency. It's about managing the business responsibly. Our revenues have falling a bit short this quarter, right? And we just want to ensure that our SG&A as percentage of sales remain intact for our long-term algorithm.

So this is about just constantly managing cost, constantly managing any opportunity on fixed cost. Looking deeper into our fleet optimization program, and as you just said, we will provide more perspective on that when we provide guidance in fiscal '22 in April.

Mark Tritton -- President and Chief Executive Officer

Yes. Christopher, just let me reinforce that Gustavo and I have looked at our numbers and we're taking a conservative estimate on '22 to ensure that we can balance out our SG&A. That is at no point connected to our capital allocation. It remains completely in place to invest in the existing plan, the investments we want to make to further enhance and turn around the business.

They're fundamental to our performance going forward, they're separate from us just being prudent in our overall cost management.

Operator

[Operator instructions]. Next question is from Kate McShane from Goldman Sachs.

Kate McShane -- Goldman Sachs -- Analyst

Good morning. Thanks for taking our question. You mentioned that you're looking at introducing more owned brands at buybuy BABY. We were curious about what the penetration of owned brands is now in the banner, how quickly you can ramp it? And is there a goal for penetration? Or do you see penetration of own brands being similar to that of the banner?

Mark Tritton -- President and Chief Executive Officer

Yes, Kate, good morning. The penetration is very low in buybuy Baby. And it has predominantly national brand and good national brand business as well as discretionary label business. There is an opportunity there in key areas like apparel, necessary furniture and across the board in the business to create a multifaceted own brand program.

We're very excited about what we put together there, and we'll be launching that in the second half of 2022. So we do have penetration goals. We'll share more of that as we get into our '22 plan.

Operator

And our next question is from Jonathan Matuszewski from Jefferies.

Jonathan Matuszewski -- Jefferies -- Analyst

Good morning. Thanks for taking my question. I noticed on one of your promotional emails yesterday, it highlighted a new subscription plan for things like coffee products, other replenishment items, similar in nature to what some other e-comm players are doing today. Do you have any goals around utilization usage from a consumer standpoint? And how should we think about that as a contributor to e-commerce sales going forward? Thanks.

Mark Tritton -- President and Chief Executive Officer

Yes. Jonathan, I think this is something that we've had in the digital arsenal. We've been able to change our capabilities. And working with our national brand vendors on their supply capabilities and their insights they have been able to provide us.

So this is a launch of a new program, just [Inaudible] will be relevant to see how that performs for both the Bed Bath business and what this transfer value is to Baby, early stages in the platform, but part of our digital arsenal overall.

Operator

Our next question is from Michael Lasser from UBS.

Michael Lasser -- UBS -- Analyst

So if we account for the -- some of the inventory challenges that you had in the quarter, your comp was still down 2%, and it suggests that you're three quarters into the transformation, it is still very difficult to drive folks to your stores and to your website to sell them products without either promoting very heavily or having to use your coupon. So as you look into next year, when arguably the environment is going to get a little tougher, do you expect to see better balance between being able to drive positive sales growth without having to work your gross margin aggressively to be able to drive that sales growth?

Mark Tritton -- President and Chief Executive Officer

Yes, Michael, let me just be clear on those. Yes, you're absolutely right, that narrows down the LY to around 2 percentage points. What we did also have affecting us as we articulated in Q2 and saw permeate in Q3 is we had a fundamental rhythm in connection with our customer through our circular. And while that does contain coupon in the back, it also is the connection point for customers a trigger for them to explore the website and come in the store.

And a large percentage of the -- the sales generated by that circular, which is substantial, are manifested at that level. We artificially cut off that lifeline, that regular rhythm of communication to our customer. And it was a big mistake that impacted on our business, both in Q2 and has permeated through Q3 and beyond. So what we see there is, if we just return to the fundamentals of what we were doing with customer connectivity and for meeting supply and demand, we would have exceeded last year.

And so that's where we were able to compartmentalize short-term and near-term pain as our long-term opportunity outside of what transformation can bring us. That doesn't mean that we're resting on using those tools alone. We have active plans in '22 for customer engagement and customer experience led by our new customer offices rough [Inaudible] on how we can create our ecosystem of engagement and communication through loyalty, personalization, and using our omnichannel environment. So [Inaudible] were weakened during these last two quarters.

We going to reinstate those and that's just the fundamentals and the rest to follow.

Operator

And our next question is from Simeon Gutman from Morgan Stanley.

Simeon Gutman -- Morgan Stanley -- Analyst

Hi, everyone. I'll ask one question with a couple of parts. First, on the fourth quarter guide, I think the third quarter proved a little aggressive of why are you confident, I guess, that this fourth quarter will be OK. And then just connecting the dots of the narrative, if there were problems with getting inventory, it looks like some of the promotions got more aggressive coming into the last legs of the holiday.

So why get more aggressive there, if you didn't have the inventory. And then how come -- it doesn't sound like this hurt buybuy BABY, maybe it did, but how come buybuy BABY was not impacted any of bed bath? Thanks.

Mark Tritton -- President and Chief Executive Officer

Let me start with the [Inaudible] -- let me start with the second part first. I think buybuy BABY was less affected for two reasons. One is, we saw -- we've seen very strong apparel and accessory trends in the market versus the softening of home trends versus 2020. So it took advantage of that.

We have a strong apparel business and a strong accessory business. And we saw nesting really kicking in, in a Baby environment. This is a great part of the connection between short-term Baby and long-term high DNA strand there. So we were better poised in terms of our overall inventory plan because we pre-purchased a lot of the apparels product.

So that helped us drive through. And we also had some performance issues. You might remember in Q3 in Baby last year and that we've anniversaried there with real strength and conviction coming into the third and fourth quarter. In terms of the question around the preparation for Q3 and expectations, look, we were always really clear that September and October had been soft, but that November represented a proportionate amount of the quarter's performance.

And our inventory plans, working with our vendors and what we have laid down shows us we were going to be in a good position. We just couldn't realize that in real time through the month of November. So while we actually changed the trajectory of sales from negative to positive in November, it wasn't enough in terms of the supply chain restrictions to offset what we'd originally planned. The promotional piece that you mentioned is interesting.

We have shared that we actually had higher reg price sales in the quarter than the prior year. So we actually increased our regular price penetration, and I think that's evidenced in the gross margin. What you may see and web perception is not reality, is that the deficit that we had in giving communications out to customers, we offset with a couple of additional promotions to offset, because we weren't using the money and making it effective on the one side. So we actually implemented other traffic-driving opportunities later in the quarter.

So again, net-net, less promotional in terms of the sales outcome and some compensatory factors to get us to the end goal.

Operator

Our next question is from Jason Haas from Bank of America.

Jason Haas -- Bank of America Merrill Lynch -- Analyst

Good morning, and thanks for taking my question. Could you talk about the gross margin drivers that you expect for 4Q?

Mark Tritton -- President and Chief Executive Officer

Yes, I think they're fully consistent, Jason. I think we see ongoing and brand strength. And is that in the mix contributing. I think product mix continue to be the same, and I think promotional optimization.

So while we know that the gross margin in Q4 is different than in Q3 and rest of the year, we still see stability and some growth in Q4. And that's despite, Jason, what I would say those ongoing supply chain pressure is not abating and us offsetting those. So when that starts to condense in post '22 and beyond, we see some real upside to our margin projections and knowing that, that's the strongest barometer of our three-year plan. We feel really confident about the movements we're making there.

Operator

Our next question is from Bobby Griffin from Raymond James.

Bobby Griffin -- Raymond James -- Analyst

Good morning, everybody. Thanks for taking my question. Mark and Gustavo, I was just hoping to may be understand the inventory and supply chain challenges just a little better and where exactly they showed up, because when I see inventory per store or just total inventory is up pretty notably sequentially. So is the issue of getting inventory from DCs to stores or any additional color to help me better understand that aspect?

Mark Tritton -- President and Chief Executive Officer

Yes. Thanks, Bobby. It's a multipart issue. And again, the perfect storm in this near-term issues.

I think that we know that we're starting off with legacy supply chain infrastructure and our investments we're making now will really take hold more in second half of 2022. So it's hitting us a little earlier than our preparation. But what we do see is a two parter. Our top 200 items sold through very well.

We talked about high level of demand at Bed Bath & Beyond. We're able to meet some demand, but not all of it. And then our initial plans with key vendors we had disappointment in terms of the receipt flow there. So we had constraints on top sellers as the industry did.

And then the second part of it was that we had inventory on chips in DCs and that just with the transportation was we could not flow that effectively creating a bottleneck. So we had the right inventory, the customer responded to the inventory we had. It's quality inventory. And as we mentioned, it's highly resilient, because it's like seasonal, but just the timing of flow and availability were off in this quarter, that's still a short-term issue, a short-term pain point that we look to rectify at.

Operator

And our next question is from Seth Basham from Wedbush.

Seth Basham -- Wedbush Securities -- Analyst

Thanks a lot, and good morning. My question is around market share. Mark, you mentioned that you are sustaining the same level of market share performing sequentially, I think. When you look to 2022, do you expect to be able to gain market share in your core categories?

Mark Tritton -- President and Chief Executive Officer

Yes, it's definitely the goal, Seth. I mean, it's been a turbulent year. Store optimization alone takes a lot of -- I mean, it's a planned move, and it's a planned reduction in our penetration in the marketplace, but it's for higher profit goals and benefit to our bottom line. We see that stabilizing through '22.

There will be still some activity, but it will be relatively stabilized. Our goal is to really generate the green shoots of the reformation in the second year of our transformation plan to stabilize and optimize both growth -- sales growth and therefore, yes, and we're doubling that down in our key categories. We've been experiencing it through Baby, Bed Bath is our key focus at the moment.

Operator

Our next question is from Justin Kleber from Baird.

Justin Kleber -- Baird -- Analyst

Thanks for taking my question. Just wanted to follow up on the baby business. And you mentioned, Mark, improving profitability there. Could you provide any more color on the margin profile of that business, how it compares to the core Bed Bath business? And then just how meaningful is Baby as a customer acquisition vehicle for the broader enterprise?

Mark Tritton -- President and Chief Executive Officer

Yes. Look, there is a differential between the Bed Bath and the baby business. I think what's really exciting about that opportunity there just is. We've yet to implement the store remodel plans and the product assortment plans that helped us so favorably in Bed Bath in the Baby business.

So that lies ahead for us. I think how we manage mix, how we manage our own brand, how we work -- partner more with our national brands. And there's some really good early signs and green shoots there that we're going to capitalize over the next two years of the transformation. It is important, I think, if we think about the ecosystem of life moments that we operate and connect with customers.

Whether we engage with the customer when they're planning the first child or having their first child or if you skim forward to when they're sending them to college or when they're moving, when they're downsizing, we can capture a lot of data and a lot of engagement and really personalize our relationship with our customer by utilizing the engagement authority in family and the engagement authority in home. And those two things are very strong then diagram that crossover. And hence, why we use the term ecosystem, the power of the two is very, very strong.

Operator

Our next question is from Anthony Chukumba from Loop Capital Markets.

Anthony Chukumba -- Loop Capital Markets -- Analyst

Good morning. Thank you so much for taking my question. I had a question. You mentioned in the press release that you picked up nearly 0.5 million BEYOND+ subscribers.

I guess what I was wondering, because I got an email and I think a tech message as well, saying that if I sign up for BEYOND+, which is $29 a year, we get a gift card for $29. So it's for all intents and purposes will be free. And I guess I'm just trying to figure out how much of a benefit of a tailwind was that promotion for BEYOND+ new subscriptions? Thank you.

Mark Tritton -- President and Chief Executive Officer

Yes. I think that is a longer -- a mid- and longer-term strategy about connecting with 0.5 million additional customers inviting them in the program and see the benefit and then doubling back with them. We're forecasting a level of stickiness with that customer, not all of them. So we're going to be tracking that.

But it's a great gateway to create engagement and specifically talk to our future customer.

Operator

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

Carla Casella -- J.P. Morgan -- Analyst

You talked about the store rationalization program. And this is the first quarter we saw a Harmon stores close. Is that now part of the 200-store rationalization? Or is that part of a new -- the new program?

Mark Tritton -- President and Chief Executive Officer

Look, if we look at the 200-store program as predominantly the Bed Bath & Beyond banner. But we look at the four-wall profitability of every single store. And I do know specifically the example mentioning Harmon. That's one example.

It's not a broad program for that banner.

Operator

Our next question is from Brad Thomas from KeyBanc Capital Markets.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Thanks, Mark and Gustavo. I was hoping to just if you can give a little more color out of you all in terms of your thinking for 2022? I know you're not ready to give formal guidance. But specifically, as we think about some of these kind of transitory issues like inventory, like the freight cost, I guess as we think about '22 on the whole, how do you think it met that at this point? Some of these items obviously may ramp until the beginning of the year. But are you thinking on the whole, you get net tailwinds from a sales and margin standpoint or that perhaps it neutralizes out or that next year, there may be still some headwinds? Just curious, any broad strokes at this point.

Thanks.

Mark Tritton -- President and Chief Executive Officer

Yes. limiting our '22 obviously, we'll come back and give more color in Q4 results and full year '22 expectations. No, I think that we've seen pretty much in the industry brand communication wise that supply chain issues will persist through half one, but we don't believe that our issues will persist through half one, because we've taken remedial action immediately. So we'll see a bifurcation of our results, not on the macro market issues, but how we've managed them internally.

I think what we see is tailwinds on things like the [Inaudible] penetration, the gross margin management, the continuing strength of Baby. I think optimizing our fleet, but also to where we're seeing store remodel program pay dividends at that expanding quarter by quarter over 2022. Remembering this year to the point we've only remodeled 81 stores, and we'll do approximately 130 by the end of the quarter, so completion over the next couple of months. We'll see sequentially more of the store remodels, which are adding positive comps versus the rest of fleet.

So we've got a number of cumulative benefits as well as the underpinning of our transformation, technology, supply chain assortment. So again, a year of stabilization for us, we believe, after a lot of reengineering in 2020 and 2021.

Operator

Our next question is from Cristina Fernandez from Telsey Advisory Group.

Cristina Fernandez -- Telsey Advisory Group -- Analyst

Good morning. I wanted to ask about the couponing strategy on the -- Earlier in your remarks, you mentioned that you weren't able to spend as much as you have wanted. Maybe could you expand on that? And how you're thinking about rectifying and balancing that going forward?

Mark Tritton -- President and Chief Executive Officer

Yes. I think that to start off with, we've always been committed to having a more balanced arrangement with the coupon, it was overblown in the past. We've been able to manage that into play. We just took too severe an action, Cristina.

So I think what we want to do is the rebalance that equation. Coupon is a great tool for customer engagement and traffic. It's not a drive, it's an opportunity. We just need to manage it better and so we kind of need to create the balance of those.

So still committed to coupon as a strategic advantage in our business.

Operator

And we have time for one final question, and that will be from Susan Anderson from B. Riley.

Susan Anderson -- B. Riley Financial Inc. -- Analyst

Good morning. Thanks for taking my question. I'm just curious on the traffic in the stores, how that form year over year and then also sequentially? And then also, are you still seeing better metrics in the remodeled stores? And what are your expectations for the number of remodeled stores this year and next? Thanks.

Gustavo Arnal -- Chief Financial Officer

Yes. So, Susan, in terms of traffic, we saw traffic below last year in Q3, high single digits, low double digits. It improved sequentially through the quarter. And as we shared earlier in the month of November, it was positive sales, comp sales at a store level.

So traffic was challenged but improved. The flip side is the conversion improved year on year. And therefore, our transaction value also improved year on year as our average AUR was improving given the promotional organization and the pricing plans we've been taking. On your second question about store remodels, we continue on track with our 450 store remodel for a three-year period.

For this fiscal, we were targeting 130 to 150. Given some of the supply chain challenges, probably we'll end this year closer to 130 stores. And we're pleased with the performance of these stores. So far, we continue to remodel over 80 stores.

And we're seeing mid-single-digit sales growth ahead of the balance of the chain in those remodeled stores with higher penetration on brands and higher margins.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Susie Kim -- Vice President of Investor Relations

Mark Tritton -- President and Chief Executive Officer

Gustavo Arnal -- Chief Financial Officer

Steven Forbes -- Guggenheim Securities -- Analyst

Christopher Horvers -- J.P. Morgan -- Analyst

Kate McShane -- Goldman Sachs -- Analyst

Jonathan Matuszewski -- Jefferies -- Analyst

Michael Lasser -- UBS -- Analyst

Simeon Gutman -- Morgan Stanley -- Analyst

Jason Haas -- Bank of America Merrill Lynch -- Analyst

Bobby Griffin -- Raymond James -- Analyst

Seth Basham -- Wedbush Securities -- Analyst

Justin Kleber -- Baird -- Analyst

Anthony Chukumba -- Loop Capital Markets -- Analyst

Carla Casella -- J.P. Morgan -- Analyst

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Cristina Fernandez -- Telsey Advisory Group -- Analyst

Susan Anderson -- B. Riley Financial Inc. -- Analyst

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