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Bed Bath & Beyond Inc (NASDAQ:BBBY)
Q2 2019 Earnings Call
Oct 2, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Bed Bath & Beyond's Second Quarter Fiscal 2019 Earnings Call. [Operator Instructions]

A rebroadcast of the conference call will be available beginning on Wednesday, October 2, 20 19, at 8:00 PM Eastern Time through 8 PM Eastern Time on Friday, October 4, 2019. To access the rebroadcast, you may dial 888-843-7419 with the passcode ID of 49010664.

At this time, I'd like to turn the conference call over to Janet Barth, Vice President, Investor Relations. Please go ahead.

Janet M. Barth -- Vice President of Investor Relations

Thank you, Adrian, and good afternoon, everyone. Before we begin, I want to remind you that our fiscal 2019 second quarter earnings release and slide presentation can be found in the Investor Relations section of our website at www.bedbathandbeyond.com, and as exhibits to the Form 8-K we filed just ahead of this call.

Joining me on our call today are Mary Winston, Bed Bath & Beyond's Interim Chief Executive Officer and Member of the Board of Directors; and Robyn D'Elia, our Chief Financial Officer and Treasurer.

Let me remind you that 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 financial measures. For a reconciliation to the most comparable measures presented in accordance with GAAP, please refer to the table at the end of our earnings release available on our website and included as an exhibit to our Form 8-K filed today.

Some highlights from the second quarter include adjusted net earnings per diluted share of $0.34, excluding $1.46, which consists of severance costs and an inventory writedown, which are related to the first wave of transformational initiatives as well as non-cash store impairment charges; a 20-basis point improvement in adjusted gross margin, reflecting benefits of several ongoing margin enhancement initiatives; a $47 million year-over-year reduction in adjusted SG&A expense reflecting some early benefits from our cost structure optimization efforts, including lower payroll and occupancy expenses; a cash and investment balance of approximately $1 billion; and a decline in retail inventories of approximately $492 million or approximately 18% at cost compared to the end of the prior-year period, including a transformation-related inventory writedown of approximately $194 million during the fiscal 2019 second quarter.

In addition, today, the Board declared a quarterly dividend of $0.17 per share that will be payable on January 14, 2020, to shareholders of record at the close of business on December 13, 2019.

I will now turn the call over to Mary.

Mary Winston -- Interim Chief Executive Officer

Thank you, Janet, and thank all of you for joining us this afternoon. On today's call, I'd like to provide an update on our actions supporting the Company's strategic near-term priorities in connection with our ongoing business transformation. Following my comments, I will turn the call over to Robyn for a review of our financial and operational highlights of the quarter, as well as our outlook for the year. Then, we'll take your questions.

We feel good about the progress we are making against our four key near-term priorities, including stabilizing sales and driving top line growth, resetting the cost structure, reviewing and optimizing the Company's asset base, including the portfolio of retail banners, and refining our organization structure. This work is being done with the support and guidance of the Business Transformation and Strategy Review Committee of the Board and a highly engaged leadership team. I'm even more confident in the tremendous opportunity in front of us.

Today, I would like to provide an update on the progress we have made against each of our four priorities, as well as what this means for our path forward. Our goal is to ensure our customers see a meaningful difference this critical holiday season while laying foundation for transforming our Company for long-term success.

Last month, in a letter to shareholders, Chairman Patrick Gaston and I shared our enthusiasm for our progress by providing a few specific examples of our near-term actions. I will now provide more details on those actions and several other initiatives we are pursuing.

Our number one priority is stabilizing our top line and optimizing our sales opportunities. A core component of our sales stabilization efforts and our transformation overall is based on new data-driven insights that we're using to identify opportunities for improving our customer value proposition. We are committed to providing our customers with value and improved omnichannel shopping experience and a relevant and compelling assortment of products.

To deliver on this commitment, we are pursuing a multi-pronged approach that includes both near-term and long-term strategies to create a noticeably different shopping experience and a differentiated value proposition for our customers. First, we are already under way with a rapid refresh of almost 160 of our highest volume and most profitable Bed Bath & Beyond stores to improve store traffic trend, drive sales and reset the store experience. We intend to create a more inviting and visually appealing shopping environment through a series of physical improvements to high traffic areas of these stores, such as in entry ways and at checkouts.

These basic improvements, including installation of queue lines at checkout to display exciting impulse items, will be complemented with a rollout of new visual merchandising elements at the front end of the store and upgraded associate and customer-facing technology tools to enhance our associates' ability to drive sales and customer engagement. We expect most of the updates to be completed in advance of the 2019 holiday season.

Second, we plan to implement performance incentives for our store managers based on sales targets over the holiday period. To further drive holiday sales, we are adding marketing and promotional support for Bed Bath & Beyond in the back half of the year. Included in the spend are further investments in life stage marketing and branding to reengage our customers as well as to drive foundational improvements in loyalty and shopping frequency. It also includes plans for special in-store and online promotional events during Thanksgiving week through Cyber Monday as part of our efforts to aggressively target this important retail period.

Increasing enrollment in our Beyond Plus membership program will be a critical focus during this time as well, including special promotional offers to drive increased customer acquisition and engagement. Our Beyond Plus members today shop on average two times more frequently than our average non-member customers and spend on average four times as much.

We continue to optimize our overall marketing mix by reinvesting savings from our direct mail efforts into digital channels, including video, paid social and display advertising, while ensuring customers who use coupons to shop continue to receive them. We're also improving our marketing personalization efforts with more than 125 test campaigns launched so far. We have subsequently scaled about one quarter of the campaigns to reach a larger audience.

Our new customer data platform allows for the faster launch of new personalized experiences while providing greater reach across channels. Our personalization efforts in email have reached more than 85% of our total email subscribers within the past five months, and customers receiving personalized emails are engaging at an average click through rate of between 20% and 40%.

Similar to our approach with marketing personalization, we are forming a cross-functional agile team focused on driving customer acquisition and sales within social media channels through rapid cycle testing of new content and targeting approaches.

We are also in the process of rolling out a new promotional framework developed around the retail holiday calendar and other relevant themes with events that are bigger, bolder and beyond anything that we've done before. This includes significant changes to our holiday promotional plan to ensure our pricing on individual offers is compelling to promote better coordination and communication across all customer touch points, both in-store and online, in a much more cohesive way and to amplify our promotions to a greater extent than in previous years through additional investments in new communication channels such as digital video and radio, while we also expand on our use of our existing communication channels.

We continue to make strategic pricing decisions to deliver noticeable value to our customers. These strategies include refining our dynamic pricing algorithms, and online and in-store pricing actions to address customer price perceptions. The implementation of markdown optimization software and processes is accelerating sell through, resulting in less aged inventory and optimizing the profitability of our seasonal and fashion assortment. We believe that more effective pricing will drive both top line growth and profit improvement.

These near-term opportunities will provide the foundation required to invest in and execute the shopping transformation consumers are demanding and allow us to reinvigorate our iconic brand. Moreover, successful transformation will require significant enhancements to both our physical and digital channels to provide our customers a more seamless omnichannel shopping experience.

To start, we will get better at meeting our customers where and how they want to shop and where and how they want to receive their purchases. We continue to invest in our customer-facing digital channels while material improvements to the search and recommendations functionality of our site and mobile app. We are also systematically working toward removing customer friction throughout the experience by streamlining the checkout process and by adding estimated delivery dates to the product pages for items that we warehouse.

We also plan to convert our reserve online pickup in-store service to buy online pickup in-store, to provide more convenience for customers to quickly pick up items at the store and enable conveniences like curbside pickup or lockers. These positive changes are yielding favorable results in our mobile app sales, which have grown over 90% year-over-year in the second quarter.

In addition to the store refresh initiative I just spoke about, we're developing a multi-year plan to upgrade and refresh a majority of our Bed Bath & Beyond locations. To help execute these plans, we are leveraging some of our other initiatives, such as our fleet optimization initiative and learnings from our Next Generation Lab stores. We will also incorporate insights from consumer research along with new visual and branding standards as well as technology upgrades. We will have a series of store experiences that we believe will resonate with our customers and enable them to interact with our brand from wherever is most convenient for them.

Our store renovation plans are more substantial than anything we've done in the past and we believe this plan will deliver noticeable change for our customers. We expect to begin the first wave of store renovations in early fiscal 2020.

Our second near-term priority is to reset our cost structure to better align with the current state of the business. We believe there are several hundred million dollars of cost savings opportunity over the long term embedded in our broader transformation efforts.

Among these actions already taken, the initiation -- first, the initiation of a comprehensive real estate optimization effort which commenced about nine months ago. As we have previously discussed, we are working with a specialized real estate consultant to renegotiate all leases, including those with longer dated terms. In many cases, we have been able to achieve more favorable lease terms and landlord contributions. Occupancy savings from these efforts are expected to benefit fiscal 2019 and beyond.

Next, we continue to review our overhead costs to drive greater operational efficiencies. We remain committed to doing what is necessary to ensure we have the right structure and resources for the business we are managing today and to position Bed Bath & Beyond for a bright future.

Although our review is ongoing and more changes are necessary, to-date, we have taken the following actions. First, we completed a workforce reduction, which affected approximately 7% of our corporate staff, including Executive Officers, Vice Presidents, Directors, Managers and Professional Staff. Second, we have realigned the organization structure to better support the transformation under way, including changes in reporting structure and responsibilities for some of our senior leaders.

Third, we are in the process of outsourcing certain transaction processing functions within our merchandising and finance areas to a third-party, which is expected to result in the elimination of nearly 80 positions later in the calendar year. These actions, including other changes in our senior leadership structure, combined with our real estate optimization savings, will generate cost savings of approximately $30 million from -- for fiscal 2019 and just over $50 million on an annualized basis.

As we work to optimize our cost structure for the longer term, we are casting a wider net, including an assessment of opportunities within our proprietary and private label brands, as well as our supply chain and global sourcing capabilities. To accelerate this initiative, we are actively engaging with the industry's leading sourcing firms. As we implement multiple initiatives over the next several months, we see opportunity to achieve longer term savings in cost of goods in the range of a few hundred million dollars.

Private label branding provides a lever to not only differentiate our customer value proposition, but also to optimize our margin structure through improved direct import and direct sourcing practices. Today, our private label penetration within Bed Bath & Beyond is well below our competitors with a smaller percentage that is directly sourced, and therefore we have a significant opportunity for margin improvement. One of our key focus areas is increasing the overall penetration of our portfolio of private label brands such as Wamsutta, SALT, ORG, Bee & Willow, Artisanal Kitchen Supply, and Olivia & Oliver, as well as our key preferred national brands such as UGG, Therapedic and Brookstone.

We are also in the process of launching two additional private label decorative home furnishing brands, One Kings Lane Open House and Marmalade. These are part of our previously communicated plans to introduce six in-house brands during 2019 and 2020. Our initial launch occurred last spring with the introduction of Bee & Willow.

Our third near-term priority is to review and optimize our asset base. As we mentioned in the recent shareholder letter, we have plans to aggressively reduce up to $1 billion of inventory at retail over the next 18 months. As a result of this decision, we took $194 million inventory writedown in the second quarter.

We believe this aggressive disposition of inventory will enable us to more quickly reset inventory levels in both our Bed Bath & Beyond stores and distribution centers to allow for a faster refresh of our assortment, as well as to enable us to refocus store labor activity to better support our customers and drive sales. In the short term, more than approximately $350 million of inventory at retail will be removed from our stores before the 2019 holiday season. This will be accomplished through a series of markdowns and clearance events, as well as with the assistance of an independent liquidator, all to be managed thoughtfully to prevent cannibalization of sales.

We have also completed our initial assessment with a fleet optimization program for all Bed Bath & Beyond stores to create a better balance between our physical and digital presence within the markets we serve. With the assistance of a third party, we have analyzed each US store's performance, profitability, geographic location and customer demographics to understand how best to position our store locations in various markets across the country.

While we previously communicated an estimate of 40 total store closures in fiscal 2019 across all concepts, our fleet optimization work has resulted in the decision to close approximately 60 total stores in fiscal 2019, including approximately 40 Bed Bath & Beyond stores and 20 other concept stores. With this action, we are increasing the profitability of our remaining portfolio and believe that our remaining fleet will benefit from our renewed focus on driving traffic and operating efficiency.

Through this fleet optimization project, we have refined our internal processes for evaluating our stores' performance, which will benefit us going forward, especially as we look to capitalize on our heavy lease expiration cadence, where we have more than 400 leases across all concepts expiring over the next couple of years.

We are also evaluating opportunities for sale leaseback transactions, which could generate significant cash for the Company. We have nearly 4 million square feet of owned real estate including both retail and non-retail buildings, as well as a little over half a million square feet of land. We are currently evaluating several offers from interested parties.

While our near-term priorities are primarily focused on Bed Bath & Beyond, a review of the strategic alignment of all the other business concepts is well under way. As previously announced, we are working with outside advisors, including Goldman Sachs, to assess how to better realign and realize greater value from certain of these assets.

As part of our strategic review, we are evaluating a range of options, including outside interest in several of our brands. At the same time, we have acted to close down one of our least productive e-commerce businesses. While we have made no final decisions and cannot make any assurances, we believe significant value can be unlocked from potential sale leaseback and business concept transactions.

Our fourth and final near-term priority is to take a fresh look at our organization structure. It is critically important that as we transform Bed Bath & Beyond, we ensure we have not only the right talent and expertise, but also the right team structures in place to facilitate a connected and efficient organization.

During this interim period, we have realigned the reporting structure of the organization such that all other business concepts now report into one leader. This is a benefit in two ways. First, this enables us to streamline and expedite our strategic review of these businesses. And second, it allows the rest of our senior leaders to focus on transforming the Bed Bath & Beyond business.

As you heard from my update today, we are making good progress across multiple fronts. Our teams are operating with urgency and focus, and I'm grateful for their hard work, commitment and support.

Together, the Board and the management team are challenging our current value proposition and operating model while also maintaining a focus on delighting our customers and delivering long-term value to shareholders.

Before closing, I'd like to comment briefly on the second quarter results and our outlook for the full year. Despite the ongoing challenges in our top line performance, we are pleased to have delivered adjusted net earnings per diluted share of $0.34 this quarter, reflecting the relentless effort of our teams and our progress in driving the Company's transformation efforts.

As Robyn will discuss in a moment, we are monitoring the tariff situation closely and working with our vendor partners to limit the impact on our business and customers. As this situation is still evolving, our financial guidance does not include any incremental impact from the List 4A and 4B tariffs or the tariff increase to 30% from List 3 items.

We continue to expect our fiscal 2019 financial results to be in line with our most recent guidance, excluding incremental tariffs.

I'll now turn the call over to Robyn to review our quarterly financials and our outlook for the year.

Robyn D'Elia -- Chief Financial Officer & Treasurer

Thank you, Mary. On a GAAP basis, we reported a net loss per diluted share of $1.12 for the second quarter of fiscal 2019. This loss includes charges related to the first wave of transformation initiatives, including severance costs of approximately $23 million associated with our corporate workforce reduction and our decision to outsource certain transaction processing functions within the business and an inventory writedown of approximately $194 million associated with our plans to aggressively reduce up to $1 billion of inventory at retail over the next 18 months.

In addition, we had a non-cash charge of approximately $28 million for the impairment of certain store level assets. Excluding these charges, which aggregate to $1.46, our net earnings per diluted share was $0.34.

My remarks today on non-GAAP results exclude the impact of these transformation-related expenses and other charges to better represent the year-over-year performance of the business during the quarter.

Turning now to a review of our second quarter sales results. Our net sales in the quarter were approximately $2.7 billion, a decrease of approximately 7.3% from the second quarter of last year. Comp sales for the quarter decreased approximately 6.7% and reflected a decrease in the number of transactions in stores, partially offset by an increase in the average transaction amount. On a directional basis, comp sales from our stores declined in the high single digit percentage range, while comp sales from our customer-facing digital channels declined slightly.

On an adjusted basis, gross margin for the quarter was approximately 33.9% of net sales as compared to approximately 33.7% in the second quarter of last year. This 20-basis point improvement reflects the progress of our margin enhancement initiatives. In order of magnitude, this improvement as a percentage of net sales was primarily due to decreases in coupon expense and net direct to customer shipping expense, partially offset by a decrease in merchandise margin. The decrease in coupon expense was the result of a lower number of redemptions, partially offset by a higher average coupon amount.

In addition, as we have previously described, our Beyond Plus membership program has impacted and will continue to unfavorably impact our gross margin as the rate of member enrollment increases. We estimate the impact from Beyond Plus on our gross margin was approximately 50 basis points for the second quarter this year, compared to 40 basis points for the second quarter last year. As a reminder, the consumer-focused benefits of this program, including 20% off entire purchase and free shipping are realized immediately upon sale, while the membership fee is currently amortized over the one-year membership period.

We currently have approximately 1.3 million Beyond Plus members representing a modest sequential increase over the membership level at the end of the first quarter. We continue to evaluate the learnings from this program. And as Mary referenced earlier, the data shows that our Beyond Plus members shop two times more frequently than our average non-member customers and spend on average four times as much. The customer insights we have gained also help us direct product offers and content to these loyal customers through marketing personalization. As Mary also mentioned, we are planning some Beyond Plus specific promotional offers around the holiday to increase acquisition and improve member engagement.

Adjusted SG&A expense for the quarter was approximately $858 million or 31.6% of net sales as compared to approximately $905 million or 30.8% of net sales in the prior-year period. The year-over-year $47 million decrease reflects some early benefits from our cost structure optimization efforts, including lower payroll and payroll related and occupancy expenses.

As a percentage of net sales, the 80-basis point increase was primarily due to the pronounced effect of our fixed costs, such as technology-related expenses, including depreciation and occupancy on a lower sales base.

On an adjusted basis, our effective tax rate was approximately 9% and includes approximately $5.3 million of net after-tax benefits or about $0.04 per diluted share due to distinct events occurring in the quarter. As a result of the lower pre-tax earnings base in the second quarter, these net after-tax benefits result in a greater beneficial impact on the effective tax rate.

In the prior-year period, our adjusted effective tax rate was approximately 24.4% and included net after tax cost of approximately $1.8 million due to distinct events occurring in that quarter.

Now looking through our balance sheet. We ended the quarter with approximately $1 billion in cash and investments. Retail inventories at the end of the quarter were approximately $2.3 billion at cost, which represents a reduction of approximately $492 million or approximately 18% at cost, compared to the end of the prior-year period, including an inventory writedown of approximately $194 million during the fiscal 2019 second quarter.

Capital expenditures for the first six months were approximately $125 million, with about 50% related to technology projects, primarily including investments in our digital capabilities, analytics and logistics. The remaining CapEx was primarily related to new store openings and maintenance of existing stores and the remodeling of 75 stores, the bulk of which were next-generation lab stores. During the second quarter, we closed two Bed Bath & Beyond stores.

Share repurchases under our current $2.5 billion share repurchase program were approximately $16 million in the quarter, representing about 1.4 million shares. We plan to continue our share repurchase program throughout the remainder of the fiscal year subject to business and market conditions.

Our capital allocation strategy is actively under review as the Board and management team evaluate future capital investments required to progress the Company's ongoing business transformation, as well as potential use of the funds generated by any potential asset sales for further monetization of our balance sheet, including sale leaseback transactions.

And finally, our Board of Directors today declared a quarterly dividend of $0.17 per share to be paid on January 14, 2020, to shareholders of record as of December 13, 2019.

I'll wrap up my remarks on the second quarter by acknowledging that while we have more work to do, we are making good progress toward achieving our objectives.

Before turning to guidance, I'd like to make a few comments about tariffs. Our merchandising and pricing teams have been able to execute appropriate strategies to minimize the unfavorable impacts from tariffs relating to items on lists 1 through 3 at the current 25% rate. These strategies primarily include negotiating with our vendor partners and adjusting retail prices when appropriate. Keep in mind that Bed Bath & Beyond currently sources the vast majority of its products domestically and therefore we are not directly subject to these tariff changes, but only to the degree that we cannot mitigate any potential pass-through from our vendor partners.

An estimation of the lists 1 through 3 tariff impact was contemplated in our most recent financial guidance. Subsequently, we have been evaluating the potential incremental impact from the move to 30% on List 3 and the proposed List 4A and 4B tariff, which affect a significantly larger part of our assortment than the prior tariffs. As you know, List 4A went into effect on September 1st, and List 4B is expected to be implemented on December 15th. So far, we have not seen any material impact from the implementation of List 4 tariffs.

At this time, we have not included an estimate for an incremental tariff impact in our fiscal 2019 guidance. However, we believe the incremental potential impact could be up to $0.10, and that is assuming we can continue to execute some mitigation strategies. We are monitoring the situation closely and working with our vendor partners to limit the impact to our business and customers.

Now turning to guidance. Fiscal 2019 full-year results continue to be in line with our most recent guidance and assumes our current investment plans to drive top line performance in the back half, as well as our comp sales trends year-to-date and exclude goodwill and other impairments, severance costs, shareholder activity costs, the inventory writedown and any incremental impact from tariff.

Fiscal 2019 full-year net sales are estimated to be around $11.4 billion and net earnings per diluted share are estimated to be between $2.08 and $2.13.

As we look to the back half of the year, I would like to point out a few items. First, our third quarter ends on November 30th, the Saturday of Thanksgiving weekend. Therefore, our third quarter results this year will reflect only the Thanksgiving holiday weekend, including Black Friday, while our fiscal third quarter results last year included Thanksgiving, Black Friday, Cyber Monday and that whole week.

Second, as Mary noted, we are adding marketing and promotional spend for Bed Bath & Beyond in the back half, with majority of this expense occurring late in the third quarter with some of the anticipated benefits of sales occurring in the fourth quarter.

Lastly, our third quarter last year benefited from a $28 million gain on the sale of the building which represented about $0.16.

Taking this all into consideration, we expect fiscal 2019 third quarter adjusted net earnings per diluted share to be relatively flat versus the prior-year period which on an adjusted basis was about $0.02 per diluted share. The remainder of our full-year net earnings per diluted share is expected to be earned in the fourth quarter.

Finally, capital expenditures for the fiscal 2019 continue to be planned at approximately $350 million to $375 million, with about 50% related to technology projects, as well as the spend associated with our rapid store refresh program and investments in warehouses for e-commerce distribution and personalized products.

I will now turn the call back over to Mary.

Mary Winston -- Interim Chief Executive Officer

Thank you, Robyn. During our call, we have provided a lot of transparency around the things that we are doing to advance our strategic priorities, including plans to aggressively reduce up to $1 billion of inventory at retail over the next 18 months, including the removal of aged inventory from our stores before the 2019 holiday season to refresh our assortment and support top line performance; the initiation of a rapid store refresh of nearly 160 of our highest volume and most profitable Bed Bath & Beyond stores to improve the in-store shopping experience; the completion of our initial fleet optimization analysis for Bed Bath & Beyond and the decision to close 40 Bed Bath & Beyond stores and 20 other concept stores this year; our decision to close down one of our least productive e-commerce businesses, and finally, the ongoing evaluation of our business concepts and our real estate holdings.

In summary, as we continue to work toward executing on our business transformation, we remain confident in the strength of our Company and the future of Bed Bath & Beyond. Our teams are moving rapidly to address many near-term opportunities to stabilize the business and lay the foundation for sustainable growth. I want to thank all of our associates for their ongoing dedication and support of the transformation efforts under way.

Before turning to Q&A, let me say a few words about our CEO search. As we said in the recent shareholder letter, substantial progress has been made toward identifying the Company's next permanent CEO. We remain on track and still expect to make an announcement soon.

Now we can open the call for questions.

Questions and Answers:

Operator

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And our first question comes from Seth Basham from Wedbush. Your line is open.

Seth Basham -- Wedbush -- Analyst

Thanks a lot, and good afternoon. My question is around the outlook for holidays. You guys are shipping a bunch of marketing dollars and promotional dollars, the holiday period. Can you first quantify how much you're shipping and how much you're adding? And secondly, what kind of improvement you expect in those sales as well as margins over this period?

Robyn D'Elia -- Chief Financial Officer & Treasurer

Sure. Thanks, Seth. So as you -- as you've mentioned, we are shifting dollars into the back half for promotional and marketing support. Those dollars are being generated from ongoing transformation initiatives as well as the benefits that Mary mentioned in our cost structure savings initiatives, and those dollars that we're planning to invest will be spent on promotional events during Thanksgiving week through Cyber Monday, as well as driving enrollment in Beyond Plus and investing in new communication channels such as digital video and radio. In terms of quantifying it, we've built it all into the model and those -- the reinvestment of those dollars is allowing us to maintain our top line at around $11.4 billion as well as maintain our bottom line within the previously guided range.

Seth Basham -- Wedbush -- Analyst

That's helpful. And then I have a follow-up as relates to your inventory. You guys are quickly reducing inventory to get to your goal of $1 billion reduction at retail. Should we expect any more markdowns or such a writedowns to reach that goal over the next 18 months?

Mary Winston -- Interim Chief Executive Officer

This is Mary. No, I think we believe that where we are with the writedown we're taking this quarter covers the full $1 billion of inventory. So now our work will just be to accelerate the process of actually getting it out of our stores.

Operator

And our next question comes from Brad Thomas from KeyBanc Capital Markets.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Yes, hi, good afternoon. Thanks for taking my question. First, I wanted to ask about some of the strategic review as you analyze some of the different business units and some of the assets that you may be able to sell like some of the real estate. I guess, is there any ability to quantify for us the kinds of bids or interest level that may be out there and any more ability to talk about timing with which you might be able to address some of this?

Mary Winston -- Interim Chief Executive Officer

Hi, this is Mary. Thanks for the question, Brad. I would say, at this point, no, we're not in a position to put specific numbers to the businesses and all that. I will say, we are very actively engaged in the process, so, and we've had a number of inbound interests on some of our portfolio companies. And so we're taking a look at those. We're evaluating that. We're going through the normal process that you would go through to do that. And so when we have something to report that actually turns into a potential transaction, we'll certainly come forward with that. But at this point, not knowing how many things may go forward and all of that, it's hard for us to put any number on it.

And in terms of the other assets, the real estate, I think, we talked about that from a square footage standpoint. It's a combination of retail and non-retail real estate. So we're looking at some inbounds there as well. And so we'll have a sense of that, I would say in the next quarter or two as we move through that process.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

That's helpful, Mary. And if I could ask a follow-up around fundamentals, you're clearly making some progress on gross margin on expenses. But I guess as I look at same-store sales, a difficult first half of the year, can you talk a little about how you're thinking about same-store sales progressing through the balance of the year and what you've been seeing so far in 3Q?

Robyn D'Elia -- Chief Financial Officer & Treasurer

Yes.

Mary Winston -- Interim Chief Executive Officer

I'll go first and then I'll let Robyn go out. Just make a couple of quick comments. I think you're right in your comments about what the trends you're currently seeing, it has been a rough first half of the year. And as we've said early on, we expect sales to start to stabilize and to see better trends in the back half of the year. For the full year, we do still expect to be comping down though. And we've talked pretty extensively in the prepared remarks about all the initiatives that we have under way to help drive sales. I'll let Robyn jump in and cover some of that.

Robyn D'Elia -- Chief Financial Officer & Treasurer

So just to cover your comment or question on how we're performing third quarter to-date, we are still declining from a comp perspective, but at a lower rate than what we've experienced through the second quarter.

Operator

And our next question comes from Bobby Griffin from Raymond James.

Bobby Griffin -- Raymond James -- Analyst

Yes, good afternoon, and thank you for taking my questions. I was first hoping to dive a little bit into the gross margin aspect, can you maybe give us a little color by concept or maybe month-by-month the progress you're making in improving the margin structure? And then basically the same question on the SG&A side, too, if we can get some color around, month-over-month, how it's improved and where the bigger opportunities last are for the remainder of the year?

Robyn D'Elia -- Chief Financial Officer & Treasurer

Sure. Just to address your point on breaking out the components by concept. that has not historically been our reporting cadence to break it out at that granular level, but look, from a gross margin perspective, we are pleased that this quarter, we have favorable trends, 20 basis points improvement. That is a significant shift from what we've been experiencing from a trending perspective. And it's driven by benefits and coupons and net direct to customer shipping with some offset in merchandise margin. But that merchandise margin, which I'm talking about on a consolidated basis, the trend in that has been improving due to some of the ongoing initiatives that we have in place. So for some select products, we've actually moved to direct importing and gained efficiencies from our own supply chain, which has benefited us. We've also been actively engaging in vendor negotiations around our merchandise. And then we've also continued with some strategic pricing initiatives which has helped benefit our margin, and we have more to come.

Bobby Griffin -- Raymond James -- Analyst

I guess I was maybe looking on the 20 basis points for the quarter. Did it exit the quarter at a stronger rate than that where we can see that it's improving at a faster rate and we're on pace for a greater than 20 exiting the quarter? I guess just on a consolidated basis is what I was asking.

Robyn D'Elia -- Chief Financial Officer & Treasurer

Yes, I guess the way I'm doing is quarter-to-quarter, I mean, last quarter we were down 50 basis points, it was unfavorable and now we've trended positively this quarter by 20. So we are moving in a positive momentum.

Bobby Griffin -- Raymond James -- Analyst

Okay. And then on the store closures, can you just tell us about the timing of the 60 all weighted in fourth quarter? How should we spread them out in our model?

Robyn D'Elia -- Chief Financial Officer & Treasurer

They are weighted toward the fourth quarter, which is the typical timing of when we negotiate our leases.

Operator

And our next question comes from Carla Casella from JP Morgan. Your line is open.

Sarah Clark -- J.P. Morgan -- Analyst

Hi, this is Sarah Clark on for Carla Casella. I was just wondering if you would consider buying back bonds in the market. And if you have any update on target leverage figure?

Mary Winston -- Interim Chief Executive Officer

We don't have an update at this point on a target leverage figure. We are actively discussing with the Board, our overall capital allocation approach. And so we will be sorting that out relatively soon. As you know, we have a number of moving pieces. I think right now, our capital allocation priorities continue to be what they have been given the amount of transformation effort that we have under way, certainly investing back in the business to drive those initiatives and get sales moving in the right direction and improve the business performance is a top priority. But we're also looking at the other ways to return funds to shareholders. So, continuing our dividend program, the share buybacks that Robyn spoke about and buying back our debt is on the list as well. So, will -- that will be a consideration as well.

Operator

And the next question comes from Simeon Gutman from Morgan Stanley. Your line is open.

Simeon Gutman -- Morgan Stanley -- Analyst

Hi, good afternoon. My first question back on some of the inventory and the destocking. I know you said an 18-month process. Can you tell us maybe what innings is it in from, I guess from the store perspective and the impact that it's having at the customer shops, can you give us some sense? Are you seeing a basket size change or are you seeing conversion then go up online, if they're not finding something in the store? And then I have one follow-up on the gross margin.

Mary Winston -- Interim Chief Executive Officer

From a timing perspective, in the short term, we are planning to have about $350 million of the inventory out of the stores before holiday. We are in the early innings of starting that process and of removing the inventory from the physical store locations. As we are working through that -- as we're working through that, we're mindful not to cannibalize sales during this holiday period.

Simeon Gutman -- Morgan Stanley -- Analyst

Okay. I guess the follow-up on the gross margin, and I apologize because I wasn't on the beginning part of the call. So, you took I guess this writedown now and you're suggesting we add it back and now you're starting to clear out some of this inventory. And so can you just talk about some of the mechanics of this on the gross margin, how we should think about it?

Mary Winston -- Interim Chief Executive Officer

Sure. So for the quarter we took a charge of $194 million, as that inventory clears through, any markdowns associated with that inventory has already been taken from a P&L perspective. But we also have inventory that we've been focused on from an assortment optimization perspective included in this writedown that we'll have to work through the process over time, which will take us about 18 months or up to 18 months to clear through that merchandise and be able to present a crisper, fresher point of view from a customer perspective.

Operator

And our next question comes from Michael Lasser from UBS. Your line is open.

Atul Maheswari -- UBS -- Analyst

Good afternoon. This is Atul Maheswari on for Michael Lasser. Thanks a lot for taking our questions. So it seems like a digital growth took a step down this quarter. What drove this deceleration? What plans do you have to reaccelerate top line -- reaccelerate online sales? And then along those lines, what have you been seeing for digital growth in the back half of the year?

Mary Winston -- Interim Chief Executive Officer

Okay, why not -- this is Mary. I'll take the first part of your question about our digital business, so your observation is correct. We were slightly down on that business this quarter and I would say the biggest impact is somewhat self-inflicted. We're still suffering the ramifications of decisions that were made earlier where we were focused on profitability at the expense of sales. So for the online business, we did things like eliminate some of the SKUs online because of their level of profitability. We minimized. We put a minimum order quantity on some of the online sales. We increased our free shipping threshold. So, collectively, all those things have put pressure on that business. What we're trying to do about that is we're reversing many of those decisions. Again, our top priority now is to focus on sales, manage the cost line through all the other initiatives that we've talked about, and so we are reinvesting in our online, we're investing in improvements in our search and recommendation capabilities on the website. We're streamlining the checkout process. We're about to be rolling out our BOPIS, Buy online, Pickup In Store. So we're doing a number of things to change the tide and change the direction of that and move that -- start to move that in the right direction.

Robyn D'Elia -- Chief Financial Officer & Treasurer

And what was your second question?

Atul Maheswari -- UBS -- Analyst

Okay. Great. Thank you. So, basically, what have you baked in for digital growth in the back half of the year?

Robyn D'Elia -- Chief Financial Officer & Treasurer

So in terms of the back half to get to the range of around $11.4 billion, it does imply that there's less negative, I guess less negative comps from a back half perspective. But we don't break that out by channel explicitly.

Operator

And the next question comes from Jonathan Matuszewski from Jefferies. Your line is open.

Jonathan Matuszewski -- Jefferies -- Analyst

Yes. Thanks for taking my questions. First one, just to follow up on e-comm, you alluded to closing down one of your least productive digital businesses. So, maybe just give us some more color there in terms of timing, rationale and impact to sales and profitability. And then I had just a quick follow-up.

Mary Winston -- Interim Chief Executive Officer

Okay. On that particular business, the timing is the end of this month. It is one of our smallest businesses. So the impact on the financial performance overall is immaterial. It's a business that specializes in selling specialized and unique fashion and home products. And again, it's one of our smallest e-commerce businesses.

Jonathan Matuszewski -- Jefferies -- Analyst

Okay, great. And then just a follow-up question on 4Q. So, based on the revised annual guide, looks like we'd be looking for around three quarters of annual earnings coming in 4Q and that's a bit above kind of what's been earned in recent years. So could you just confirm, is it the new promotional framework during the holiday season that you think is going to be driving the earnings growth? And then just clarify whether that implied 4Q guide includes things like potential sale leaseback proceeds? Thank you.

Robyn D'Elia -- Chief Financial Officer & Treasurer

So we do have a significant amount of earnings included in the fourth quarter, one due to the timing shift of the holiday period. So, the third quarter this year ends on the Saturday right after Thanksgiving, whereas last year it had included Thanksgiving, Black Friday and the full week following that. So that's one item that the fourth quarter now picks up that initial week following Thanksgiving. Additionally, with the incremental marketing and promotional spend that we're adding for the year, if you may recall that from the accounting rules, once you send an event out, you immediately have to expense that event in full even though the benefits of that event may spread over a period of time. And so it will impact third quarter more heavily and benefit fourth quarter because they'll have some sale spill over into that period.

Operator

And the next --

Robyn D'Elia -- Chief Financial Officer & Treasurer

And as far as -- sorry, as far as considering proceeds from sale leasebacks, that is not contemplated in the model.

Operator

And our next question comes from Oliver Wintermantel from Evercore ISI. Your line is open.

Oliver Wintermantel -- Evercore ISI -- Analyst

Yes. Thanks very much. I just wanted to clarify, when you said that the inventory sell-through, that should not have a gross margin impact throughout the rest of the year. So I just want to clarify that. And then my other question on gross margins is like the shipping costs seem to be a benefit in the second quarter. So was that driven by lower sales, and that's why shipping costs were better? And then now looking into the back end of the year, if you expect that your sales are going to improve throughout the year and the Beyond Plus membership promotions that you have during the holiday season, should we expect gross margins to be down because of shipping costs or should that have a negative impact? Thank you.

Mary Winston -- Interim Chief Executive Officer

So that was a multi-part question. I'm going to start with the first one, and I may have to ask you to repeat a couple of your sub-bullet points. So, on the inventory, you're asking about the margin impact as we take out the merchandise. Again, we're mindful not to cannibalize sales during the holiday period and we can, using a third-party liquidator, remove that merchandise from our stores but not have it out in the market competing against ourselves or be liquidating it in a heavy fashion during this time frame. And then I think you asked about shipping expense. Yes, we've seen shipping as a favorable driver as a percent of sales benefiting gross margin this quarter. And I'm sorry if you could repeat your --

Oliver Wintermantel -- Evercore ISI -- Analyst

Yes, the question was just with your improving sales in the back end of the year and Beyond Plus membership promotions. Should we expect then gross margins to be negatively impacted because of shipping costs in the second half?

Mary Winston -- Interim Chief Executive Officer

Assuming a significant ramp up in Beyond Plus, yes, we've been calling out how that's impacted margin because they do have free shipping associated with increased enrollment, but they also spend more frequently and spend heavier when they're buying from us than the average customer.

Oliver Wintermantel -- Evercore ISI -- Analyst

Thanks very much.

Mary Winston -- Interim Chief Executive Officer

You're welcome.

Operator

And our next question comes from Curtis Nagle from the Bank of America. Your line is open.

Curtis Nagle -- Bank of America -- Analyst

Great. Thanks very much for taking my question. Maybe just a little bit more detail on the progress of the CEO search process. How many candidates are down to? What does soon mean? And are you still within "weeks" as you guys have laid out in your shareholder letter?

Mary Winston -- Interim Chief Executive Officer

So to answer the last part of your question, first, yes, we are definitely down to the final weeks, I'm not going to get into the details of the number of candidates. But we have been very actively focused on the search. We've got great search firm working with us. We've had great interest in the position. So we've had quite a number of strong candidates. As I think we had mentioned before, we're looking for somebody with retail transformation experience, innovation, online and digital experience, marketing experience. So we're looking for all of the things that we would need to really continue the transformation of the business and we feel good about where we are in the process. And so we expect to be naming a permanent CEO soon.

Curtis Nagle -- Bank of America -- Analyst

Okay. Fair enough. And then just, in terms of 3Q, thinking about the timing and the calendar shift and when holidays hit, is that going to impact how you guys report comps or is that going to be adjusted for?

Mary Winston -- Interim Chief Executive Officer

Our comps will be based on the same period in the prior year, so we wouldn't adjust for it.

Curtis Nagle -- Bank of America -- Analyst

Okay. Understood. Thank you.

Operator

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

Zach Fadem -- Wells Fargo -- Analyst

Hi. Thanks for fitting me in. Again, on the gross margin, you mentioned the ramp in Beyond Plus. But I believe you said the coupon had a less negative impact from fewer redemptions. So curious if you could speak to that in a little more detail, whether the lower coupon usage was self-inflicted and how we should think about the coupon going forward, as its impact to sales and gross margin?

Mary Winston -- Interim Chief Executive Officer

Sure, so coupon -- the decrease in the redemptions of coupons was, I would say, not self-inflicted. We had as many coupons distributed this quarter -- this year versus last year. And we will continue to issue coupons to customers who utilize them and who want them when they're shopping with us.

Zach Fadem -- Wells Fargo -- Analyst

Okay. Understood. And then on the store manager incentives, maybe you could talk a little bit more about the metrics you'll be tracking and rewarding and when you were evaluating whether to move forward with this plan, curious to hear whether you piloted the program in any of your stores and maybe you could talk about your findings there and any sales or margin lift per store that we should anticipate?

Mary Winston -- Interim Chief Executive Officer

So we don't have those details quite handy, and no, we did not pilot it separately, and this is basically a one-time program that's targeted toward driving sales over the holiday period. This is a really critical period for us. We're doing a lot of things to bring people into the stores. And so we also want to incentivize our sales managers to be thinking about selling and driving sales as they're in the stores. And it's also good for morale in a time of change in the stores and sales comping down up to this point. So it will give them the opportunity to participate in driving incremental sales.

Operator

And our last question will come from Danielle Hopkins from William Blair. Your line is open.

Danielle Hopkins -- William Blair -- Analyst

Hi, good afternoon. Just a quick question about general fundamentals and then a quick -- just a couple of quick housekeeping questions. So, you talked about efforts to drive more sales in the back half into the holidays. Can you just talk about what sort of impact you expect on profit margins or profitability from that and how that could kind of build over time, obviously, driving top line is important, but in terms of the trade-off between sales and margins, and then like I said, I have a couple of quick housekeeping questions after that.

Mary Winston -- Interim Chief Executive Officer

So, let me just start and then I'm going to turn it over to Robyn to maybe talk at a little bit more detailed level. But even as we said in the fourth quarter, we are focused on drive -- in the first quarter call, we're focused on driving top line, but we're focused on maintaining profitability as well. So we believe given the number of levers we have to pull and the number of opportunities we have in the business, that we can drive sales and we may be on promotion, of course, through the holiday season and be doing more advertising. But we think we have other levers to pull to control the cost structure, to maintain profitability.

Robyn D'Elia -- Chief Financial Officer & Treasurer

And considering that and the sales stabilization initiatives that we have is what led us to maintaining our guidance at the sales around $11.4 billion and then EPS between $2.08 and $2.13.

Danielle Hopkins -- William Blair -- Analyst

Okay. Thanks. And then I guess just a couple of things, a couple adjustments you guys have made, I guess in this release and then a prior quarter or two. You took a -- what looks like a sizable reduction in your sales return liability in the last couple of quarters relative to last year, like, more than 200 basis points by your math as a percentage of sales. I was just wondering what would have driven that large reduction? And then my other question is just on the size of the inventory adjustment this quarter in terms of like adding it all back to adjusted earnings.

Robyn D'Elia -- Chief Financial Officer & Treasurer

So from a sales return perspective, that reserve is definitely impacted by the seasonality of our business. And so, if sales are coming down, depending on the time of the year that we're in, we're certainly going to see reductions in that reserve. In addition, we made some changes to our returns policy, which over time we would assume that the sales returns would be fewer than what we've had experienced in the past. However, we don't know if we've compromised sales by some of those changes initially from a customer-facing perspective. But again, over time, the sales return policy would impact it, if you have a specific quarter detailed dollars, we could certainly have a follow-up call to walk through the mechanics of what you're seeing.

Danielle Hopkins -- William Blair -- Analyst

Okay.

Robyn D'Elia -- Chief Financial Officer & Treasurer

And, I'm sorry, you had a second question?

Danielle Hopkins -- William Blair -- Analyst

Yes, just about the inventory adjustment. I mean, I understand conceptually, but it kind of seems like, this is -- the inventory presumably was either in hindsight, you ever paid for it or market conditions or whatever kind of competitive conditions changed. Just wondering why it would be -- why you guys would add back kind of that full charge within this quarter as opposed to just part of it or apply it against historical earnings over the period where it would have lost value?

Mary Winston -- Interim Chief Executive Officer

Well, this inventory writedown is tied to our strategic initiatives. It's flagging inventory that we see as aged inventory or duplicative fuse in our assortment. So we've been actively working on identifying nodes to put it in use and wanting to move them out of our assortment again so that we can present a clean -- a clearer point of view from an inventory and merchandising perspective to our customers. So we view this as tied to transformation.

Operator

And this concludes the question-and-answer session. I'll now turn the call back over to Janet Barth for final remarks.

Janet M. Barth -- Vice President of Investor Relations

Thank you. And thank you all for participating on our call today. If we didn't get your questions or if you have additional questions, please feel free to contact me for a follow-up call, email, call me, be happy to get back to you. Otherwise, have a good night.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Janet M. Barth -- Vice President of Investor Relations

Mary Winston -- Interim Chief Executive Officer

Robyn D'Elia -- Chief Financial Officer & Treasurer

Seth Basham -- Wedbush -- Analyst

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Bobby Griffin -- Raymond James -- Analyst

Sarah Clark -- J.P. Morgan -- Analyst

Simeon Gutman -- Morgan Stanley -- Analyst

Atul Maheswari -- UBS -- Analyst

Jonathan Matuszewski -- Jefferies -- Analyst

Oliver Wintermantel -- Evercore ISI -- Analyst

Curtis Nagle -- Bank of America -- Analyst

Zach Fadem -- Wells Fargo -- Analyst

Danielle Hopkins -- William Blair -- Analyst

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