Welcome to Bed Bath & Beyond’s Fiscal 2018 Third Quarter Earnings Call. [Operator instructions] Today’s conference call is being recorded. A rebroadcast of the conference call will be available beginning on Wednesday, January 9, 2019 at 8 p.m. Eastern Time through 8 p.m. Eastern Time on Friday, January 11, 2019. To access the rebroadcast, you may dial 888-843-7419 with a passcode ID of 47947100. At this time, I would like to turn the conference call over to Janet Barth, Vice President, Investor Relations. Please go ahead.

Thank you, Adrienne and good afternoon everyone. Before we begin, I want to remind you that our fiscal 2018 third 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 a Form 8-K we filed just ahead of this call. Feel free to access these materials now while I continue with our introduction. Joining me on our call today are Steven Temares, Bed Bath & Beyond’s Chief Executive Officer and Member of the Board of Directors; Robyn D’Elia, our Chief Financial Officer and Treasurer; Gene Castagna, President and Chief Operating Officer; and Sue Lattmann, our Chief Administrative Officer. 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 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. The company undertakes no obligation to update or revise any forward-looking statements. Here are some financial highlights. Our net sales increased approximately 2.6% for the quarter and comparable sales declined approximately 1.8% with strong sales growth in our customer-facing digital channels and a mid-single-digit percentage decline in sales from our stores. Our net earnings per diluted share in the third quarter were $0.18 in line with our model. Our retail inventories ended at about $2.9 billion at the end of the third quarter, down about 6% from the end of the prior year period and this contributed to our strong cash and investments balance of approximately $1 billion, which is nearly double the amount of cash and investments we had at the end of our fiscal 2017 third quarter. We have updated our fiscal 2018 modeling assumptions and currently estimate comparable sales for the year to decrease about 1% and continue to model net earnings per diluted share for fiscal 2018 to be about $2. We are ahead of plan with respect to our long-term financial goals to moderate the declines in our operating profit and net earnings per diluted share this year and next and grow net earnings per diluted share by 2020. And based upon our preliminary assumptions, we now believe that our fiscal 2019 net earnings per diluted share will be about the same as this year. In addition, our Board of Directors today declared a quarterly dividend of $0.16 per share payable on April 16, 2019 to shareholders of record at the close of business on March 15, 2019. During our call today, Steven will give an update on the company and a few of our strategic initiatives, then Robyn will review our quarterly financial results, share our updated modeling assumptions for fiscal 2018, and then provide some high level directional information for fiscal 2019. We will then open up the call for questions. I will now turn the call over to Steven.

Thank you, Janet. Let me start by saying that we are pleased with the progress we are making in transforming our company and believe we are currently ahead of plan. This reflects some of the adjustments we have been making as we pursue our long-term strategic goals. As we discussed during our last call in September, we have been managing our business with a stronger bias towards prioritizing profitability above sales growth to put us in a better position to reestablish earnings growth. Through a comprehensive review of our assortment, the early learnings coming from our initiatives as well as the investments we have been making in new technology tools and systems, we are able to make better decisions and pull different levers to drive more profitable results. We are using these insights to support various business decisions to ensure that they are aligned with our mission of being the expert for the home and heartfelt life events and we can execute in a way that is profitable and scalable. While some of these decisions, such as eliminating less profitable SKUs from our assortment, making adjustments to our free shipping thresholds, modifying business rules for beyond store and web transactions, and modifying our pricing algorithms may unfavorably impact our sales in the near term, we believe these sound business decisions will lead to a stronger company and improved profitability over time. Turning now to an update on a few of our strategic initiatives. For those that have the slide presentation in front of you, I will start with FEO, which stands for Front-End Optimization. FEO involves the re-platforming of our digital commerce platforms for Bed Bath & Beyond and buybuy BABY for both the United States and Canada. This new service-based architecture has a responsive design that enables us to change and deploy new sections or features within and across all of our web channels more quickly and cost effectively. For our customers, FEO will create a better shopping experience with improved page load performance and a cleaner, more contemporary website design. We were anxious and excited to roll out FEO before the holiday, although knowing that not all of the existing website functionality would be available at launch. We believe that the valuable learnings we would gain in terms of customer experience and site performance during the peak sales period would be more beneficial in the long run versus the short-term risk to sales due to some temporary loss of relevancy in our search result rankings and any revisions required within the newly created platform. We are now building the functionality with additional features and capabilities, and as we go forward, we will continue to optimize the platform and integrate more content and product imagery to display our expertise. Next, let’s turn to our next generation store initiative. As we have previously said, we have identified as many as 40 or so Bed Bath & Beyond stores that will become our working labs in support of our next generation store initiatives. In these lab stores, we are testing new and different assortments and visual merchandising and re-imagining the in-store experience to be able to further reinforce our position as the expert for the home and heartfelt life events. We are incorporating the learnings from our assortment strategy initiatives and other ongoing tests to assess where we can selectively and efficiently roll out these new experiences to a larger number of stores. Just to note, these lab stores will each present differently with different tests underway at any given time. In the 18 lab stores we have initiated so far, we have been augmenting our assortments with seasonal and treasure hunt product as well as commodity products consisting of health and beauty care and food. We have also been testing different visual merchandising presentations to create a more inspirational environment while at the same time reducing inventory to optimize the floor space and to create a cleaner and more open appearance. Again, early learnings and successes can then be rolled out to the broader chain as part of our ordinary course of business. The next set of experiences we will be testing feature even more evolved models for visual presentations, merchandising and store operations, including creating more open sight lines, further integrating our assortment, and focusing associate support across merchandise areas to better represent our key destinational categories, such as cooking and entertaining, bedding and bath, home décor, and cleaning and organization. We are tracking the progress of these evolving experiences with several metrics, including customer behavior data to new, existing, and reactivated customers, space productivity, transactions, sales and profitability and inventory. For the lab stores that have been opened for at least 4 weeks, the experiences created are contributing to sales and transactions, which year-to-date through the end of the third quarter are performing at a mid-single percentage rate better than the rest of our Bed Bath & Beyond stores. For the same period, these stores are achieving inventory reductions in excess of 10% better than the inventory reductions being achieved by the rest of the chain. We are pleased with the early learnings from these lab stores and we continue to iterate based upon them. I will finish my update with decorative furnishings, which is also being expressed in our next-gen lab store initiative through a treasure hunt assortment of cash and carry items as well as in more than 70 other Bed Bath & Beyond stores in the form of furniture vignettes, with plans to expand to approximately 150 stores during 2019. Overall sales of decorative furnishings within Bed Bath & Beyond and buybuy BABY in the United States and Canada have grown in the mid-teen percentage range fiscal year-to-date. As with our overall sales, sales of our decorative furnishings in the third quarter were tempered by actions taken to drive improvement in the long-term margin structure of our decorative furnishings category. In this regard, we have been eliminating less profitable SKUs and poor performing vendors from our assortment. Our strategy to decorative furnishings is to continue shifting the category sales mix to more proprietary products, such as our upcoming introduction of the Bee & Willow line, the first of six in-house decorative furnishing brands we plan to introduce for Bed Bath & Beyond in 2019 and 2020. The Bee & Willow home collection includes a mix of modern farmhouse and cottage furnishings, including furniture, lighting, rugs, wall decor and seasonal accessories and more. This exclusive brand will be featured in all our Bed Bath & Beyond stores and online and we will have upwards of approximately 150 stores the in-roll of furniture vignettes. While some elements of the collection are starting to rollout now, the full assortment will be available by March 2019. Our new in-house brands will each have an independent esthetic that built upon existing and established private label brands or as a new brand launch within our private label portfolio. With these new introductions, we will be able to enhance our product differentiation and margin profile within the category as well as offer a range of distinctive styles, inclusive of farmhouse, traditional, modern, global and eclectic. As we transform our company, we have been engaged in significant change to permit, undertake and execute our reinvention across people, processes and systems. The investments we have made and continue to make are designed to position our company for long-term success. We have established the foundation and the framework and are executing initiatives that we believe are allowing us to stabilize our business and grow earnings again. As we are moving forward in 2019, we expect these initiatives to gain even more momentum and accelerate. Looking past 2019, our transformation will become even more visible to our customers. Our intent is to continue to put resources behind deepening our identity as a data-driven analytics and technology company. We will better represent whole home and heartfelt life events and better inspire our customers through a more robust decorative furnishings offering and more proprietary and meaningfully differentiated product. We will further integrate our life stage businesses. We will evolve our stores so that they will have cleaner sightlines, less clutter and are better cross merchandised and our associates will be better enabled to support our customers’ shopping needs. We will continue to enhance our digital experience. We will better engage with our customers through both more relatable national branding and a greater emphasis on marketing personalization. And overall, we expect to operate fewer stores while continuing to drive profitable digital growth, all supported by an efficient corporate structure. In all of this, we remain focused on our financial goals of moderating the declines in our operating profit and net earnings per diluted share and reestablishing growth in both. As Janet said earlier, we are ahead of plan. And based on our preliminary assumptions, we now believe that our fiscal 2019 net earnings per diluted share will be about the same as this year. I will now turn the call over to Robyn to review our quarterly results in more detail, sharing our modeling assumptions for fiscal 2018 and then provide some high level directional information for 2019. Robyn D’Elia: Thank you, Steven. As I begin, I would like to remind you that our fiscal 2017 was a 53-week year, causing our fiscal 2018 to start 1 calendar week later than fiscal 2017. However, our comp sales metric compared to the same year-over-year calendar weeks. For your reference, specific date ranges related to our comp sales metric are provided on the slide entitled Q3 2018 P&L summary. For those of you who are following along with the slides, I will now review our third quarter results. Overall, while our net earnings per diluted share were in line with our model for the quarter, as Steve described earlier, our third quarter net sales growth was somewhat moderated by actions taken during the quarter in support of our stronger bias towards driving profitability improvement over near-term sales growth. For example, during the quarter in our Bed Bath & Beyond digital channels, we raised our free shipping thresholds $39 from $29 and during the extended Thanksgiving weekend, we offered a free shipping threshold of $19 compared to having no minimum purchase during the same period last year. We issued fewer marketing e-mails and spent less on paid search advertising for Bed Bath & Beyond compared to the prior year. We eliminated less profitable SKUs from our assortment primarily within our decorative furnishings category and we knew that the pre-holiday rollout of FEO would be a risk to sales due to some temporary loss of relevancy in our search result rankings. Net sales in the quarter were approximately $3 billion, an increase of approximately 2.6% compared to the third quarter of last year primarily due to the calendar shift of the post Thanksgiving week into the third quarter and out of the fourth quarter partially offset by actions taken during the quarter in support of our stronger bias towards driving profitability improvement that I just mentioned. Comp sales for the quarter declined approximately 1.8% 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 growth from our customer-facing digital channels continued to be strong in the quarter while comp sales from our stores declined in the mid single-digit percentage range. Gross margin in the quarter was approximately 33.1% of net sales as compared to approximately 35.2% in the third quarter of last year. In order of magnitude, this decrease as a percentage of net sales was primarily due to a decrease in merchandise margin and an increase in coupon expense. The increase in coupon expense was the result of an increase in the average coupon amount partially offset by a decrease in the number of redemptions. As we have previously described during these calls, our BEYOND+ membership program had and will continue to have an impact on our gross margin as the rate of member enrollment increases. We estimate the impact from BEYOND+ on our gross margin with approximately 30 basis points for the third quarter and approximately 40 basis points for the first 9 months. As a reminder, the richer benefits of this program, including 20% off entire purchase and free shipping, are realized immediately upon sale, while the $29 membership fee is currently amortized over the 1 year membership period. Notwithstanding the short-term margin impact during this period of increasing member enrollment, we continue to evaluate the learnings and remain very encouraged by the long-term potential of BEYOND+. SG&A for the quarter was approximately 31.5% of net sales as compared to approximately 31.6% in the prior year period. We had two significant items in the quarter which were previously discussed that basically offset each other. First, we had about $26 million in incremental advertising expense in this quarter resulting from the impact of the new revenue recognition standard, which for us shifted advertising expenses from the fourth quarter to the third quarter. This expense was offset by the $28 million gain on the sale of the building. As a percentage of net sales, we also had increases in technology-related expenses, including related depreciation and management consulting expenses related to some of our ongoing strategic initiatives offset by decreases in payroll and payroll-related expenses, including the benefit from the change in the value of our non-qualified deferred compensation plan investments. This benefit was fully offset in net interest expense and therefore did not impact net earnings. For the quarter and year-to-date, the decline in the operating profit margin was less than we experienced in the prior year, which was in line with our model. Net interest expense was approximately $22.7 million compared to $13.6 million in the prior year period. As I just mentioned, this increase in net interest expense was primarily the result of an unfavorable change in the value of our non-qualified deferred compensation plan investment, which was fully offset in SG&A. While we are now modeling our effective tax rate for the year to be around 24%, our effective rate for the quarter was approximately 9.2%. The rate this quarter reflects the lower federal tax rate resulting from the Tax Act and approximately $4.8 million of net after-tax benefits due to distinct events occurring in this quarter, which is only about $1.5 million higher than the net after-tax benefits occurring in the prior year period. However, on a lower pre-tax earnings base, this resulted in a greater beneficial impact on the tax rate for the quarter. Considering all of this activity, net earnings per diluted share were $0.18 for the quarter in line with our model. Now, looking to our balance sheet, we ended the quarter with approximately $1 billion in cash and investments, an increase of approximately $460 million, which is nearly double the amount of cash and investments we had at the end of the fiscal 2017 third quarter. We also ended the quarter with retail inventories of approximately $2.9 billion at cost, which represents a reduction of about 6% compared to the end of the third quarter last year. We continue to focus on inventory optimization strategies. Our retail inventories continue to be tailored to meet the stated demands of our customers and are in good position. Capital expenditures for the first 9 months of 2018 were approximately $256 million, with about two-thirds related to technology projects, including investments in our digital capabilities and the development and deployment of new systems and equipment in our stores. The remaining CapEx was primarily related to our new store openings and investments in existing stores. During the third quarter, we opened 4 new stores and closed 15 stores. Our goodwill and other intangible assets will be reviewed as required by the accounting rules during our fiscal fourth quarter to determine if the carrying value of these assets needs to be adjusted. Looking ahead, if our market capitalization remains around its current level through the fiscal fourth quarter based on the application of the accounting rules, it may indicate that the carrying value of these assets will need to be adjusted through a non-cash charge in the fiscal fourth quarter. Of course, this non-cash charge, if taken, would be disclosed as a separate item to provide visibility to our actual operating results. Also during the third quarter, share repurchases were approximately $8 million, representing a little more than 0.5 million shares. In addition, our Board of Directors today declared a quarterly dividend of $0.16 per share to be paid on April 16, 2019 to shareholders of record as of March 15, 2019. Now, let’s turn to our modeling assumptions for fiscal 2018, which have been updated to consider our results to-date including the holiday selling seasons, the continuation of trends we have been experiencing and the earlier mentioned actions being taken in support of our stronger bias towards prioritizing long-term profitability over near-term sales growth. Consolidated net sales which include 1 less week of sales compared to fiscal 2017 are modeled to decrease in the low single-digit percentage range. As a result of the impact of the fiscal calendar shift resulting from the 53rd week in the prior year, which moved the post Thanksgiving week into the third quarter and out of the fourth quarter and 1 less week in the fiscal fourth quarter, we are modeling net sales for the fourth quarter to decrease in the low double-digit percentage range, comparable sales for the year to decrease about 1%, including continued strong growth in our customer-facing digital channels, gross margin de-leverage primarily due to our continued investment in our customer value proposition, including the impact from the BEYOND+ membership program, and our overall mix and merchandise, including the ongoing shift to our digital channels; SG&A de-leverage, primarily due to the investments we are making to transform the company; operating margin de-leverage to be less than we experienced in 2017; depreciation expense to be in the range of approximately $325 million to $335 million; an estimated full year tax rate around 24%, the reduction of our year-over-year retail inventory at cost by approximately $100 million or about 4% at the end of the fiscal year; capital expenditures for the full year in the range of approximately $350 million to $400 million subject to the timing and composition of projects, the opening of approximately 20 new stores with the majority being buybuy BABY and Cost Plus World Market stores; the closing of approximately 40 stores with the majority being Bed Bath & Beyond stores; continued growth of our cash and investments even after funding our operations and capital expenditures as well as our quarterly dividends and share repurchases. As a reminder, our share repurchase program maybe influenced by several factors, including business and market conditions. All of this considered, we continue to model our annual net earnings per diluted share to be about $2. I will end my remarks with a few high level directional comments about next year. During our quarterly conference call in April, we will be in a better position to provide more detailed modeling assumptions around fiscal 2019. But for now, I want to reiterate what Steven said earlier that we remain focused on our financial goals of moderating the declines in our operating profit and net earnings per diluted share and reestablishing growth in both. Based on our progress with the transformation and our stronger bias towards prioritizing long-term profitability above near-term sales growth, we have made the following preliminary assumptions for fiscal 2019. We expect comparable sales to decrease in the low single-digit percentage range driven by the declines in store traffic that we have been experiencing. We expect our operating profit as a percentage of sales to be similar to 2018 as a result of our ongoing initiatives and the review of our overall expense structure across the organization. And this includes implementing efficiencies in store and corporate operations, executing against opportunities to improve the overall mix of our product offerings to a higher gross margin; optimizing our advertising and coupon strategies associated with some of our advertising vehicles, including direct mail, digital and social media and placing greater reliance on personalization; a comprehensive review of all store users with the assistance of a third-party; and further leveraging of our dedicated offshore technology office in India. Lastly, we expect CapEx to be similar to this year. Based on these high level assumptions, we believe we will be able to substantially reduce the year-over-year decline in our net earnings per diluted share that we have experienced during our period of heavy investment to transform our company over the past 3 years. On a preliminary basis, we believe that our fiscal 2019 net earnings per diluted share will be about the same as this year. Before we open the call to questions, I want to note that we will report our fiscal fourth quarter earnings results on Wednesday, April 10, 2019. We can now open the call to questions.

Thank you. [Operator instructions] And the first question comes from Jonathan Matuszewski from Jefferies. Please go ahead. Your line is open.

Yes, thanks for taking my questions. I guess, just first off on the next-gen lab stores, you shared what you are doing differently from a top line perspective in categories, but can you go into a little bit more about what you are doing from an expense structure perspective and how those changes can be replicated across the chain?

Sure, Jonathan. So, first of all, like we said that these are lab stores and that there is different tests going on in different stores at any one time, and some of the things we are doing as we model store payroll going forward is we are looking at the categories of the store that we’re really destinational or core and that really drives an associate – a positive associate interaction with the customer. Where is it that a customer can best be approached, be offered help, put together and answer for a customer, where if you look across fashion decisions or parts of the store where it’s more difficult to make a decision across higher price points and more complicated or complex merchandise. Those are the areas where we would shift payroll into those areas of the store versus those areas that maybe we just need to do a good job of making sure that we are in stock. The things that we are doing to make sure that we have the associates in the stores for the hours that we need them, we have different tools now to make sure that we understand those hours in any particular store that we need people and where do we need them. We could look at where we have callouts and the ability to have new technology to allow us to quickly address callouts in store to make sure that we have the proper coverage on the floor. So there’s a number of things we are doing from a payroll model that are translating and should translate over time to a better customer experience.

Great. That’s helpful. And then I guess just transitioning to kind of the upgrade of kind of the front-end site, it sounds like maybe some of the improvements have been implemented and others are on the way, but maybe when you are doing testing for some of these upgrades, what kind of traffic and conversion improvements did you see coming from efforts to improve page load speed or simplified user interface? Were these material to kind of digital trends? And I guess when can we expect the rest of the upgrades to be rolled out and maybe other concepts beyond Bed Bath’s website to get them? Thanks.

Sure. Okay, so the answer to the back half of the question is that we are looking at the end some time to – right now, we are shooting for the middle of March to recover a lot of the functionality that didn’t go into FEO so that we could get FEO out in the timeframe we wanted to get it out. We are seeing improvements in conversion. The traffic itself, there was impact and there’s measurement impacts and impacts in terms of our ability to look at Omniture data. So right now, there is a lot of things are going on that we have to better assess to understand, but we did – we knew going into it that things like traffic, relevancy could have been impacted by things that we did, that we knew that there was functionality that we had that we didn’t have day one to be able to launch. So again, we will recover that functionality by that second week of March is the plan then to continue to add-on functionality as we go forward. But again, even with this, we have seen good improvements in conversion rate.

And Jon, this is Gene. Bed Bath & Beyond and buybuy BABY are both on the new front-end infrastructure. And then we are looking over the next couple of years to see when it makes sense to add any of the other concepts to the infrastructure.

And the next question comes from Zach Fadem from Wells Fargo. Your line is open.

Hey, good afternoon. Could you talk a little more about the impact of the real estate gain in the quarter? It looks like your EPS in Q3 was closer to $0.02, excluding that one-time item. So first of all, is that right? And then second of all, for the full year outlook, just want to clarify whether the $2 in guidance also includes this one-time gain? Robyn D’Elia: Sure. So, we did have a sale of the building in the quarter and we talked about it last quarter and it did represent $0.16 on the quarter. But also, we had the acceleration of our advertising expenses from our revenue recognition accounting standard move into the third quarter as well. So, those two essentially offset each other and we have provided visibility to those items on our call last quarter. And then as far as the – sorry as far as the full year guidance, the $2, it does include the impact of this gain on the sale of the building.

So, the $2 for the full year includes a one-time gain, but what about the offsetting ad expense, is that different or is it the full $0.15? Robyn D’Elia: No, both items are included in our full-year model. The advertising expense is a change due to revenue recognition and it impacts the timing of advertising. But for the full year, it wouldn’t be an impact. So, it was more pronounced, the advertising on Q3 and Q4 where we shifted dollars into Q3, shifted advertising expense into Q3 and out of Q4, but both are in our full year model and both were in our plans as of last quarter and continue to be there this quarter.

So for the full year, the real estate gain is a one-time item while the ad expense is not, correct?

Correct.

Got it. And then second on the decision to raise your free shipping threshold on your website, curious how much comp you think you left on the table from doing this?

Yes. I mean, it’s always difficult to say how much comp you left on the table with the change, you will have certain customers perhaps not buy due to the higher threshold and perhaps other customers add something to the card to get to the threshold. But we do think anytime you raise the threshold like that it does have some impact on sales, but it’s difficult to quantify externally.

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

Good evening. Thanks a lot for taking my question. It’s on the initial 2019 guidance. It would represent obviously a substantial change in trend. So, could you give us more detail? I think some of the comments that you outlined suggests that a good portion of the improvement in the margin trajectory could have come from SG&A. So, is there really that much more cost to cut and how much is going to come from gross margin? Robyn D’Elia: Sure. Thanks for the question. So in our preliminary assumptions, as you noted, we outlined some of the items where we have initiatives that we expect to take hold. There are many others that we are continuing to work on. And we do think predominantly the dollars will come from SG&A benefits, but some will be in margin as well. And some of the items that I had outlined include a comprehensive review of all of our store leases with the assistance of a third-party. So typically, if you look out a few years and we have an in-house real estate team that regularly negotiates our leases, but we have decided at this point to take a more aggressive approach in looking at that particular area and evaluating all of our store leases with set parameters and expectations in terms of what we want to achieve. We are also working on optimizing our advertising and coupon strategies, including all of our advertising vehicles. And as we mentioned before, we were working on a personalization strategic initiative and so we plan on placing greater reliance on personalization.

Yes. And through this period of transition, we have been making heavy investments. Next year, we believe that to a greater degree we will be able to leverage a lot of the investments that we have been making both in technology and in people to be able to enhance the profitability.

And if we look at the run-rate of your business, your comp has been declining at a low single-digit rate. Your gross margin has been declining in excess of a couple of 100 basis points. You are expecting next year that your comps will decline at a similar level, but your gross margin maybe flat to up. So, what’s inherent in that expectation? You are no longer will be pursuing or you are going to be prioritizing profitability at the expense of sales. So shouldn’t we expect sales to be even lower next year than this year? And what have you assumed from a coupon redemption and amount perspective as an added function for next year? Thank you so much. Robyn D’Elia: Well, in our preliminary assumptions, we did share that our comp sales will be decreasing in the low single-digit considering all of the levers that we were pulling to drive more profitable results. So it is considered in the model. And I think what we shared with our operating margin will be consistent with fiscal ‘18.

And of course, we haven’t completed the budget. This is a preliminary look. In April, we will be able to provide a lot more information, but we do think directionally at this point in time, that’s just where 2019 will head.

And again, just so we are clear about it that it’s not about just – it’s not a cost-cutting exercise for us. As Gene said, this is a natural evolution for us. From all these investments that we have been making, that we changed our entire leadership team, we have hired the people. We have invested in the systems. We put the processes in place. We have added the SKUs. We have benefited from having the consulting expertise. We are executing against our initiatives. So again, all those things allow us to pull the levers and to make the changes necessary to be more profitable. So again, we have established a new baseline for us to conduct business in a better way and those are the investments we have been making to allow us to do that.

And our next question comes from Steve Forbes from Guggenheim. Your line is open.

Good afternoon. Maybe a quick follow-up on the shipping threshold changes, so more about the margin implications during the quarter right given the change, can you help us quantify what that benefit was year-on-year, and whether we should expect a similar sort of benefit looking out over the next 9 months, is there any plan to sort of change those thresholds one way or another? Robyn D’Elia: What we’ve built into our planning regarding our free shipping threshold is to remain at the current levels that we’re at, barring any changes for holidays or things of that nature. And I think as Gene mentioned, it’s difficult to quantify one individual item and whether we lost sales as a result of raising that free shipping threshold for an individual customer, but we’ve built in the plan at a consistent level.

And then just a follow-up on decorative furnishings, right. So it appears, right, that the growth rate has been moderating and I think you talked about some reasons why. So can you just give us an exit rate there, what was the rate of growth during the quarter, and then can you update us on the number of SKUs, I mean, is the number of SKUs – are you reducing the absolute number of SKUs or is it more like optimization et cetera?

Yes, it’s going to be a combination, for now it was a reduction of SKUs. We’re taking 1000s of SKUs off if we can’t get them to the right model for us. But at the same time going forward, as we said, we’re developing private label proprietary brands and the purpose of that is to drive margin opportunity and differentiation in our assortment. Again, getting back to the critical importance of newness and meaningfully differentiating our assortment, this is going to be one of the categories that the customers are going to see it when we talk about being rollout or we talk about the rollouts of the next 5 private label proprietary brands that we’re going to be showing our customers between now and 2020, that will allow us not only to add other additional SKUs, but it’s going to allow us to be more profitable in doing so and to be able to bring to the customer something they’re not seeing elsewhere.

And then just one last follow-up on the number of openings and closings incorporated into the ‘19 plan? Robyn D’Elia: We can’t provide that further detail. We hadn’t shared that in this preliminary view of our ‘19 model.

And again, so much of it is you’ve heard the conversation around that we’ve taken a more aggressive approach to speaking to our landlords historically. We believe that we’ve done a good job with our real estate program, but we’ve only been talking a few years out on leases or leases that were problematic for us, which were few and far between. Now we’ve taken the approach with the absolute benefit of outside partner to talk about all our leases. So again, where we end up in ‘19 is really going to be dependent upon our communication with our landlord vendors, where we come out – our landlord partners, where we come out in these negotiations. So it’s very – I’d say it’s – we’ll have a greater color on it clearly as we speak in the next few months, but that’s also something that’s going to I think develop over the course of the year because it’s being aggressive the way we should be and having the sense of urgency in how we deal with the company and across the company and when it comes to our real estate.

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

Good afternoon. I appreciate you guys taking my questions. My first question is on the next-generation stores. You guys have disclosed some favorable metrics with the 40 test stores. I was just curious what you would like to see maybe to accelerate that rollout and have a bigger kind of redo of the core Bed Bath & Beyond stores?

Yes. Again, just so that we remain focused on the fact that these are lab stores, so there’s a lot of different initiatives going on. The intent is to get those initiatives as they work whether it relates to our assortment or our visual merchandising or to the store labor model and to roll them forward into the existing stores. It’s not as if one of those stores is going to walk in and see perfection. So again, the things that we’re learning and things that we’re doing and things that are working, the intent is to get them to other stores and to scale them.

I guess the follow-up, what would be the timeframe that you would like to get them to other stores and to scale them? Is there workings to maybe speed that up given some of the success you’re seeing early on?

Yes, we like to have them in there 3 years ago. If we’ve been working on all of them, then that’s not going to be the case, but some of them are out there already. So when we look at some of the things we’re doing with the assortment when we look at putting things together in a collection, our approach to newness or approach to some of the openness in the store that we wanted, to queue lines or to taking down finger walls or lifestyle across merchandising categories or some of the things we’re doing from a labor perspective, all those things have aspects to them that are rolling forward as we speak, because again is that the intent isn’t to work behind the scenes on a perfect store and then transfer that in one fell swoop is to get these wins and as we go to roll them forward.

Okay. I appreciate that color. And then I guess lastly for me, interest rate ticked up sequentially. Can you just help us understand what exactly drove that? And is the 3Q rate more of the normalized rate we should use going forward? Robyn D’Elia: The interest expense line item, this is included in the remarks if you go back that we had a change in our non-qualified deferred compensation plan, the change in investment value in the market value, and we have a dollar amount that runs through interest expense and an offsetting amount that runs through SG&A. So the net impact on the P&L is zero, but interest expense was a bit higher for the quarter.

And that will continue going forward? Robyn D’Elia: No. That was just tied to the change in the value at the end of this quarter.

Yes, because the 3 components of our interest expense are our bonds and that’s fixed every quarter. We have a couple of sale leaseback transactions that are small that go through there and then other than that, it’s just the fluctuation in the non-qual plan and then whatever interest income we have to offset, which as our cash balances have gone up and interest rates have gone up, there actually been a bigger offset year-over-year. But usually, the biggest fluctuation could be if the stock market goes up and down and our participants have investments in the stock market that flows through the interest income expense line and offset into SG&A and that’s been happening for years.

And the next question comes from Christopher Horvers from JPMorgan. Your line is open.

Thanks. Good evening. So a clarification question. On the 2019 guide, that about $2. If you back out the building gain, is it that you’re expecting earnings to actually – should be up a little bit year-over-year not trying to hold you to $0.15, but is that accurate? And related to that, as you think about a flat operating margin in 2019, it seems like you’re expecting gross margin to still decline but at a much lower pace. Do you expect leverage on operating expenses? Robyn D’Elia: So the earnings guidance, that will be about the same as this year, meaning same as ‘18. We are contemplating that including the gain on the sale of the building, so it would be about the same level. And then your second question on the op margin, I think you’re indicating what’s the variation between gross margin –

Gross margin and SG&A. Robyn D’Elia: Gross margin and SG&A, again, we expect more benefit in the SG&A area.

I mean, at this time, it is still preliminary. We are still putting together the budgets but we do believe that having an earnings per share next year equal to what it is this year is achievable.

Got it. And then in terms of – and then as you think about like the tax rate implied for the fourth quarter is actually – it looks like it’s lower than the year or so. What – how do you think about like your longer-term tax rate? Robyn D’Elia: Our tax rate, I guess, with the changes in the Tax Act, should run on average about 25%, that’s what we started this year modeling, and our full-year assumption is 24% with the discrete fees we had to-date, so that should be the normalized run rate. But again, we – you can have discrete any quarter that we hadn’t planned on due to settlements of federal or state ongoing audits.

Got it.

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

Hi. This is Josh Kamboj on for Simeon. Thanks for taking my questions. In 2019’s guidance, what is improving more than you expected today versus sort of is there anything that you might be pulling ahead in terms of strategic plans that you earlier would have done later on after next year?

Yes. From my perspective and I guess, everybody could have their perspective on it because it’s across a lot of different line items and a lot of things we’re doing in the company, but for me is that just – we’ve been – spent a lot of time and effort reinventing our company. Our earnings peaked I think in what was it February 2015 on an earnings per share basis and we’ve been reinventing the company. We’ve been investing heavily in our company over this period of time. And the things that we’re doing, we’re now – they’re taking root and we’re seeing these things take root and we’re seeing the ability to be more optimistic earlier we felt comfortable with 2020, now we’re saying earlier. So that’s what we’re seeing today. But it really is a long – everything we’re doing, when we talk about the things we’re doing from an assortment perspective or the things we’re doing from a digital perspective or the marketing we talked about the things we’re doing from personalization, when we talk about the technology enhancements, our enterprise order management system, our human capital management system, we talked about the things we’re doing with Revionics and our value optimization group, rolling out the point of sale, the workforce management. There are so many things that we put into place that now we’re starting to see and we’re getting the cadence of when we’re going to get these benefits, so it allows us to be we’re closer to that timeframe, it allows us to have greater visibility and so that’s a shorter term, so that’s where we’re at.

Alright. Thank you. Just a quick follow-up. The EPS guidance for next year, is it fair to assume that it’s based on today’s share count? And a linked question, you’ve got a lot of cash on the balance sheet that’s built up over time. Can you talk maybe about your plans for that? Robyn D’Elia: Sure. So our plan for 2019 be about the same as 2018, assumes a similar buyback cadence to our plans for ‘18, so no dramatic shift there. And then in terms of our cash balance, we had been indicating we are planning to build our cash balance. We feel it’s prudent to have cash while we’re going through this transformation process. We work with our Board regularly on any capital allocation decisions, and to-date, we’ve been utilizing cash to buy back shares.

Alright. Thank you. And then just last one, can you tell us what percentage of your stores are unprofitable today? Robyn D’Elia: The vast majority of our stores are profitable.

Yes. But again – just again, this is – so here’s the thing, is that we are forward-looking. We’ve been fortunate that we made good real estate decisions with good forward-looking approaches to them. We’ve assumed a lot of things. But going forward, when we’re looking at in states, the starting rate going up and what that means for inflation in terms of wages, when we look at what’s the decline in foot traffic in the store, when we look at the visibility and transparency and pricing, what does that mean to margins? When we look at these things, we’re not just looking today. We’re making decisions today with our – within our real estate and with our real estate that’s looking years out. So today, we’re in a good place. But again, we want to make sure that we’re in a good place 6 months from now and 2 years from now. And we’ve acted upon things. And we have, at Bed Bath & Beyond [sic] for example, I don’t know, 960 stores or some number thereabout. And our ability to push the business from one store to the other and to retain significant portions of it are enough to make sense of that move is also part of the equation. So you can have a profitable store but if that declines in profitability, it makes more sense to move the money or the sales into another store. So that’s all part of the analysis that’s getting done. So although we’ve been very good and in a good place, we’re looking forward and we’re looking at what those opportunities are and we will be aggressive in acting to the degree that our conversations with our landlords don’t result in the answers that we’re looking for.

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

Great. Thank you very much for taking my question. So the first one is, I guess, just not to belabor a point, but as you guys have sort of stated there are a lot of moving pieces here going into next year. So why did you provide preliminary guidance for ‘19 given that it is the first – what would imply the first increase in earnings in many years and gross margins still looks like it’s been pretty weak? Why not wait another quarter until things settle out a little bit? Robyn D’Elia: Well, we’re comfortable with our plan that we’ve laid out and how we’re executing against that plan. As we mentioned, we’re ahead of plan and we felt it was important to share what our view is at this point and we can provide further details as we get to April.

Yes. Because we had been providing the thought that we would have decrease in earnings per share this year, a further decrease next year and then an increase in 2020. But based on all the planning work we’ve done, we’re comfortable that, that changed, so we didn’t want to obviously repeat the – what we were thinking that we would have a decrease next year and an increase in this call, we wanted to update that for where we stood today.

Okay. And when you say, I guess, you’re ahead of your plan. I mean, could you specify what that means? And then just one other quick question, how did the baby business do and did they help comps?

I mean, we’re ahead of plan as far as what I just said. Our long-term planning was that we would have a decrease in EPS this year, a decrease next year and then starting to see growth the year after. We’re seeing it quite ahead of plan because we’re planning preliminary not to have that decrease next year that we’re going to start to see improvements enough to be able to flatten out the EPS next year. As far as the baby business, it continues to do well. We’re unless competitive in the market with Babies"R"Us not being a business. And so the baby business across the Bed Bath & Beyond side, baby side, baby stores continues to perform well.

[Operator Instructions] And our next question comes from Brad Thomas from KeyBanc. Your line is open.

Yes. Thanks for taking my question. I guess wanted to follow up on the outlook for SG&A and just sort of stepping back, obviously, you’ve been making investments. I guess, how much of an opportunity is there to get better savings simply because you’re not making the investments? Are there dollars that you’ve been spending with vendors or duplicative IT suppliers that will just roll off? And any more color on that would be helpful? Robyn D’Elia: So we’ve been calling out for a few quarters that in the SG&A area, we’ve had incremental spend due to management consulting. And while we’ve had a number of – we have a number of ongoing projects with our consultants, we do think some will fall off, maybe a couple will be added in. But net-net in ‘19 that we would estimate seeing a reduction of about $8 million in the plan.

Great. And then I think you called out 30 basis points drag from the BEYOND+ program. I guess, when we think about the run rate of that program, is there any way to quantify what sort of a tailwind it might be for you for margins in 2019? Robyn D’Elia: Well, the drag comes when we’re in this heavy ramp-up period in terms of enrollment, so it’s somewhat tied to how many members will scale up to. But I wouldn’t anticipate a significant change from what we’ve seen or what we’ve provided in ‘19.

And we’re continuing to monitor the program and continue our learnings and whatnot. And so as we develop the plan further for BEYOND+, we could make changes that we feel were appropriate to continue to make sure that it’s a profitable endeavor and that we continue to see favorable results with it.

And our next question comes from Peter Benedict from Baird. Your line is open.

Hey, guys. Thanks. Just a couple here. Are you able to quantify the calendar shift impact just on the third quarter sales, what that was? Robyn D’Elia: We haven’t quantified the calendar shift or the impact on sales. But we do know that net sales were up 2.6%, and our comp on an apples-to-apples basis was down 1.8%, but the primary driver of the increase to 2.6% was that incremental week of sales post-Thanksgiving.

Okay, that makes sense. Thank you. And then the lab stores, I think you guys said that the lab stores are running mid-single-digits maybe better than the base. I was curious, is that – is the base of the other non-lab stores so it’s running mid-single-digit better than the store base, or is it – is that better than the total company kind of comps?

It’s better than the store base. Robyn D’Elia: Right.

But again, I wouldn’t – there’s so many – that’s why we keep saying that these initiatives within the NGS stores are contributing to stores that are showing this because there’s different ones in different stores and different degrees, but in the aggregate, that’s what they’re doing through the third quarter, that’s what they was. But again, we’re looking at the individual initiatives even more than we’re looking at the store because even if you look holistically, the store is not even necessarily the customer would identify something at the store, you might have something positive in the store and something that’s not working in the store. So again, it’s really critical that we get everybody – trying to get everybody to understand that these are lab stores and that it’s not like you’re walking into seeing something that’s in a complete soup-to-nuts and as we expected that’s going to tell us something that way. But again, each initiative is being measured and measured in connection with the other initiatives that are going on in that store.

And our next question comes from Cristina Fernandez from Telsey Advisory Group.

Yes, good afternoon. I wanted to ask a question on the home furnishings initiatives. Can you talk about on the 70 stores, where you have the expanded SKUs, are those home furnishing sales driving a lift to other parts of the store? That’s one part. And then the second part, as you add the 6 private label brands over the next year or 2, like can you help us quantify how many incremental SKUs that will add to that assortment?

What was the second part of the question, I’m sorry, Cristina.

The – so you talked about adding 6 brands over the next year or 2 on the home furnishing side. Help us quantify like how many additional SKUs that would add to the total home furnishings category.

Yes again, first of all, I don’t have it in my fingertip so I couldn’t answer that. And I’m not sure that we’ve shared it or it’s fully developed yet, but again, some of this is still very much a work-in-progress. With regard to the first question, which was the 70 stores, is that what the first question was, is it driving – Robyn D’Elia: Unless to the rest of the –

Yes, so again, we have two things going on. We have – merchandise in the decorative furnishings area that’s cash and carry, that’s treasure hunt, it’s in and out. And again, that continues to do well and we’re going to continue to upgrade that assortment. And I think as we move into this January, February period, we can even see that assortment improve. And then simultaneously, we have stores that have furniture vignettes, which are not things that people are buying and carrying out of the store, but it’s with the sales associate help, we can get you something, we could order for Beyond store or we introduce you to this category and you go home on buy it online. And that’s today in 70 stores, that’s the 70 store number and that will be expanded to 140, 150 stores over the course of 2019. So again, two different things. The treasure hunt primarily could be found in the lab stores. The furniture vignettes could be found in, for the most part, additional stores an additional 70 stores to soon become 150.

And our next question comes from John Quinn from Deutsche Bank. Your line is open.

Hi. Thanks for squeezing me in here. Just one quick clarification on the 2019 guidance preliminary and I apologize if I missed this. But just want to be clear, as you’re including that $0.16 in the $2 this year, are there any real estate gains or anything one-time in nature that’s contemplated for next year going forward? Robyn D’Elia: We don’t have any one-time transactions contemplated for next year.

And just so we’re clear on the real estate again, it was part of our plan this year. It’s not part of any real estate, but we do have about, I guess, 4 million square feet of real estate, is that correct, that we own. Robyn D’Elia: Yes.

And again, this particular piece that we sold, we were no longer operating it, so we sold it. It’s not part of what we do selling real estate. But again, to the extent that we’ve made good real estate decisions and looking across the 4 million square feet we have, I think generally speaking, we’ve made very good decisions regard to real estate, so there’s good opportunity there, but it’s not part of the plan.

Okay. Thank you. And just one other quick one. Just trying to do the math just as it relates to that. So if you take the $0.16 out and kind of put the numbers through based on your comp guidance and it seems like that would imply maybe margins down a little bit. I just – that’s why I was wondering if there’s something I was missing on the operating – the flattish operating margin guidance. Robyn D’Elia: No. The flattish operating margin guidance contemplates that the building sale was in 2018. And that sale of that real estate was contemplated in our model for 3Q and for our full-year when we provided guidance last quarter.

And your last question will come from Greg Melich from MoffettNathanson. Your line is open.

Hi, thanks. I’ll try and keep it relatively quick. Happy New Year. Robyn D’Elia: Happy New Year.

Thank you.

Digital, is it still mid-teens percent of sales? And I’m sort of backing into maybe it was up 20% given that the stores were down mid-single-digits. Does that make sense? Robyn D’Elia: Yes. We did experience a strong growth in our customer-facing digital channels for the quarter.

But you don’t want to give a number to it or –

Yes. I mean, what – a part of what we’re doing looking forward is, for example, Steve has mentioned before that we pulled some products that were not making money on the web off. And we’re looking at all areas of our business. Part of it may include increasing or decreasing advertising in certain areas where we’re seeing the profits. And so as far as giving a number for the digital increase every year, I mean, strong obviously means positive comps, but we haven’t really gone into what percent exactly it will –

Okay. We’ll guess it’s strong double-digit. I’ll make that a MoffettNathanson estimate.

Just again, Greg, not to be difficult, but again, just another thing to talk about is that we’re moving away from this because the levers we’re pulling, whether it be taking SKUs off or whether it’s – that we change the business rules for Beyond store and web transactions, if we change free shipping thresholds. So again, as we have the bias towards profitability, getting locked into this business, it’s growing more or less. It’s more important that we’re growing the profitability of that business.

Got it.

So again – so this is again, we’re not trying to be difficult but then as we don’t want to lock into that, that’s being the significant thing to measure.

Great. And then there’s 2 other things real quick, did I hear that in your plan for next year, it also included some potential asset sales or no? Robyn D’Elia: No, it does not include.

No, okay, that was all about this year. And then last, I hate to have an accounting question, but have you taken a look at or how do you think any preliminary estimates as to the new accounting could play out in terms of bringing the leases on balance sheet next year? Robyn D’Elia: We have been working through that process. We’ve implemented new software to take the burden off of the accounting team and make it easier administratively to be able to quantify that impact, but essentially the rent expense going into next year will be the same, it should be at the same level and it will gross up the balance sheet and our preliminary estimate was about $2 billion, but we’re still working through the details.

Got it. So we came out to about 2 turns of leverage added and that sounds about right? You get that up to $2 billion just using the multiple rent? Robyn D’Elia: Yes.

Okay. Alright, appreciate it. Thanks a lot, and good luck.

Thank you. Thanks so much. Robyn D’Elia: Thank you.

Thank you.

Thank you. I’ll now turn the call back over to Janet Barth for final remarks.

Thank you, Adrienne and thank you all for joining us today. We look forward to speaking with you again on April 10 when we report our fiscal 2018 fourth quarter results. Have a good night.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.