Bob's Discount Furniture Q1 2026 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2026

Key Takeaways

  • Positive Sentiment: Q1 net sales rose 8.5% to $578.1M with comparable sales +1.2%, and management reiterated FY2026 guidance (net revenue $2.6–2.625B; adj. EBITDA $255–265M).
  • Positive Sentiment: Merchandising drove a broad-based “trade up” from good to better across all income cohorts, lifting average order value and supporting gross margins via strength in motion upholstery, adult bedroom and mattresses.
  • Positive Sentiment: Omnichannel and digital investments (OMNI Cart, AI scheduling/recommendations, sectional configurator) increased e‑commerce penetration to 16.2% and improved conversion and channel synergies.
  • Positive Sentiment: Growth and liquidity progress — opened 5 stores in Q1 (on track for ~20 in 2026), launched a Midwest regional DC with a Georgia DC planned for 2027, prepaid a $350M term loan and upsized the ABL to $200M leaving ~ $127M total liquidity.
  • Negative Sentiment: Margin and cost pressures — adjusted EBITDA margin declined 50 bps to 6.5% and adj. EPS fell to $0.09 (vs $0.13) due to weather-related supply inefficiencies and higher interest expense; management expects ~100 bps Q2 gross‑margin headwind from freight and remains exposed to fuel/tariff risks.
AI Generated. May Contain Errors.
Earnings Conference Call
Bob's Discount Furniture Q1 2026
00:00 / 00:00

There are 13 speakers on the call.

Speaker 9

Welcome to Bob's Discount Furniture 2026 1st quarter earnings conference call. At this time, we kindly request that all participants remain in listen-only mode. A question and answer session will follow the formal pre-prepared remarks. As a reminder, this conference call is being webcast live and recorded for replay. I will now turn the call over to Edward Plank, Vice President of Investor Relations and Strategy.

Speaker 5

Good morning, everyone, and thank you for joining us to discuss our first quarter 2026 financial results. On the call with me today are Bill Barton, President and Chief Executive Officer, and Carl Lukach, Executive Vice President and Chief Financial Officer. After Bill and Carl have made their formal remarks, we'll open the call to questions. As a reminder, the language on forward-looking statements included in the earnings release also applies to the comments made during the call. The release can be found on the website at ir.mybobs.com, along with a reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures. I'll now turn the call over to Bill.

Speaker 1

Thanks, Eddie. Good morning, everyone, and thank you for joining us today on our first quarter earnings call. Before I dive into our first quarter performance, I wanna begin by thanking our fantastic team members who are truly the heart of our company. They delivered an exceptional customer experience even as we navigated a dynamic operating environment, and we couldn't be more pleased with their efforts. Their dedication enabled us to achieve strong results. Turning to our first quarter performance, sales results met our expectations, which incorporated the adverse winter weather events and broader economic headwinds that we discussed on our last call. Total net sales increased 8.5% year-over-year, driven by new store expansion and comparable sales growth of 1.2%. For the quarter, we generated an adjusted EBITDA margin of 6.5%, which was slightly ahead of our expectations.

Speaker 1

During the quarter, the home furnishings category continued to face sales declines, due in part to a continued difficult housing environment. Despite this backdrop, Bob's delivered positive results, highlighting the resilience of our model, the competitive differentiation we've built over the years, and our ability to gain market share in all market environments. This momentum has continued into the second quarter, and as Carl will discuss, we are pleased to see demand trends tracking in line with our long-term algorithm. At Bob's, providing value without compromise is what we do. Our strategic advantages drive operating efficiencies as we scale, setting us apart in the marketplace and enabling us to gain share across market cycles. Let me walk you through the key elements of our first quarter performance and the strategic initiatives fueling our success.

Speaker 1

Our first advantage is our merchandising strategy, which centers on a narrow and deep curated assortment, supporting our everyday low price model while providing quality and style. We estimate that on average, our pricing is about 20%-25% below our competitors' listed price and 10% below their lowest promoted prices. Our narrow and deep assortment strategy also enables strong in-stock positions. We aim for over 85% of inventory to be on hand with the ability to be delivered in as little as 3 days. During the first quarter, we saw customers trade up from our good tier to our better tier, led by strength in the motion upholstery, adult bedroom, and mattress categories. This was a deliberate strategic outcome, not a market anomaly, reflecting our focused efforts to right-size our product architecture and create compelling reasons for customers to trade up.

Speaker 1

We saw strength in our new product launches, including in motion, particularly recliners and sectionals, which featured new launches and additional colorways. The success of these launches demonstrates our ability to identify and meet consumer preferences and underscores our strong capabilities in product development. What gives us further confidence in the durability of this trend is that the trade up was broad-based across all consumer household income cohorts. It was not concentrated among higher income households, but consistent across our entire customer base, underscoring the universal appeal of our value proposition at the better price tier. Our results indicate that customers are finding value across our assortment and are willing to invest in pieces with additional features and functionality. Our second strategic advantage is our omnichannel capability.

Speaker 1

At Bob's, we are a true omni-channel company built on two key pillars: our portable coast-to-coast retail footprint of 214 stores, where we deliver best-in-class shopping experiences and our differentiated e-commerce platform. At the center is our OMNI Cart technology, which creates a seamless customer experience, channel synergies, and a higher conversion. In stores, our AI-driven smart scheduling has significantly improved manager and staffing efficiency, ensuring we are appropriately staffed to consistently meet customer demand, deliver exceptional service, and continue to drive conversion. Within e-commerce, sales increased low teens year-over-year, with penetration rising approximately 70 basis points to 16.2% of total sales for the quarter. While we are encouraged by the continued increase in e-commerce penetration, as an omni-channel business, we are agnostic as to where our customer chooses to shop.

Speaker 1

Our platform is designed to deliver a consistent high-quality experience with seamless integration between digital and physical touchpoints. That said, we continue to enhance our online experience by leveraging AI and expanding our digital capabilities. This includes AI-powered product recommendations on our website, and more recently, the launch of a new sectional configurator that allows customers to design their own sectional and visualize in their own homes, one innovation that has been very well received. Our third strategic advantage is driving brand awareness through compelling messaging and increasingly precise customer targeting. To that end, we are applying AI to turn proprietary and third-party customer data into real-time personalized targeting, enabling us to reach the right customer with the right message at the right moment.

Speaker 1

As a result, we continue to see strong growth amongst higher income households with rising penetration of customers earning over 100,000 and $150,000. We intensified our focus on this higher household income customer segment in late 2025 through precision performance media and tailored product recommendations and built on that momentum in the first quarter of 2026. Our value proposition resonates across a broad range of income levels, and we remain encouraged by our growing penetration of higher income value-seeking households. In addition, enhancements to our customer data platform are improving site personalization features that will enable deeper customer insights and more targeted messaging to cohorts beyond just household income. We see this as a huge opportunity.

Speaker 1

Looking ahead, we remain focused on executing to our long-term growth algorithm, growing our store base across new and existing markets, driving comparable sales, and leveraging our scale and density to improve efficiency and expand margins. Let me walk you through how we're executing on each of these objectives. First off, at Bob's, we believe everyone deserves a home they love. We are energized to bring Bob's tremendous value proposition to more and more customers nationwide. We opened five stores during the first quarter, including three in Central Illinois, a new location in Pasadena to strengthen our presence in the L.A. market, and an infill store in Seekonk, Massachusetts. While it's still early, we're very pleased with their performance to date. The openings in Central Illinois are particularly exciting as they provide valuable insight into our ability to succeed within smaller markets outside of our traditional multi-store market clusters.

Speaker 1

We're also seeing continued strength from our 2025 new store cohort as the first location anniversary their opening. Our stores in North Carolina, in particular, give us strong confidence in our expansion strategy as we continue executing our contiguous market growth plan and open more stores across the Carolinas and Tennessee this year. Speaking of Tennessee, we've already kicked off our market entry playbook, just as we did in North Carolina. We're leveraging customer insights to craft our messaging and broader marketing campaigns while also implementing pricing and other competitive strategies. This disciplined, repeatable, market-specific approach to new market entry has proven successful in North Carolina and will remain a key part of our Southeast expansion strategy, beginning with our entry into Tennessee.

Speaker 1

In all, we remain on track to open approximately 20 stores in 2026, representing 10% unit growth, and we continue to see a clear and actionable path to more than 500 stores by 2035. Turning next to our comp store sales performance. Comp increased 1.2% in the quarter as strong results in March offset the significant impact of winter storms earlier in the period. March was our strongest month of the quarter. We saw historically large delivery weeks at the end of the month, and our teams rose to the occasion, delivering sales in line with our expectations. Our results were driven by continued improvement in conversion rates, reflecting ongoing benefits from investments in our retail operating system, enhanced scheduling effectiveness, and increased OMNI Cart penetration. We expect these foundational investments to deliver benefits for many years to come.

Speaker 1

In addition, mix shift from good to better categories drove higher AOV. These gains were partially offset by lower traffic, largely due to the adverse winter weather. Looking ahead, we're closely monitoring the evolving macro landscape. Bob's has a long history of successfully navigating a variety of market conditions, and we are confident in our ability to continue to do so. In the meantime, the demand side of our business remains solid. Moving forward, we continue to execute on key operational initiatives. Our new Midwest regional fulfillment center opened in the first quarter to support ongoing expansion in this region. We are also progressing on our transition to Synchrony as our primary financing partner, which we expect to launch in May and roll out through the summer. We believe that this represents a meaningful opportunity to increase financing penetration and drive higher average order value over time.

Speaker 1

All that said, we continue to operate in a dynamic environment. We saw some incremental trucking surcharges related to domestic fuel costs during the first quarter, though the impact was small. While conditions remain fluid, we have a proven playbook for managing these situations as we've demonstrated through prior supply chain disruptions and more recently, tariffs. Touching briefly on tariffs, we are encouraged by recent rate reductions in the elimination of steel and aluminum duties for our covered products. We will continue to monitor developments as the backdrop evolves. At Bob's, we take our people and culture very seriously. It is the foundation that represents the Bob's way and drives our long-term results. I'm particularly proud that Newsweek recently awarded Bob's five stars as one of America's greatest workplaces for entry-level roles, which is a testament to the culture we built and the commitment we have to our people.

Speaker 1

In closing, we remain focused on our long-term strategy of delivering double-digit unit growth, driving low single-digit comparable store sales, and accelerating EBITDA growth. I'm excited by the tremendous opportunity in front of us. Through discipline and prudent execution of our playbook, we see a well-defined path forward to expand our market share. Our vision is supported by strong unit economics, a proven portable business model that works across diverse markets, best-in-class omni-channel capabilities, a differentiated merchandising strategy that delivers innovation, value, and quality, and an exceptional team that executes with consistency and passion. With that, I'll turn the call over to Carl to review our financial results and outlook in more detail. Carl.

Speaker 3

Thank you, Bill. As Bill discussed, our first quarter performance reinforced the resilience of our model and our ability to navigate a dynamic environment while continuing to invest in our future. The team remains focused and disciplined, and we are confident in our ability to continue delivering solid results. In the first quarter, net revenue increased 8.5% to $578.1 million, driven by comparable store sales growth and contributions from new store openings. We opened 5 new locations in the first quarter, bringing us to a total store count of 214 stores. Comparable sales increased 1.2% in Q1 on top of a 6.2% gain last year.

Speaker 3

Performance was driven by conversion growth and higher average order values across both our retail and e-commerce channels, partially offset by lower in-store traffic due to the winter storms and related lost store operating hours that we discussed on our last earnings call. As Bill mentioned, we saw historically large delivery weeks at the end of the first quarter, reflecting strength in March demand and seamless execution by our supply chain teams to meet customer delivery preferences. Average order value benefited from a mix shift into our better pricing tier, while pricing increases taken last fall were largely offset by lower units per transaction. First quarter gross margin was flat to last year at 44.4%.

Speaker 3

During the quarter, we benefited from a favorable mix shift into the better category, which carried a higher margin rate and reinforcing our confidence that our targeted good, better, best architecture is resonating with customers. We also benefited from a more normalized freight environment compared to last year when we saw elevated costs associated with supply chain disruption, in addition to higher protection plan margins that we will anniversary next quarter. These benefits were offset by the initial ramping of our new Midwest DC that opened in January this year, which we refer to internally as a regional fulfillment center, in addition to costs related to inventory growth. SG&A as a percentage of net revenue was 40.7%, an increase of approximately 20 basis points compared to the prior year due to a one-time non-recurring cost associated with the termination of our Bain management fee.

Speaker 3

Excluding this one-time charge, SG&A as a percentage of net revenue was relatively flat, driven by efficiencies at existing stores and offset by incremental marketing and occupancy expense associated with new stores and greenfield market expansion. The team remains focused with respect to managing costs and driving greater leverage. In total, adjusted EBITDA was relatively flat to last year at $37.6 million, and adjusted EBITDA margins decreased 50 basis points to 6.5%, primarily due to supply chain inefficiencies during the periods of extreme weather and incremental pre-opening expenses. As a reminder, due to seasonality, Q1 is our lowest adjusted EBITDA margin quarter. Adjusted net income was $11.1 million compared to $14.1 million in the first quarter of fiscal 2025, reflecting higher interest expense associated with our term loan, which was outstanding from October 2025 until our prepayment during the first quarter.

Speaker 3

Adjusted diluted EPS was $0.09 compared to $0.13 in the first quarter of FY 2025. Moving on to some balance sheet and cash flow highlights. At the end of the first quarter, cash and cash equivalent was $28 million, and we maintained total liquidity of nearly $127 million. During the quarter, we prepaid our $350 million term loan in full using the proceeds from our IPO and cash on hand. We are pleased to report that we recently amended and extended our ABL, which upsized our facility to $200 million from the previous amount of $125 million and extended the loan maturity to 2031. Our amendment was opportunistic, driven by growth in our borrowing base and designed to further strengthen our liquidity profile. As of quarter end, our ABL balance was $25 million.

Speaker 3

Our balance sheet remains strong and flexible, enabling us to self-fund our growth. Turning to inventory. Inventory increased approximately 5% compared to last year, primarily driven by store growth and increases in comparable store sales. We are comfortable with the level and composition of inventory. Total CapEx, net of tenant allowances, were approximately $23 million in the quarter, largely the result of investments associated with new store growth. Turning to our outlook. Following the rebound in traffic in March, we have continued to see healthy sales trends into the second quarter. Demand is tracking in line with our long-term algorithm of low single-digit comparable sales growth, and we feel confident about our positioning as we move through the quarter. At the same time, we are monitoring the cost environment closely.

Speaker 3

We anticipate some incremental fuel related pressure during the second quarter through delivery and line haul costs, which are real-time indicators that flow through our cost structure immediately. We are managing this actively through our logistics network and consider it largely manageable at this point. As a reminder, gross margins during the second quarter last year benefited from a highly favorable freight rate environment that is not expected to recur this year. As a result, we continue to expect second quarter gross margins to be approximately 100 basis points below last year. As stated in our earnings press release, we are reiterating our 2026 full year guidance. We continue to expect net revenue of $2.6 billion-$2.625 billion, supported by comparable sales growth of 1.5%-2.5%.

Speaker 3

Adjusted net income between $121 million and $129 million. Adjusted EBITDA between $255 million and $265 million. At the midpoint, our outlook implies an adjusted EBITDA margin of around 10%, driven by our expectations for a relatively flat gross margin performance year-over-year and slight operating expense deleverage to invest in our 2026 and 2027 greenfield store growth, including continued expansion into the Southeast and the associated marketing expense. Although the environment remains fluid, our guidance reflects our current expectations for mitigating cost pressures. With respect to tariffs, our guidance assumes that the current 10% tariff rate under Section 301 and the current 25% upholstery tariff rate remains in place for the full year. Our guidance also does not assume any tariff refund opportunity, although we are actively evaluating these avenues.

Speaker 3

In addition, we are in ongoing dialogue with our vendor and ocean freight partners on fuel cost mitigation. We have navigated similar environments in the past, including the recent tariff cycle, where a combination of vendor contribution and pricing actions helped offset cost pressure. We believe this experience positioned us well to respond to a range of market conditions. Moving to CapEx. We continue to expect approximately $110 million-$115 million of net capital expenditures for the year, deployed primarily towards new store growth and supporting infrastructure. This includes a majority of the associated capital for the new distribution center in Georgia that we expect to open in 2027. With respect to store expansion, we continue to expect to open approximately 20 stores in 2026, reflecting 10% year-over-year growth.

Speaker 3

These stores will primarily be in newer markets in the Southeast, with some infill locations in existing markets. As we noted on our last call, we expect pre-opening costs of approximately $23 million-$24 million in 2026, a portion of which is earmarked for the accelerated timing of a handful of early 2027 stores opening in the Southeast. Finally, to be helpful with modeling, we expect a full year tax rate of around 27% and a full year share count of approximately 135 million. The fully diluted shares beginning in the second quarter is expected to be approximately 137 million. Before I hand the call back over to Bill for closing remarks, I want to thank the entire Bob's team for their hard work.

Speaker 3

As our business continues to scale and we face ongoing macro uncertainty, it is our culture and the dedication of our people that drives our results. Looking ahead, we remain focused on our near and long-term objectives. With that, let me pass it over to Bill.

Speaker 1

Thank you, Carl. As we close today's call, I'll highlight three things that define both our performance and our path forward. First, our results validate our strategic focus. We delivered 8.5% top line growth and positive comps despite material weather disruptions and a challenging industry backdrop. We continued to see healthy demand through the start of the second quarter, all driven by disciplined execution across merchandising, omni-channel capabilities and customer acquisition. Second, our growth engine is working. We opened 5 stores in Q1 and remain on track to open approximately 20 stores this year. The strong performance of our North Carolina stores reinforces our confidence in our contiguous southeast expansion plans. Third, we're built to navigate uncertainty. We've managed through cycles before, and we continue to do so through strong vendor partnerships, pricing strategy, and operational agility. The Bob's way is more than culture.

Speaker 1

It's our competitive advantage, and it underpins our confidence in delivering double-digit unit growth, low single-digit comp growth, and accelerating EBITDA profitability over time. Thank you to our team for the relentless commitment and to our shareholders for your continued support. With that, we're happy to take your questions. Operator.

Speaker 9

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate you're lined in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you. Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please go-

Speaker 12

Hey, good morning, everyone. My question is, we're beginning to lap some of the toughest comparisons. Can you remind us how you build your sales plan? You know, how do you know, lap some of these double digit comps? Remind us what the pricing piece of it is and then any of the initiatives that you're, you know, you're layering on top of last year. Thanks.

Speaker 1

Yeah. Good morning, Simeon. It's good to hear from you, and thanks for that question. As we think about lapping last year's strong performance on comp sales in Q2, the drivers that we've seen recently continue to be the drivers that we're watching unfold. Strong conversion, maximizing every customer visit, be it on the website or in our stores or on the phone with our Bob's Squad organization. Conversion remains strong as well as AOV. We commented in the release that we saw a nice strong shift of some of our business up into the better price tier, which was planned. It was orchestrated and architected by our merchandising team going back to last fall when they started sourcing new goods.

Speaker 1

We're very pleased with the conversion and the AOV growth, and we're continuing to see that into the second quarter against a tough traffic backdrop. Again, you know, we've taken the momentum that came out of March. It's continuing into April. When you take all that together, we're feeling very good about the current trends we're seeing in the second quarter and consistent with our long term algorithm.

Speaker 3

Simeon, just to add a couple details. Last year in the second quarter, our comp was a +10.5%, as Bill mentioned, largely driven by conversion. We talked about the performance we're seeing April so far, and conversion has been a favorable driver to our to our performance, so encouraged by lapping that conversion performance last year. Lastly, you asked about pricing. Our year-over-year pricing remains at 7%, largely offset by units, so really not a factor in comp performance.

Speaker 12

As a follow-up, this shift that you're seeing into better and best, is this a higher income customer that's allowing you to move there? How is the, let's say, the middle to lower income customer, are they not part of that shift, or you're just doing a better job targeting customers who have the means to be able to trade up?

Speaker 1

Yeah, Simeon, great question again. Thank you. Look, we're seeing consistent performance across all the income demos. You know, as we saw this lift into the better price tier, we had an assumption going in that it was being driven by the increased penetration of the higher income households, but not so much. It's pretty consistent across all the demos, I think it's really a reflection of our merchandising team creating these compelling values. You know, as we've talked about before, you know, oftentimes people would be pulled into our store based on things they've seen in our good price tier. What they discover once they come to Bob's is that we have compelling values at all price tiers.

Speaker 1

This leaning in with the new merchandise and the better and best price tiers, we've just seen a consistent reaction positively from all the income demos. As far as we've seen thus far, Simeon, it's not being driven by our increased penetration of higher household incomes.

Speaker 12

Okay, thanks. Good luck.

Speaker 1

Yeah, thank you.

Speaker 9

Your next question comes from the line of Oliver Wintermantel with Evercore ISI. Please go ahead.

Speaker 8

Yeah, good morning, guys. You opened 5 stores in 1 Q, excuse me, and expect 20 for the rest of the year. How are the newest cohorts performing versus underwriting, especially in the greenfield markets? Has anything changed in your view of mature store productivity or ramp timing?

Speaker 1

Yeah. Good morning, Oli. Thanks for that question. Look, we're very pleased with the performance of the stores we've opened in Q1, and it's very consistent with the prior cohorts in 2025 and 2024. Again, this is a reflection of how we approach new markets. You know, we spend on average two years studying and planning market entry, right? We hold focus groups. You know, we study the competition. We study intensely the kind of furnitures being bought in those markets. With that level of depth and planning, we continue to see very consistent new cohort performance. I'm very pleased with the five that we've opened thus far and very encouraged that the playbook that we're executing will continue to yield those results. Specific to your question, the five are performing very, very well.

Speaker 1

You know, the remainder are either, you know, under construction or at least under lease. We have really great visibility into our 26 cohort in total.

Speaker 8

Got it. My follow-up is on gross margins. It was flat year-over-year despite the new Midwest DC and inventory growth. Can you help us size the track from the new DC and how we should think about freight mix and protecting the margins over the balance of the year with I think you said 100 basis points down in the second quarter, so more view of the second half. Thank you very much.

Speaker 3

Sure. In terms of Q1, we did have the new DC opening in January that was ramping up to utilization. As we sit here now in May, that's largely complete and fully utilized. The offset there and the expense that we saw to get that up to full capacity was fully offset by what we mentioned earlier on a trade up into the better category from good, which tend to carry a higher margin, in addition to lapping a more favorable freight environment this year than we had last year in the 1st quarter. We head into the 2nd quarter, we are now lapping a more favorable freight environment that occurred last year. That's the 100 basis point headwind that we mentioned.

Speaker 3

Largely in line with what we had anticipated, given this was lapping a more challenging environment. As we head back into the remainder of the year, we're expecting some sequential improvement quarter-over-quarter into gross margin, largely driven by the continuation of the better and best strategy that we have landing in our stores in terms of our product mix.

Speaker 8

Thanks very much.

Speaker 3

Thank you.

Speaker 9

Your next question comes from the line of Bobby Griffin with Raymond James. Please go ahead.

Operator

Good morning. This is Alessandra Jimenez on for Bobby Griffin. Thank you for taking our questions. First, I wanted to follow up on the current cost environment. Can you walk us through the puts and takes and how much incremental cost pressure you could see for the year if crude remains at current levels versus the potential offset from lower tariffs?

Speaker 3

Sure. I'll start there. As we mentioned on the call, I'll speak to it from a guidance perspective and how we're looking at what we expect. Our guidance assumes current tariff policy. As a reminder for that policy, we are operating under a 10% tariff rate under Section one twenty-two and operating under 25% upholstery tariff rate. Our assumption here is that this continues. The assumption also is that there's really no additional tariff refund opportunity that's implied in the guide. Secondly, as we think about any fuel-related pressures, it is a volatile environment. Right now, the guide assumes that any incremental costs that we would incur would be fully mitigated under our tried and true playbook.

Speaker 3

To put that in context a bit, in our 35-year history, we've seen several periods of volatility, and we've successfully navigated these and maintained, you know, minimal disruption and in year profitability. This is a demonstrated capability that we have. We have confidence that the ongoing volatility that we are seeing in 2026 with the team and the playbook to fully navigate.

Operator

That's very helpful. Then maybe just a follow-up on that. Do you anticipate any pricing adjustments in the second half of the year?

Speaker 3

I'll jump in that first, and Bill may weigh in. As a reminder to our playbook for cost mitigation, pricing is a factor. Right now, the pricing would be considered under a variety of scenarios as we think about where the cost landscape ends up landing. That's just one of several factors within our playbook. We also think about vendor partnership, both on an ocean freight vendor and our product vendors, in addition to thinking about, you know, country of origin sourcing and then how we think about the costing within our goods.

Speaker 1

Yeah.

Speaker 3

Do you wanna jump in?

Speaker 1

Yeah. You bet, Carl. You're exactly right. Let me just add one thing here. As we all know, you know, pricing and value are at the heart of our value proposition to the consumer. We're always committed to maintaining value without compromise. As we think about pricing, as Carl mentioned, you know, we have a playbook to deal with cost issues, and it's well tested and well proven. Pricing is always the last thing that we will take into consideration, and we will always do it with an eye towards maintaining our price leadership or value leadership in every market we serve. We take it very seriously. We use it when we need to, but we have other pillars that we lean on first. For example, working with our great vendor partners.

Speaker 1

They've been really great partners through all kinds of cost disruptions over the last five years. Focusing on price is something that we take very seriously, and we're always maintaining our commitment of value without compromise.

Operator

Thank you so much, and best of luck here in 2Q.

Speaker 1

Yeah. Thank you.

Speaker 9

Our next question comes from the line of Peter Benedict with Baird. Please go ahead.

Speaker 10

Hey, guys. Thanks for taking the question. I guess you mentioned in the prepared remarks the positive momentum you've got with OMNI Cart penetration rates as well as, I think it was financing penetration. I wonder if you could dig into that a little more, maybe give us some color on the magnitude of the change there and maybe how much further you think you can take it.

Speaker 1

Yeah, Peter, thanks for that question. We appreciate it. We love talking about our OMNI Cart. Look, our strategy is based on the belief and that the consumer naturally behaves in an omni-channel way when they're buying furniture, which means, you know, they use digital, they come into the stores, they go online, they call our telecenter, et cetera. We've enabled that uniquely with this omni-channel cart. Now, we've only launched it a couple years ago. It's still a relatively new thing for us, but it's rapidly becoming very popular with our customers. I get letters literally every week from customers who appreciate it, and it's also a manifestation of our low-pressure environment, right?

Speaker 1

The customer comes into our store and is helped by one of our guest experience specialists, and they're not quite ready to buy at that moment. Which is not unusual, right? Furniture is a considered purchase. You know, we will create on their behalf what we call the omni-channel cart. We'll put into that cart all the things that they looked at in the store, and we will email it to them. They can go home, they can open it, look at it with their significant other. They may choose to purchase on our website, which is an exact replica of the experience they have in the store, so they can buy online or they can take that cart back into the store and close it. It's growing in popularity, it's easy, and they appreciate it.

Speaker 1

That's the part I wanna underscore here is that we're getting thank you letters and it has a higher AOV and higher closing rate than many of our other channels. We're very excited about how it's performing. It increased last quarter. I'll let Carl jump in, you know, to add to this, I just wanna underscore the importance to the consumer of our OMNI Cart and how much they appreciate that we do it on their behalf. Carl, go ahead.

Speaker 3

I'll actually jump in on your financing question. Financing remains a headwind in terms of our penetration, and our mix is lower than historical averages. Encouragingly, within the second quarter, we do expect to transition our primary financing partner to Synchrony, and we see a number of benefits. We see better approval ratings at the primary level. We see more customer insights, fees and incentive structures. Our secondary, tertiary lease to own remain unchanged, so we can really provide financing to all customers, but we do see this as a potential opportunity in the back half.

Speaker 10

Oh, that's super helpful. My follow-up would just be, maybe, Carl, around the margin gaps across your mix, across good, better, best. Can you remind us maybe what the differences are there as you see the consumers continue to trade up? Thank you.

Speaker 3

Sure. It's an average of averages. When you look at the better and best category, they tend to run at a higher margin rate than our good category. It really does depend by family and by style. It's difficult to quantify the exact number, but they tend to run more favorable. As we see a mix shift into better and best, we anticipate that being benefit on the comp side from an AOV perspective and on a overall gross margin perspective.

Speaker 10

Got it. Thanks so much.

Speaker 9

Our next question comes from the line of Michael Lasser with UBS. Please go ahead.

Speaker 6

Good morning. Thank you so much for taking my question. There still remains an intense amount of focus on how Bob's will maintain its long-term, low single-digit comp growth as the business confronts more difficult comparisons, especially getting into the back half of the year. Seems like your message today is, given the momentum that you're seeing, along with more opportunities to improve conversion, you feel confident that you'll be able to do that. A, is that fair? B, at what point should we hold Bob's accountable for driving more traffic in order to be able to provide more cushion for the ability to drive the comp? Thank you.

Speaker 1

Yeah, Michael, good morning. It's good to hear from you, thanks for that question. Look, you know, we're very pleased with the performance we've seen thus far into the second quarter. Again, I would underscore our performance with conversion and AOV is continuing to drive our year-over-year performance. We feel very good about that. Again, in line with our long-term algorithm. We have a very effective marketing organization, you know, we continue to take market share when it comes to traffic as well. Again, you know, we reach out. We have a plan to target the consumers and bring them back into our stores. We have very effective marketing, very high recall, for example.

Speaker 1

you know, we're punching above our weight on ad recall and ability to drive traffic into our stores. Our traffic share continues to grow. you know, we would certainly benefit from a shift in the industry towards positive overall traffic growth. In the meantime, we're not waiting for that, right? We're leaning in to take share of traffic, and we're seeing that as a result. Carl, you wanna jump in on any of that?

Speaker 3

I'll just jump in on the traffic component. As Bill mentioned-

Speaker 1

Yeah

Speaker 3

the industry has been challenged. Where we're focusing is what we can control. From a traffic perspective, it's qualified traffic. It's getting to know our customer better, and targeting customer segmentation. At Bob's, this is all beginning to be more and more AI-driven, understanding who our customer is, what they've shopped at, but also, the AI capabilities that let us see that customer behavior across all their different patterns and all the areas they shop. This has been encouraging that even as traffic levels in the industry have remained challenged, we can make sure we're targeting the right customer at the right time, driven by AI tools and capabilities, and have them come in to be more qualified to purchase.

Speaker 1

Yeah, perfectly said, Carl. All in service of our consumer, right? To better serve them. Great question, Michael. Thank you.

Speaker 6

Thank you. My follow-up question is, it seems like your expectation for the back half of the year is that conversion in AOV will still be the drivers of your comp. Can you give us a frame of reference of what you need to see in order to continue to drive those levers as a way to generate this low single-digit same store sales increase? Meaning, where do you stand on average versus where the opportunity lies? Are you seeing some stores at the hurdle rate that you expect the entire chain to be?

Speaker 6

In addition, to what extent do you think those factors, AOV and conversion, have been helped in the last few months from something like tax refunds, which in the absence of that benefit in the back half of the year could make the business a little bit harder to drive?

Speaker 1

Michael, look, another great question. Let me say this, you know, we have been in the process for the last 2 years, rolling out what we call our retail operating system, right, all the productivity and efficiency enhancements in our stores. Concurrent with that, continuously improving our digital environment with our e-com site, et cetera. You know, those continue to roll out. We're nowhere near what I believe can be the top productivity results coming from these enhancements. We learn from them and continue to improve them in a real-time basis. As excited as I am about the improvements that we've seen in store productivity and e-com productivity, the OMNI Cart, which glues it all together, I'm even more encouraged by the changes that we have coming.

Speaker 1

I feel very confident that the approach and the strategy we've taken in the last few years has not yet yielded the kind of improvements that we see as a potential. We're gonna stay the course. We're gonna continue to do what we've been doing, enhancing all this to drive better customer experience. I would expect that we would continue to see those results in improved conversion in AOV, plus other things that Carl's called out. For example, you know, introducing our new financing partners midyear with Synchrony. You know, we're very encouraged about that.

Speaker 1

As we've reported, you know, prior, we've seen, you know, our financing penetration drift downward over the last several quarters, both as a result, we believe, of pressure on the consumer, but also we believe that Synchrony will be bringing to the table a better offer for the consumers. We're, again, we're just very excited about that. Look, you raised the issue of tax refunds, that happens every year. You know, we've digested the tax refund impact as we expected, we obviously don't rely on the tax refunds to deliver results into the second half.

Speaker 1

Again, you know, we're very clear on the road ahead, what we've implemented and what we have yet to come, and feel confident that we'll continue to see the drive through both conversion and AOV that we've seen in the recent past. It's stay the course and keep driving the results that we've seen.

Speaker 6

Thank you so much, and good luck.

Speaker 1

Yeah, thanks, Michael.

Speaker 9

Our next question comes from the line of Christopher Horvers with JPMorgan. Please go ahead.

Speaker 4

Thanks. Good morning, guys. I wanted to follow back up on the new store performance. As you think about the North Carolina stores last year relative to your pro forma model of $9 million mature AUV, and 84% year 1 new store productivity, you know, how did those stores come out of the gate relative to that? You know, I would think that your brand awareness is pretty relatively low in that market. Does it give you any sort of optimism that perhaps we mature at a much higher level than that $9 million?

Speaker 1

Yeah. Hey, Chris, good to hear from you today, a great question. I love talking about our North Carolina stores, thank you. Look, again, let me underscore first and foremost that we take on average two years to study and plan our entry into a market. Look, North Carolina was our first major move into a southern, a southeastern market, although we did test our model in Southern Virginia for a year first to get a handle on it. Prior to the entry into North Carolina, you know, we held focus groups. We studied what furniture was being sold there, we were highly aware that North Carolina is the mecca and hub of furniture in the U.S. We took it very, very seriously. I think the, you know, the results are just amazing.

Speaker 1

You know, we were welcomed there. To your point about lower brand awareness, it was about average for us going into a market that hasn't necessarily seen Bob's before. We knew the brand awareness level. We tailored our entry to that market after holding focus groups, showing them our advertising, getting responses to it and reactions to it. We went in with a well-prepared plan. We executed it really, really well, and the consumers there responded really well. On top of that, let me just add that the, you know, just to put a cherry on top of that cupcake, we're sponsoring our first ever NASCAR.

Speaker 1

You know, again, in response to trying to, you know, make sure that the people in North Carolina know that we're a part of the community. We wanna be a part of who they are. All that put together, our entry has been very well received. The stores are over-performing as a cohort. I'll let Carl jump in on any additional comments. It gives us, Chris, really high confidence that we will continue with this approach as we think about our entry this year into Tennessee, into South Carolina, and elsewhere. You know, I would call this overall approach, you know, confident humility, right? We're confident in our playbook. We're humble enough to listen to the consumer, study the markets, modify our approach as needed.

Speaker 1

The consumers specific to your North Carolina question have responded very well to that. Again, great question, and Carl, you might wanna add into that.

Speaker 3

I'll just jump in from a model perspective. We continue to believe that our new store prototype is the appropriate way to think about our new store openings. $9 million by year 5, 84% by the first year, and that all implies 60% cash on cash return by year 2 and 80% by year 5, which is a highly attractive use of capital. We're encouraged by this. Having said all that, as Bill alluded to, we saw some outperformance in North Carolina. That's giving us confidence to continue our expansion in the Southeast. It's a bit too early to be looking at that as a true indicator of any changes to our prototype. We're continuing to track along with those plans.

Speaker 4

That's fantastic. Then as you think about tariffs. Could you perhaps size, you know, tariff refunds? The relative to last year, what were your tariff rates year, you know, in the back half of 2025? As you think about this category, you know, big ticket durable, definitely some consumer pressures out there. It does, based on what peers have reported, does seem like you're taking share. How do you think about, you know, the risk of deflation in the category? Sort of the puts and big picture puts and takes, like what are potential, you know, refunds? What are tariff rates year over year? How do you think about the risk of the category actually becoming deflationary?

Speaker 3

I'll jump in with the tariff refund part. Bill, you can maybe talk about just the overall category, inflation, deflation. From a tariff refund perspective, we applied for a tariff refund. It's too early to tell timing or certainty of the refund. It all remains in audit process. We'll just leave it as it's a bit too early to tell in terms of the refund itself. From a tariff rate perspective, we've been operating at 10%, Section 122 tariff and 25% tariff. That 10% was previously 20% in last year's in last year's environment. There was a steel and aluminum tariff that was live last year as well, which was largely de minimis for us specifically.

Speaker 3

The 25% upholstery tariff is really one area that's been more outsized, given 50% of our product mix is upholstery.

Speaker 1

Yeah. Excellent, Carl. Look, Chris, as far as deflation or inflation, we don't have a crystal ball for sure. You know, we're gonna maintain our commitment to be the value leader in every market we serve. We work very closely with our vendor partners. I was at the High Point market a few weeks ago with our merchants and buyers, speaking first person with our major vendors and the CEOs there. Look, we're gonna work collaboratively to make sure that we can maintain our value leadership and protect our margins. I'm thankful for those long-term relationships. As far as whether there's deflation or inflation, I don't have a crystal ball on that. We're just trying to maintain, and we will maintain our value leadership in every market we serve.

Speaker 4

That's great. Thank you very much.

Speaker 1

Yeah. Thanks, Christopher.

Speaker 9

Your next question comes from the line of Robert Ohmes with Bank of America. Please go ahead.

Speaker 11

Hey, Bill. Hey, Carl. Thanks for taking my question. My first question is just a follow-up on the new markets. You know, you're calling out the Carolinas. Is anything changing in your thinking about, you know, how fast the profitability of new markets, you know, ramp up versus existing markets? Is it maybe cheaper to operate, you know, in the Carolinas than in the Northeast? Is it maybe less competitive there? I would love to just get your thoughts on, does it seem like newer markets are gonna be, I don't know if easier is the right word, but maybe easier to hit higher levels of profitability than you initially thought, you know, based on what you're seeing in the Carolinas?

Speaker 3

Sure. I'll jump in with that. First, just the prototype is probably the best way to model it. Anytime you enter a new greenfield market, you do wanna make sure you're investing in the supply chain infrastructure and you're investing in your marketing to make sure you're entering with first share of voice and building up your brand awareness. Brand awareness is highly correlated with your sales and the trajectory. That investment is one area of the new store operating model that may not accelerate the margin performance, but will operate alongside what we would have expected. I would continue to think through our new store prototype as the right way to model on a go-forward basis.

Speaker 11

That's really helpful. Just another quick follow-up. The, you know, having great success, I think you guys are seeing a lot of great success up to better, and I know you're throwing in best, but is there more of an unlock coming, you know, in the best areas of the store? You know, is there any sort of merchandising architecture coming, you know, that could accelerate trade up, you know, beyond better into best?

Speaker 1

Yeah. Bobby, great question. This is Bill. I'll take that one. Look, you know, our merchants are very thoughtful about planning out the architecture of our price tiers and our products in each one of the categories we operate. They're constantly looking to make sure that as a standalone value, every article speaks to the value commitment that we make to the consumer. They also spend a great deal of time thinking about how they perform relative to each other within the architecture. Good to better to best. We've introduced some new best products as well, and we like how they're performing. We will continue to invest in all those.

Speaker 1

You know, we have to always protect our opening price when it's good because, you know, we're known for that, and we're always gonna have great leadership at that price tier. We're always gonna be very thoughtful about bringing out new product in the better and best that follow trends, that create compelling values, that if the consumer sees it and wants it, they can step up with confidence that even at the better and best price tiers, they're getting the best possible value. Yes, we saw an outsized shift to better this last quarter, and it's continued into this quarter. We've seen good performance among our new entries into the best price tier. And we're not done. We'll never be done.

Speaker 1

We'll continuously evolve and architect across all three of those. To be very specific, we like the performance we're seeing of our new best price tier items as well.

Speaker 11

That sounds great. Thanks so much.

Speaker 1

Yeah, you bet. You bet, Bobby. You bet.

Speaker 9

Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please go ahead.

Speaker 2

Thanks. Good morning. A question for Carl initially, if I could, just about thinking about margin puts and takes as we move through the year. You gave some comments on 2Q. Just with some of the moving pieces and input costs and potential price increases, can you just remind us how you're thinking about the margin as we move through the back half of the year? Thanks.

Speaker 3

Sure. First, as we think about our playbook of continuing to drive the customer into better and best, that's gonna be an opportunity for us to drive margin, and we would expect some sequential gross margin improvement throughout the year heading into the back half. That's just underlying the opportunity we see from a product mix perspective. In terms of the cost environment, it remains volatile. We're carefully monitoring. We know we have a playbook. The cost that would potentially actualize would first come at origin, and there would be country of origin, and then it would take time to make its way through to our distribution center, in addition to our moving average price inventory accounting.

Speaker 3

It would take some time, we're gonna watch through that as the cost environment begins to become more certain and we understand the landscape. Again, price there would be a part of the equation. There's other areas that we constantly look at from our playbook to mitigate those potential cost impacts.

Speaker 2

That's great. Maybe I could zoom out, and we could just talk about the competitive landscape. Curious if you've seen anything of late? We know from many manufacturers there were price increases going through to retailers in May. Curious if you've seen anything and the degree to which you think that the Bob's value proposition could resonate even more in a backdrop where your competitors keep raising prices? Thank you.

Speaker 1

Yeah, Brad. Hey, this is Bill. It's good to hear from you. Thanks for that question. Look, as I mentioned a moment ago, I was with the our merchants and buyers at the High Point market a few weeks ago. Obviously, the topic du jour is, you know, the impacts of oil cost on both transportation as well as input costs, right, to the vendors. As we said a few times, you know, we have this now well worn out playbook on how to deal with cost increases. Thus far, we're in a pretty good place. We're feeling very good about the costs that we're getting in line with what we need to maintain the margins we have.

Speaker 1

We have a playbook to deal with them as they may go up. As Carl intimated, you know, we have multiple strategies within that playbook, one of which is working with our vendor partners to keep the costs low. If costs come down, you know, we have the ability to do things such as resource product to other vendors or other venues. It's one of the strengths of our merchandising strategy, right? Because we don't sell any third-party brands in our stores. Everything that we sell is made for us, which gives us tremendous flexibility on sourcing between factories, between geographic venues. We have in the past, and we will as needed in the future, make moves to protect our cost and our value proposition.

Speaker 1

As we've said, you know, pricing is always the last thing we'll take, and always with an eye towards where the competitors are in any given market to maintain our value commitment to the consumer. We like where we are right now. We're watching everything very carefully. You know, admittedly, it's a very dynamic backdrop. In this situation, having these long-standing relationships with our vendor partners and their willingness to work with us to maintain that relationship is playing out yet again right now for us.

Speaker 2

Very helpful. Thanks, Bill.

Speaker 1

Yeah, you bet, Brad.

Speaker 9

Our last question comes from the line of Mike Baker with D.A. Davidson. Please go ahead.

Speaker 7

Okay, great. thanks for sliding me in. I guess I'll ask, you know, bigger picture. Southeast, you've talked a lot about North Carolina and then South Carolina and Tennessee later this year. How big can South, can the Southeast be for you? Florida is out there. I don't know if Texas is considered Southeast, but, you know, Florida and Texas, huge markets. We suspect that you're looking at real estate down there. Can you talk about how big Southeast can be and when you could hit those two big markets?

Speaker 1

Yeah, Mike, it's good to hear from you. This is Bill. Listen, we love talking about our growth plans, of course. Look, we have shared in recent past that we believe there's approximately 100 stores available to us in the southeast, plus or minus. You know, as we get further in, you know, we'll know better and refine. We have a long-term strategy, you know, by 2035 of 500+ stores. We don't know that that's the top end. We just know that that's a major milestone of, like, 2035. The southeast is a focus for us right now. It's not the sole focus. We continue to do infill stores in all of our regions, right? We're not done in the northeast.

Speaker 1

Believe it or not, our original region of the Northeast, we opened some new stores just this past year. Plenty of infill left for us. We're excited about the Southeast. Again, a target of approximately 100 stores, and as we get closer to that, we'll know better. You know, our strategy is contiguous growth. You know, as we think about expanding our distribution model, first to North Carolina, now this year into South Carolina and Tennessee. As we solidify those, we'll continue to expand into other markets in the South, like you might imagine, you know, Georgia, Florida, et cetera. Always with a very disciplined eye towards studying the market, preparing our entry, being disciplined about it, and always with a commitment to value without compromise to the consumers in those markets.

Speaker 1

Hopefully at the higher level, it gives you good visibility into our strategy and our imminent plans. Again, all of it underscored by our satisfaction with the performance of North Carolina and our excitement for entry into South Carolina and Tennessee this year.

Speaker 3

What I'll add to that is our current stores in the southeast are being serviced by our existing infrastructure. As we mentioned on the call, later this year in 2026, we'll begin to allocate some capital to building a distribution center in Georgia. We're encouraged that that should be able to service the opportunity that Bill walked us through.

Speaker 7

Understood. Appreciate the color. Thank you.

Speaker 1

Yeah, thanks, Mike.

Speaker 9

This now concludes our question and answer session. I would like to turn the floor back over to Bill Barton for closing comments.

Speaker 1

Thank you. Thank you everyone for joining the call today. Obviously, you know, we're pleased with where we are. We're excited about the remainder of the year. We have our strategy and our plans, a proven playbook for dealing with various disruptions, and we're disciplined operators, and we look forward to speaking to you again in the future. Thank you for taking the time to speak with us today.

Speaker 9

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.

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