Bob's Discount Furniture Q2 2026 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2026

Key Takeaways

  • Solid Q2 performance: Net sales rose 8.8% to $619.6 million, supported by 2.3% comparable-sales growth and four new stores. Adjusted EBITDA was $60.8 million, despite a difficult comparison and softer industry traffic.
  • The company reiterated its 2026 outlook for $2.6–$2.625 billion in revenue, 1.5%–2.5% comparable-sales growth, $255–$265 million in adjusted EBITDA, and approximately 10% unit growth.
  • Omnichannel and merchandising initiatives are gaining traction: E-commerce sales increased nearly 25%, reaching 17.3% of total sales, while trade-up into “better” and “best” products lifted average order values and supported margins.
  • Margin pressures remain: Adjusted gross margin fell 100 basis points to 45.4%, and adjusted EBITDA margin declined to 9.8% from 11% as freight, fuel, ocean surcharges, foam, and tariff-related costs weigh on the business. Management expects additional product-cost pressure in the second half, partly offset by pricing, sourcing, and efficiency measures.
  • Expansion remains aggressive: Bob’s plans to open approximately 20 stores in 2026, including its entry into Tennessee, while a Georgia distribution center is on track to open in early 2027. The new Synchrony financing partnership is showing early improvement in approval rates and amounts, with financing penetration currently in the low 40% range versus a historical target of about 50%.
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Earnings Conference Call
Bob's Discount Furniture Q2 2026
00:00 / 00:00

There are 12 speakers on the call.

Operator

Welcome to Bob's Discount Furniture's 2026 second 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 prepared remarks. As a reminder, this conference call is being webcast live and recorded for replay. I will now turn the call over to Eddie Plank, Vice President of Investor Relations and Strategy.

Speaker 1

Good morning, everyone. Thank you for joining us to discuss our second 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 2

Thanks, Eddie. Good morning. Thank you for joining us today to discuss our second quarter earnings. As always, I'd like to start by thanking our exceptional teams across the company. Their focus and discipline helped us deliver a solid second quarter. Against a challenging macro backdrop and strong prior year comparison, I'm very pleased with our performance in the second quarter and the way we executed across the business. Total net sales increased 9%, driven by new store expansion and comparable sales growth of 2.3%. We opened four new stores in Q2 as we continue to execute on our white space growth model. For the quarter, we generated an adjusted EBITDA margin of 9.8%. These results reflect the resilience of the Bob's business model and the operating rigor of our teams as we continue to navigate softer industry traffic.

Speaker 2

Expanding on comparable sales, our 2.3% comp increase in the quarter was driven primarily by higher average order value, reflecting continued mix shift from good into better and best categories, along with some incremental targeted pricing actions taken in Q2. We also saw improvement in conversion, which contributed positively to comp. Together, these factors more than offset lower traffic trends. While industry store traffic remains a headwind, we continue to perform well by leaning into our unique business model, which has proven effective across economic and business cycles. Importantly, store traffic does not fully capture customer demand as more customers engage with Bob's across digital and omni-channel touchpoints. As we like to say at Bob's, value is always in vogue. Customers continue to respond to Bob's value without compromise promise, quality, stylish furniture at everyday low prices delivered through a friendly, non-intrusive shopping experience.

Speaker 2

That proposition, together with our operating discipline and differentiated approach, is helping us gain share. Encouragingly, demand trends have remained healthy through the early part of the third quarter, and our momentum continues to track in line with our long-term algorithm. Let me now spend a few minutes updating you on the underlying drivers of our second quarter performance. Starting with merchandising, our narrow and deep assortment, everyday low pricing, and strong in-stock position continue to resonate with customers. As you know, unlike many of our competitors, we don't rely on promotional activity at Bob's. Our everyday low price model is designed to maintain a 20%-25% price advantage versus our competitors' listed prices. Even during more aggressive promotional periods, as we saw in the second quarter, we remained on average approximately 10% below their lowest advertised prices.

Speaker 2

We also continue to see healthy trade-up in our product mix from our good tier into our better tier with particular strength in motion upholstery and dining. Two core categories have long resonated with our customers. This mix shift is a result of the deliberate and effective work our merchants have done over the last several quarters to strengthen our product architecture. By creating greater differentiation across tiers and introducing products with compelling feature and style upgrades, we've made it easier for customers to see the value in trading up. The mix benefits we're realizing today support average order value growth and help to mitigate cost pressures while also reinforcing our value proposition to the customer. Importantly, we're seeing broad-based customer adoption of these better-featured products, demonstrating that customers continue to recognize and respond to compelling value.

Speaker 2

Looking to the remainder of the year, we're executing our proven playbook to offset anticipated fuel and tariff pressures while protecting our value leadership. For example, as a retailer that doesn't sell third-party brands, we have significant flexibility across our sourcing network. Our merchants have been actively working across several areas, including sourcing, product development, and assortment optimization, and we're beginning to see the benefit of those efforts. Through a combination of cost discipline, new product introductions, and a continued focus on margin-enhancing product architecture, we remain well-positioned to deliver compelling value for our customers while supporting the overall profitability of the business. Moving to our omnichannel capabilities. At Bob's, we continue to build out our omnichannel business.

Speaker 2

With 218 stores, a growing retail footprint, an e-commerce platform, omnicart, and digital selling tools, we're making it easier for customers to shop with us and easier for our teams to convert demand efficiently, both in store and online. Importantly, our omnicart penetration continues to grow as customers increasingly use the platform to move seamlessly across channels. This is driving stronger store to digital synergies and supporting higher cross-channel conversion and AOV, and enhancing the overall experience for our customer. Omnichannel conversion was a positive comp driver in the second quarter and remains an important contributor to driving our performance on top of the double-digit comp growth we saw in Q2 last year. Within e-commerce, sales increased nearly 25% year-over-year, with penetration increasing more than 200 basis points to 17.3% of total sales for the quarter. Our omnichannel capabilities are increasingly supporting conversion with more store-originated omnicarts completed online.

Speaker 2

That said, as the lines between digital and physical retail continue to blur, we believe seamless integration matters most. Our goal is to meet customers wherever they choose to engage with Bob's and make the experience consistent, convenient, and easy to complete. To that end, we're also leveraging AI in new ways across the customer journey, including AI-enabled scheduling to improve manager and staff efficiency in our stores, as well as to provide immediate opportunities for associate performance tracking and training. AI-powered product recommendations are another important part of that effort, helping customers discover relevant products faster, supporting higher quality engagement, and ultimately improving conversion across the journey. Finally, from a marketing perspective, we're building stronger brand visibility and awareness through impactful storytelling and sharper customer targeting.

Speaker 2

On the targeting front, we continue to leverage our rapidly expanding file of first-party customer information, combined with trusted third-party data to identify specific customers and prospects with a high likelihood to shop at Bob's. Once we've identified those profiles, we're using AI-driven insights to craft the right message to deliver to that specific target customer when they are most likely to engage. A competitive differentiator for Bob's is that our value proposition resonates across a wide range of income levels. It's always started with great furniture at everyday low price. Today, we are seeing more customers recognize that value can also mean style, quality, and a better overall shopping experience. That's helping us build momentum with higher income households, including those earning over $100,000 and $150,000 while staying true to the value promise that has made Bob's successful.

Speaker 2

While these higher income customers buy a slightly higher mix of better and best products, our good category still has the largest share of their baskets, underscoring the broad appeal of value across demographic segments. Our marketing efforts are focused on clearly communicating Bob's compelling value proposition. Customers are increasingly discerning in their purchase decisions, and it is more important than ever to showcase the value available across our assortment every day. From opening price points like our $399 sofas and $599 dining sets with the differentiated features, style, and quality available in our better and best categories. Finally, as we approach our 35th anniversary, we plan to use our Labor Day campaign as an opportunity to reinforce how enduring Bob's values are and create excitement with both new and existing customers.

Speaker 2

Looking ahead, we remain focused on executing against our long-term growth algorithm, which is driven by three key objectives. Growing our store base across new and existing markets, driving comparable sales, and expanding margins by leveraging our scale to improve efficiency. I'll give you a brief update on how we're executing against each of these objectives. When it comes to real estate and development, we have a saying at Bob's, "We don't open units, we develop markets." Our new store performance validates the strength of that strategy. During the second quarter, we opened four stores, bringing year-to-date openings to nine. These openings included our first two stores in South Carolina, marking our entry into an attractive new market and our 27th state. We also opened two stores in the Charlotte area, increasing our North Carolina footprint to eight locations with another store planned for the back half of the year.

Speaker 2

This expansion reflects our disciplined market development approach, establishing a presence in key markets and then building density through targeted infill opportunities. Across the portfolio, our new stores are performing at or ahead of expectations. We continue to see strong results from the 2025 cohort as those stores move beyond their first anniversaries, and our newer openings are off to a solid start. Importantly, our new infill locations are performing particularly well, helping us capture market share and drive incremental profitability with lower marketing requirements and attractive cash-on-cash returns. Looking ahead, our development pipeline remains on track with a number of openings planned around Labor Day, including our entry into Tennessee with four new stores. As we did with our most recent Southeast expansion, we will leverage strong awareness-driving media, local messaging, and partnerships that feel native to Nashville and the broader Tennessee customer for these openings.

Speaker 2

The goal is not simply to open stores, but to enter each market with a smarter, more efficient media mix that builds brand affinity from day one and positions Bob's to capture share over time. On comparable store sales, while the operating environment remains dynamic, we are pleased with the healthy demand we're seeing across the business. Initiatives such as our good, better, best product architecture and omnicart technology are helping us improve conversion, support average order value, and gain share despite a challenging traffic backdrop. We're also continuing to advance the operational initiatives that support our long-term growth. Our Midwest regional fulfillment center is now fully operational, and construction continues on our Georgia distribution center, which is expected to be completed in early 2027 to support our Southeast expansion. Separately, we successfully completed our transition to Synchrony as our primary financing partner.

Speaker 2

While it will take time to fully roll out, early reads are encouraging, and over time, we expect the partnership to support better approval rates, higher average order value, and a return of financing penetration toward historic levels of approximately 50%. As we look forward, we're staying close to the macro environment while continuing to manage the business with discipline and flexibility. Carl will discuss some of our cost mitigation strategies in more detail shortly, but I want to reiterate that Bob's has operated successfully through a range of market cycles, and that experience gives us confidence in our ability to navigate what comes next. At Bob's, our people and culture are central to who we are, how we operate, and how we win. They bring the Bob's way to life every day and are a critical driver of our long-term performance.

Speaker 2

The strength of that culture continues to translate to our results, and I'm especially proud that Furniture Today recently cited Bob's as the fastest-growing furniture retailer in the United States. Our priorities are clear. Deliver double-digit unit growth, drive low single-digit comparable store sales, and accelerate EBITDA growth over time. We are energized by the opportunity ahead and confident in the path we are on. With strong unit economics, a proven and portable store model, leading omni-channel capabilities, a differentiated merchandising strategy, and an exceptional team, we believe Bob's is well-positioned to continue expanding market share through disciplined execution of our playbook. 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, we delivered a strong second quarter amid external headwinds and lapping strong performance last year. Our results demonstrated disciplined execution across the business and continued focus on managing the factors within our control. While we continue to closely monitor the consumer and cost environment, we remain confident in the resilience of our operating model and the strength of our financial position as we invest in our long-term growth objectives. Before we get into the numbers, I'd like to quickly comment on the tariff environment. In the second quarter, we recognized a total of $45.1 million in IEEPA tariff refunds, of which $37.9 million was recorded to gross margin and $1.5 million was recorded in interest income. We view this event as one time in nature, and as such, excluded the P&L impact within our adjusted results for comparability and simplicity purposes.

Speaker 3

The remaining $5.7 million was recorded within inventory on our balance sheet related to product not yet sold. From a balance sheet perspective, it's also worth noting that the majority of actual cash received fell into the third quarter, and as such, $3.2 million of the refund was included in second quarter cash, and $41.9 million was recorded as a receivable. Moving to our results. Net revenue increased 8.8% to $619.6 million in Q2, driven by comparable store sales growth and contributions from new store openings. We opened four new locations in the second quarter, bringing us to a total store count of 218 stores. Comparable sales increased 2.3% in Q2 on top of a 10.5% gain last year. Performance was driven by higher average order values across both our retail and e-commerce channels and growth in conversion, which was partially offset by lower in-store traffic.

Speaker 3

Average order value continued to benefit from a mix shift into our better pricing tier. We were pleased to see that the targeted efforts we made in our good, better, best architecture continue to resonate with customers. As a reminder, the 10.5% comparable sales growth last year was predominantly driven by conversion related to the adoption of our omnicart technology in both stores and online. Second quarter adjusted gross margin, which excludes the tariff refund benefit, decreased 100 basis points to 45.4%. This was in line with our expectations, as last year benefited from a more favorable ocean freight environment that normalized this year. This impact offset margin gains from favorable mix shift into the better product category and higher protection plan margins and some moderate pricing actions.

Speaker 3

As we mentioned on our last call, we did incur some incremental fuel-related pressures in Q2 related to the delivery and line haul costs, which we were largely able to offset within our delivery margins. SG&A as a percentage of net revenue was 37.9%, an increase of approximately 20 basis points compared to the prior year, due to incremental marketing spend, largely to support our Southeast expansion, as well as higher payroll and occupancy expense associated with new stores. Overall, SG&A remains well controlled as we continue to drive efficiencies at existing stores. We are committed to disciplined cost management and optimizing efficiencies across the business. Adjusted EBITDA was $60.8 million, and adjusted EBITDA margin was 9.8% compared to 11% last year. The year-over-year decline in adjusted EBITDA margin was primarily due to the previously mentioned gross margin contraction.

Speaker 3

Adjusted net income was $27.8 million, compared to $32.2 million in the second quarter of last year. In addition to the drivers of adjusted EBITDA, adjusted net income also reflects interest on outstanding borrowings under our revolving credit facility, which we paid down near quarter end. Adjusted diluted EPS was $0.20, compared to $0.29 in the second quarter of fiscal 2025. Moving on to some balance sheet and cash flow highlights. At the end of the second quarter, cash and cash equivalents were $32 million, and we maintained strong total liquidity of roughly $177 million. As mentioned earlier, we received $41.9 million of tariff refunds subsequent to fiscal quarter end, further strengthening our liquidity. Our balance sheet is healthy, debt-free, and provides the financial flexibility to invest in growth and navigate an evolving macroeconomic environment. Turning to inventory.

Speaker 3

Inventories increased approximately 9% compared to last year, primarily driven by strategic and seasonal inventory investments to support store growth and increases in comparable sales. We are comfortable with the level and composition of inventory heading into the back half. Year-to-date, total capital expenditures net of tenant allowances were approximately $47 million, largely the result of investment associated with new store openings and distribution centers to support growth. Turning to our outlook. Thus far into the third quarter, we are pleased to see sales trends tracking in line with our long-term algorithm of low single-digit comparable sales growth. At the same time, we continue to monitor the cost environment and consumer behavior closely with a focus on disciplined execution and managing the factors within our control.

Speaker 3

Our experience navigating a range of market conditions gives us confidence in our ability to execute against our plan while remaining responsive to changes in the environment. The macro remains fluid, we expect incremental product cost pressures in the back half from fuel, ocean freight surcharges, and foam. As Bill noted, we have a mitigation playbook with several actions already underway, including vendor collaboration, targeted inventory purchases, supply chain efficiencies, and selective pricing adjustments. These actions have been incorporated into our outlook. Separately, the $5.7 million of tariff refunds recorded to inventory for product not yet sold represents another potential tool in our playbook, should it be needed in the back half. As a reminder, our guidance assumes the continuation of the existing tariff structure, including the 25% upholstery tariff.

Speaker 3

Since quarter end, the tariff landscape has evolved, with Section 232 tariffs expiring and being replaced by Section 301 tariffs at rates generally ranging from 10%-12.5%, depending on country of origin. Our outlook has contemplated a 10% rate, we view the incremental increase to 12.5% in Vietnam as manageable and expect to offset this through the mitigation actions we have successfully executed over the past several years. As a reminder, upholstered furniture remains subject to a 25% tariff that does not stack with Section 301 tariffs. As stated in our earnings 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%. Adjusted net income between $121 million and $129 million, and adjusted EBITDA between $255 million and $265 million.

Speaker 3

As a reminder, our guidance is in line with our long-term algorithm of low single-digit comparable store sales growth, 10% unit growth, and 10%-12% adjusted EBITDA growth. At the midpoint, our outlook implies an adjusted EBITDA margin of approximately 10% as we continue to expect a relatively flat gross margin rate year-over-year and slight operating expense deleverage to invest in our 2026 and 2027 greenfield store growth, including deeper expansion into the Southeast and the associated marketing expense. Our 2026 capital plan remains unchanged, with expected net capital expenditures of approximately $110 million-$115 million. The bulk of that spend will support our store growth initiatives and related infrastructure investments, including most of the capital associated with our new distribution center in Georgia ahead of its planned opening in early 2027, and we are already making tremendous progress.

Speaker 3

With respect to new store openings, we continue to target 10% year-over-year growth this year, primarily in newer markets across the Southeast, complemented by select infill locations in existing markets. We expect pre-opening expense of approximately $26 million in 2026, slightly higher than our prior expectations of $23 million-$24 million, largely due to the accelerated timing of a handful of early 2027 openings in the Southeast. Finally, to be helpful with modeling, we expect a full year tax rate of approximately 27% and full year share count of approximately 135 million. Before I wrap up, I'd also like to thank our teams across the organization for their hard work and focus. Their efforts have been instrumental in delivering these results and positioning us for the opportunities ahead.

Speaker 3

We remain confident in the strength of the business, our financial foundation, and our ability to execute our strategy while creating long-term value for our shareholders. With that, I'll hand it back to Bill for closing remarks.

Speaker 2

Thank you, Carl. Before we wrap up, I want to thank the entire Bob's team for their hard work and dedication. As our business continues to scale, our culture, the Bob's way, remains a core differentiator and a meaningful driver of our success. Looking ahead, we're confident in our ability to deliver double-digit unit growth, low single-digit comp growth, and accelerating EBITDA profitability over time. First, we are focused. We delivered solid growth and profitability on top of a strong year, and demand has remained healthy early into the third quarter. Second, we have a sustainable growth engine. We're on track to open approximately 20 stores in 2026, representing 10% unit growth, and we continue to see a clear path to more than 500 stores by 2035. Finally, our model is proven.

Speaker 2

We've successfully navigated multiple economic cycles by leaning into our core strengths. Strong vendor partnerships, a compelling value proposition, and operational agility. In closing, we're well-positioned. I'm excited about the opportunities ahead as we continue to unlock our potential. With that, we're happy to take questions. Operator?

Operator

Thank you. We will now be conducting a question and answer session. We ask that you limit yourself to one question and one follow-up. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would 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. One moment, please, while we poll for questions. Our first question is from Peter Benedict with Baird. Please proceed with your question.

Speaker 4

Hey, good morning, guys. Thanks for taking the questions. First, appreciate all the transparency around the tariff impacts. Really very helpful, well done there. I'm curious about how you're thinking about the second half from a refund standpoint. I think, Carl, you mentioned $5.7 million or so of maybe an option tool that you could deploy. Bill, you had mentioned kind of protecting value leadership in some of your prepared remarks. Maybe give us a sense for how you're thinking about the back half, what to do with that tariff money. Is this something where you think investing in price is going to make a difference? Is it marketing? Just curious kind of how you're thinking about the second half.

Speaker 3

Happy to. Let me elaborate on a few of the points we made in the prepared remarks on the tariff refund. First, the total refund was approximately $45 million, of which $39 million was related to inventory already sold. That was recognized on the P&L. That includes the associated interest income. We view that as unique. It was one time, and we fully excluded that amount out from our adjusted financial metrics. As you pointed out, approximately $5.7 million relates to the inventory not yet sold, and this was recorded as a reduction to inventory on the balance sheet. Given our roughly four times annual inventory turns, we do expect this inventory to be sold during the back half of the year. Although that amount is not assumed to benefit us in the guide we provided.

Speaker 3

As a reminder, our outlook assumes we successfully mitigate all cost pressures through actions within our playbook, this benefit provides an additional tool within our cost mitigation playbook should we choose to utilize it. Although we currently have no plans to do so. Just as a reminder, we have applied for a modest amount of additional refunds, it's too early to determine the outcome of that amount is not as material.

Speaker 4

Got it. Okay, that's great. Thanks, Carl. I guess my follow-up question would just be on the in-store traffic trends. Obviously, you guys are doing a great job with conversion and average order value. Maybe can you talk a little bit more about the trends in traffic? Are they stable? Are they getting any better? Are they getting worse? Just any color around the traffic trends would be helpful. Thank you.

Speaker 2

Yeah. Hey, Peter. This is Bill. Great question. Traffic continued to be a headwind in the second quarter, although our traffic trends outpaced the industry. We're very pleased to be taking market share in that regard. We are seeing maybe a little bit of flattening out of that traffic decline that we've seen in over the prior quarters. It's certainly too early to call a bottom. I don't have a crystal ball on that, no idea. For sure, we're seeing some green shoots in a few markets where we're beginning to see a little bit of an upturn in traffic. As regards second quarter, it remained a headwind. Having said that, we know how to lean into our conversion and AOV. We also are very excited about the increased penetration of higher income households among our customer base.

Speaker 2

That's been a trend for a number of quarters. It continued in the second quarter, where these higher income households are, as I mentioned in my prepared remarks, are loving the values they're finding at Bob's, that traffic is turning out to be very beneficial to us.

Speaker 4

Great. Thanks so much and good luck.

Speaker 2

Yeah. Thanks, Peter.

Operator

Our next question is from Robbie Ohmes with Bank of America. Please proceed with your question.

Speaker 5

Carl, I think you mentioned some select price increases to offset maybe some pressures as we're moving into the back half year. Can you remind us the way you're thinking about year-over-year prices? I think it was up 7% or something in the first quarter. What was price up in the second quarter, and how should we think about price increases in the back half?

Speaker 3

Sure. I'll start, Bill, you may want to jump in on kind of how we think holistically about pricing. We're still running around 7% on an LTM and year-to-date basis. We took only modest price increases in the second quarter and really in the first half. What we're seeing from a customer reception so far is exactly as we expect, which is that elasticity is unit elasticity, and that's kind of in line with our expectations. As a reminder, Bill will jump in on this, our pricing is surgical, and it's down to the local and regional level, and we're really encouraged by our ability to take those really sophisticated learnings and apply them when we take price at this level.

Speaker 5

Got you.

Speaker 2

Yeah. Hey, good morning.

Speaker 5

Oh, go ahead. Yeah, sorry. Go ahead, Bill. Go ahead.

Speaker 2

Yeah. Hey, Robbie.

Speaker 5

No, please.

Speaker 2

Good morning. Thanks for the question. Yeah, let me just punctuate what Carl said by saying that, as a reminder, for us, our commitment to value in every market we serve is absolute. As we think about managing our pricing in these volatile times, we want to make sure that our commitment to being 20%-25% below our competitor's average listed price, remains intact. That's the way we viewed the first half. Again, this commitment to value, I think, is at the core. In fact, I know it's at the core of our success through these turbulent times, but we've maintained that commitment throughout the first half.

Speaker 5

That's helpful. Just my follow-up. On Synchrony, the benefits so far versus your expectations, is Synchrony tracking in line? When do you think Synchrony could really sort of kick in and drive the penetration up?

Speaker 2

Yeah. Robbie, that's a great question. Obviously, we're watching it closely. We're very excited about this partnership. We implemented it in the late spring, in the second quarter, and it takes time to ramp up. Early stages, we are seeing a move towards higher approval rates and higher approval amounts, which certainly will benefit us. It's going to take a little bit of time for our consumers to transition from their prior Wells Fargo lines of credit over. I think it's safe to say that we're very pleased with the early days. As it ramps up, as Carl mentioned in the remarks, we're relying on this, and we're eager and excited for this partnership to be foundational as we move back towards our historical financing penetration of 50%. Carl, you may want to add some specifics to that.

Speaker 3

The only thing I'd add is that we're still running at a low 40% financing mix, which gives us opportunity and runway to 50%. We have the correct partners. We have the correct architecture to provide our customers really a best-in-class experience with financing. We're looking for trends from a consumer perspective to want to take on some additional personal credit. That's where we would see the opportunity go forward.

Speaker 5

Great. Thank you.

Speaker 2

Yeah. Thanks, Robbie.

Operator

Our next question is from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Speaker 6

Hi. Good morning. I wanted to ask about traffic in a couple of ways. The first is there any contrast between mature and immature? Do you like what you're seeing in ramping markets and stores? Thinking about this backdrop, is it mostly just macro, Bill, where the interest in the category is lower, or are you seeing evidence even in your business where the consumer is starting their journey online and ending it online and not coming into a showroom? Does that get resolved with macro, or is there some bigger push to e-commerce, you think, that's happening under our eyes?

Speaker 2

Yeah. Hey, good morning, Simeon. Thanks for those questions. Let me take the last one first around e-commerce. As we've reported, our e-commerce growth outpaced our store growth on total sales. Remember, we're an omnichannel player, so we're agnostic as to which channel they close in. Having said that, there's a clear trend we're seeing in the adoption of our omnicarts. Whether they close them online or in store, we're getting a lot of great feedback from the consumer that they love the easy, low-pressure environment. It's a self-directed journey. We're definitely seeing higher penetration in e-commerce. Let me just try to bifurcate between what I think might be macro and what might be a result of our intentional activities.

Speaker 2

As you know, we've been investing a great deal in the last couple of years in making sure that our e-commerce environment is congruent with our store environment, that the consumer can move easily between those two environments. We're getting a lot of great feedback from consumers that they're recognizing that exact thing. Same product assortment online, same financing options, same delivery options, et cetera. That penetration again went up in the second quarter. As far as macro backdrop to e-commerce, I think what we're seeing is relatively consistent, which is the typical furniture buyer may start their journey online. In fact, that's what we believe is the typical start to the journey with Bob's. They start online. They look at our website. They find things they like. They may buy online, and we're more than happy to support that, of course.

Speaker 2

More often than not, they want to come into the stores and see, touch, feel the product. Sit on that sofa, lie on that mattress. That continues to be the primary customer journey for us, and that's remained consistent. That hasn't really changed that much for us. What we're really excited about, of course, is the consumer who starts a cart in the store and closes it online, which really supports this idea of omnichannel. From the e-commerce macro perspective, I'd say it's consistent. Omnichannel continues to be the main focus for a furniture buyer, at least through our lens, and I think that played out in the second quarter. As far as your first question around traffic related to mature and immature markets, as I'm sure you know, we've talked about this in the past.

Speaker 2

We have a market development playbook that focuses on a number of things, specifically around brand awareness. We, as you know, spend on average two years planning our entry into a market. What we're seeing in relation to traffic in new markets, frankly, is very pleasing to us. It's meeting or exceeding our expectations in these new markets, and it's not accidental. We've leaned in heavily to brand development, marketing. We spend a lot of time doing focus groups. As we've referenced our Southeast expansion, we're very pleased with the stores that we've opened in the Southeast, and we're very optimistic for the new ones that we'll be opening the rest of this year.

Speaker 6

Okay. My follow-up is how we should think about pricing input costs, and then you have tariff refunds coming. It sounds like there's more input costs that are going to come for suppliers. You didn't say it necessarily, but it feels like that should happen as a result of what's happened to crude. Is that right? How do your suppliers look at that, and then how do you put that all together with what you're getting from tariff refunds?

Speaker 2

Yeah. Let me start with this, I know Carl wanted to jump in as well. First off, our merchandising strategy is really a superpower for us, and it's a core strength as we think about how we mitigate tariffs, raw material costs, inputs, et cetera. As a reminder, we don't sell any third-party brands. Everything we sell is made for us, and we've been working with our vendor partners as their input costs have been going up to mitigate those costs with them. In some cases where we need to, we will source new goods, which include tariffs and new higher input costs, again, to protect our margins.

Speaker 2

Our merchants have been very, as you might imagine, very busy over the last year and a half, making sure that we source the goods that have the costs embedded in them to protect our margins and allow us to deliver those goods at the prices that are compelling. We have a very open working relationship with our vendors. They've been super working with us, very transparent on their input cost increases. Where necessary, they've been passing through some minor cost increases, and we've been able to mitigate those with our tariff and price mitigation playbook. It's a very dynamic environment. We're very pleased with what we've been able to do to date. As we look forward, we feel confident that that tariff mitigation playbook will enable us to deal with whatever price increases come along.

Speaker 2

We have a wonderful, transparent working relationship with our vendor partners, and I want to call that out because that's at the core of how we're able to merchandise this so successfully. Carl, you want to probably add some specifics to that, I'm sure.

Speaker 3

What I'll add is on the timing of some of those input cost increases. Within the second quarter, we did incur higher fuel costs in our line haul and delivery, and we were able to fully offset this in the second quarter. They were generally related to real-time fuel prices, and they closely track market rates. Our ability to offset this was really driven by operational efficiencies, and particularly in delivery, we have leveraged AI planning to improve route economics, like stops per truck, retail per stop. We've added furniture removal as a component of our delivery process. In addition, we've seen benefit from our regional fulfillment center, which is now running at capacity in the Midwest. We feel confident in our playbook to use operating efficiencies to drive the input cost trends that we saw, and that was evident in the second quarter.

Speaker 3

In the back half, that's where we're going to begin to see the landed input costs related to ocean freight surcharges and raw material price increases. Again, as Bill mentioned, we have a tried and true playbook. Price is on that playbook, but it's the bottom of the rung. As you pointed out, we do now have a tariff refund, that is part of the playbook, but we have no specific intention to use that at this point. It's just part of the playbook.

Speaker 6

Excellent. Thanks, guys.

Speaker 2

Yeah, thanks, Ari.

Operator

Our next question is from Christopher Horvers with J.P. Morgan. Please proceed with your question.

Speaker 7

Thanks. Good morning, guys. The category overall seems to be particularly strong at the mid to high-end consumer based on what others reported. It seems like there's some pressure at the low end. I was curious, thinking about your results and your commentary on sort of better best versus cautious consumer, it does seem like there's some low-end pressure. As you think about that sort of goes in, goes out of trade-in versus maybe some pressure at the low end, how do you assess that? Did you see pressure on traffic or trends in May when gas prices peaked? Do you think that pressure is being offset by Value City share gains and maybe quantify how much of that Value City is maybe helping your overall same-store sales trends as well? Thanks so much.

Speaker 2

Yeah, you bet. Hey, Chris, it's good to hear from you. This is Bill. A couple of things related to the consumer demographics. We would say that the second quarter demographics are pretty consistent with what we've seen in recent quarters. As I mentioned, the penetration of the higher income consumer continues to outperform. We're very pleased with all the income levels that we're seeing thus far. Traffic has been very consistent. Our traffic has been down less than the industry, so we're picking up share there. I wouldn't say that we've seen any movement overall in the traffic or the demos other than the higher income consumer continuing to over-penetrate. I would also remind you that as we think about what these higher end consumers are buying, they're purchasing across our good, better, best at relatively the same proportion as all of our income demos.

Speaker 2

Slightly higher in better and best, but they're finding value in the opening and the good price points, which makes us very happy. I would also say this, while we're drawing in more of the higher income households, we're not being passive about that. We're reaching back out to them to reinforce repeat purchases and remind them of other opportunities at Bob's. We have a long history of understanding the purchase cycle, right? Our marketing team is being very poignant about welcoming them and bringing them into our fold and then encouraging repeat sales, which we're beginning to see. Specific to the Value City, again, we're very pleased with the performance of our stores that overlap with Value City. As a reminder, about 75 of our stores overlap with the Value City stores that have closed. That's 75 out of 218, so it's a minority for sure.

Speaker 2

We're very pleased with the reception that we're seeing with those prior Value City customers. We also benefit from the Value City closure in other ways. For example, real estate. We've picked up a few of their stores. In fact, some of the Southeast stores that we'll be opening this year were prior Value City or American Signature. We're benefiting from some of their excellent real estate. Then lastly, and in some ways, maybe most importantly, we're benefiting from the talent acquisition. We've welcomed on board a number of Value City former employees, both at the store management and line ranks, and we're very excited to welcome them and to show them and teach them the Bob's way, and they've been performing quite well. The Value City regions have been performing very well, as has our other regions. We're pleased with the overall performance.

Speaker 2

While we don't disclose individual region performance, I would just say this, that our performance relative to the industry across all of our regions has been outperforming. We're very excited about that. Let's see. I think I hit most of your points there. Carl, you'll probably want to fill in a few blanks, but it's a great question on the category overall. Let me just say this before I give it to Carl. The strength of our merchandising strategy and our everyday low prices, we've seen this performance across cycles for over 30 years now, and I would say it's performing pretty consistent with that as we see the macro backdrop today. Carl, go ahead.

Speaker 3

I think you answered that, Bill.

Speaker 2

Got it.

Speaker 7

Got it. Then as a follow-up, part of the overhang in the stock is as classic retail is the harder comparison. Are they going to be able to comp the comp? You face a harder compare here in the third quarter as it relates to what you've seen so far quarter to date. Does the two-year trend validate being able to land inside that like 2% long-term algorithm in the third quarter of this year?

Speaker 2

Yeah, Chris, first off, obviously, we're pleased with the second quarter performance that was in line with our long-term algorithm of low single digit. As you pointed out, comping the big comp we had the prior year, which was a step up, right? Q2 of 2025 was really a step up in performance, and it was really related to the implementation of a multi-year investment in technology, training, et cetera, our omni-channel cart. All those omni-channel investments played out and really, again, gave us a step change in performance last year. This year, we comp that with our long-term algorithm. We came out with 2.3% in the second quarter. As we sit here today in the third quarter, we're very pleased with the demand that we've seen thus far and believe it's in line with our long-term algorithm.

Speaker 7

Thank you so much.

Speaker 2

Yeah, you bet. Thanks, Chris.

Operator

Our next question is from Michael Lasser with UBS. Please proceed with your question.

Speaker 8

Good morning. Thank you so much for taking my question. Bill, you spoke to improving traffic trends, it sounded like within the second quarter. Not sure if that's inclusive of the quarter to date period as well. What would you attribute that to considering the macro backdrop? Is that all trade down versus some of the initiatives that Bob's has been taking to support its traffic right now?

Speaker 2

Good morning, Michael. Thanks for that question. As a reminder, store traffic, brick and mortar traffic was a headwind in the second quarter. Our traffic was down less than the industry, so we were picking up share there. I would say, look, it's a couple things. We say value is always in vogue and maybe never more so than in challenging times. Our marketing efforts have done a super job with communicating that. We believe that our outperformance in traffic trends has been a result of intentional activities to both welcome in the higher income consumer, but really, frankly, also remind our consumers of the great values that we have every single day at Bob's, as an everyday low price player.

Speaker 2

If I think about the overall macro backdrop, again, our comment was that while we've seen maybe a little bit of a turn in traffic in a handful of markets, we would overall describe it as flattish. The traffic trends overall is flattish. We're certainly not going to call the bottom on traffic for the industry. Again, another quarter where we outperformed on traffic versus the industry. Let me just make the comment, Michael, about our e-commerce traffic, which is up significantly. Again, we believe that's the direct result of our investments in our omni-channel business. We see the consumer more and more, moving between our channels and comfortable transacting online versus in-store. E-commerce traffic is up, and we're very excited about that. Brick and mortar traffic is outperforming the industry, which we believe is an intentional result of our marketing activities.

Speaker 2

Lastly, we've been welcomed into these new markets, and we're very pleased. Many of those stores are well outperforming their original pro forma, both on traffic and sales performance. I think this is an environment, again, where the Bob's value proposition, value without compromise, everyday low prices and quality stylish furniture is resonating, but it's an intentional result. I wouldn't say yet that the overall industry is turning. Carl, do you want to add anything to that?

Speaker 3

Well said, Bill.

Speaker 2

Okay. Yeah. Thanks, Michael.

Speaker 8

My quick follow-up question, Bill, is that coming off of the last point that you're not calling the bottom or calling the industry to improve, I should say. When it does improve, is it your expectation that Bob's is going to see an equal to or maybe greater improvement in its same store sales growth than the rest of the industry? Or does, because its position as a value player, mean that Bob's may lag behind the industry as the incremental demand comes in? Then how do you think about the potential margin on an upturn as that does unfold, especially if Bob's is comping in the mid-single digit range or better? Thank you.

Speaker 2

Yeah, Michael. Let me take the first part of that, then I'll let Carl jump in on the margin question. Look, we've been around 35 years. We've seen the performance of our business through every kind of economic cycle. I would just say relevant to your question about when the industry does turn, I would expect that our performance would be like it's been in the past. That we prosper in good times and in challenging times, and we take market share in all those times. We're very optimistic, and when the industry turns, that we'll more than outperform. I think our history demonstrates that. Carl, do you want to add anything?

Speaker 3

The one thing I'll add is just our confidence in the full year gross margin guide. What you could imply in the guide is that we're expecting flat year-over-year gross margins. Just given the contraction we saw in Q2, that does imply some outperformance in the back half. Our playbook is dynamic, and we react to the input costs. We're able to control with the playbook the actions we're going to take. The one thing I would point out about the back half is that specifically in the fourth quarter, we're going to anniversary some unfavorable product mix shift that we saw in the fourth quarter of 2025. As a reminder, last year around September, we took some price actions as it relates to offsetting some costs, specifically tariffs. That caused an unfavorable mix shift in our good, better, best architecture and overall product mix.

Speaker 3

We now are fully landed on the right architecture. It's working. We're seeing the improvement in the better and best category shift. We would expect that to continue into the back half, and you'll see that more favorable comparison in the fourth quarter.

Speaker 8

That's super helpful. Thank you so much, and good luck.

Speaker 2

Yeah. Thanks, Michael.

Operator

Our next question is from Jeremy Hamblin with Craig-Hallum Capital Group. Please proceed with your question.

Speaker 9

Hey, this is Will on for Jeremy. Wanted to stay on the pricing tiers here. I'm curious where that mix stands today versus the end of 2025, kind of where you'd expect to see that better and best tiers by the end of the year, and what sort of impact that shift could have on AOV and gross margin?

Speaker 2

Hey, Will, good morning. Thanks for the question. I would say right now, as we sit here today, our architecture is where we want it to be. As we've said a few times now, last fall, our merchants spent a great deal of time working overseas and domestically with our vendor partners to make sure we brought in goods that had the embedded tariff costs to protect our margin and to bring value to the consumer. Those goods started showing up in the spring. As we sit here today with the second quarter results, our good, better, best product architecture and pricing is kind of where we want it to be. We like it, and we love the way the consumer is responding and stepping up to better and best.

Speaker 2

We sit here today, we really like that position and we believe it's where we want to be. Our merchants will continue to enhance that, but I think it's right exactly where we want to be. As a reminder, when it comes to pricing, we have zone pricing capabilities. Our commitment to the consumer in every market we serve is that we'll be the value leader. As needed, we will make sure we manage our prices accordingly to retain that commitment. Carl, do you want to take it?

Speaker 3

The only thing I'll add is that the driver of the better and best category was both AOV, as you pointed out, in addition to the higher margin mix shift. They're modest, right? They're incremental drivers. We would expect where we're landed today that that would be a continued driver in the back half.

Speaker 2

Yeah. That's exactly right.

Speaker 9

Okay. That's helpful. Then just quick one. It sounds like the Georgia DC is on track here. I'm just wondering what kind of impact we should expect to see on the P&L, and how many stores that would be able to support in the Southeast once that's fully ramped.

Speaker 3

That's right. It's on track, and we're really encouraged. We broke ground and we're starting to develop there. All of the CapEx is expected to be deployed in the back half, maybe a little in the early part of 2027. We're expecting to open in the first quarter of 2027. There will certainly be a period of ramp as we have some pre-opening expense embedded in the guidance, in addition to just building the efficiency. That's largely expected to support a majority of our Southeast expansion, as we think about the areas within our openings into Nashville in the back half, in addition to continued expansion in North Carolina and South Carolina. That's where we see that Southeast expansion potential.

Speaker 9

Got it. Thanks for taking the questions.

Speaker 2

You bet. Thanks, Bill.

Operator

Our next question is from Oliver Wintermantel with Evercore ISI. Please proceed with your question.

Speaker 10

Yeah, good morning, guys. Are you seeing any change in competitive promotional intensity as peers absorb their own tariff costs?

Speaker 2

Yeah. Good morning, Ollie. It's great to hear from you. Yeah, look, it's definitely been a more promotional environment. We saw that through the second quarter, through the holiday promotional periods. We've seen it sustained into the third quarter. There's definitely been more promotional activity. As you know, we're an everyday low price player, so we don't participate in that. What's clear to us is the consumer is still seeing the great values of Bob's, and it's shown in our results. The competitive promotional activity does seem, to us, more intense and more sustained than it has in prior years.

Speaker 10

Got it. Thank you. When does the freight cost comparisons fully anniversary and should we assume gross margins then turn positive at that point?

Speaker 3

The freight cost, as I mentioned earlier, there's some timing component in the freight cost. In the second quarter, and we also saw some of this in the first quarter of this year, we saw elevated freight costs related to line haul and delivery. Should that continue, that would continue into the back half, and we have mitigation strategies, especially with our delivery efficiencies. The back half, that's where we're expected to see more ocean freight and freight related to higher raw material costs, and that's where those will land. The anniversary of that really would not be until 2027 or beyond.

Speaker 10

Got it. Thanks very much and good luck.

Speaker 2

Yeah, thanks.

Operator

Our next question is from Kate McShane with Goldman Sachs. Please proceed with your question.

Speaker 11

Good morning. Thanks for taking our question. I just wanted to follow up on the promotion question from earlier. You had mentioned it was higher across the industry, and it sounds like maybe gaps narrowed to 10% in the areas where promotions were a little bit more aggressive. Could you maybe talk about how sustained you're seeing maybe some of that narrowing of the price gap? Again, not to beat a dead horse, but just how you manage through that in the back half of the year if that gap does sustain itself.

Speaker 2

Good morning, Kate. It's great to hear that question. We've been able to, through our zone pricing mechanisms, maintain our price commitment to the consumer markets. Where we need to be reactive, we're able to do that. We're pretty confident, and I think our results show that we've been able to, through our pricing analytics, again, as a reminder, we have a very sophisticated pricing analytics function. With that, along with zone pricing, has allowed us to maintain our price gap across these various markets. We watch it carefully. We want to make sure we maintain our commitment to the consumer for value leadership in every market we serve.

Speaker 2

It's definitely been more promotional out there and we've been a much more, I wouldn't say more, but maybe consistently vigilant on making sure that our prices fulfill our value commitment to the consumer.

Speaker 11

Thank you.

Speaker 2

Yeah, you bet.

Operator

We have reached the end of the question and answer session. I would like to turn the floor back over to Bill Barton for closing comments.

Speaker 2

Yeah, listen, I want to thank everyone for joining us this morning and for all the questions. We're obviously very pleased with our performance in the second quarter and what we've seen quarter to date in the third quarter. We look forward to speaking with all of you again in a few months when we report our third quarter.

Operator

Disconnect your lines at this time. Thank you for your participation.

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