Welcome to Bed Bath & Beyond's Second Quarter Fiscal 2016 Earnings Call. All participants will be in a listen-only mode until the Q&A session of the call. Today’s conference call is being recorded. A rebroadcast of the conference call will be available beginning on Wednesday, September 21, 2016 at 7.30 PM Eastern Time through 7.30 PM Eastern Time on Friday, December 23, 2016. To access the rebroadcast, you may dial 888-843-7419 with the passcode ID of 43322661. At this time, I like to turn the conference over to Janet Barth, Vice President, Investor Relations. Please go ahead.

Thank you, Adrienne, and good afternoon everyone. Joining me on our call today are Steven Temares, Bed Bath & Beyond's Chief Executive Officer and member of the Board of Directors; Gene Castagna, Chief Operating Officer; and Sue Lattmann, Chief Financial Officer and Treasurer. Before we begin, I'd like to remind you that this conference call may contain forward-looking statements including statements about or references to our internal models and our long-term objectives. All such statements are subject to risks and uncertainties that could cause actual results to differ materially from what we say during the call today. Please refer to our most recent periodic SEC filings for more detail on these risks and uncertainties. The Company undertakes no obligation to update or revise any forward-looking statements as events or circumstances may change after this call. Our earnings press release dated September 21, 2016 can be found in the Investor Relations section of our website at www.bedbathandbeyond.com. Here are some highlights from our financial results. Second quarter net earnings per diluted share were $1.11. Net sales for the quarter were approximately $3 billion, a decrease of 0.2% compared to the prior year period. Quarterly comparable sales decreased approximately 1.2%. Sales from our customer facing digital channels grew in excess of 20% and sales from our stores declined in the low single digit percentage range. In addition, our Board of Directors today declared a quarterly dividend of $0.125 per share to be paid on January 17, 2017 to shareholders of record as of the close of business on December 16, 2016. Fiscal 2016 net earnings per diluted share are expected to be within the range we described in our previous earnings press release. I will now turn the call over to Sue who will review our second quarter financial results and our fiscal 2016 key modeling assumptions. Steven will then discuss some of the notable developments relating to our strategic initiatives. After our prepared remarks, we will open up the call to questions. I’ll now turn the call over to Sue.

Thanks Janet, and good afternoon, everyone. I’ll start with a review of our second quarter results which include the activity of One Kings Lane from June, 14. Our net sales for the quarter were approximately $3 billion, a decrease of 0.2% from the second quarter of last year primarily due to a decrease of approximately 1.2% in comp sales, partially offset by an increase of approximately 1% in non-comp sales including new stores and One Kings Lane. The decrease in comp sales for the quarter was attributable to a decrease in the number of transactions partially offset by an increase in the average transaction amount. As a reminder, One Kings Lane is excluded from our comp sales calculation and will be until after the anniversary of the purchase. Comp sales from our customer facing digital channels grew in excess of 20% in the second quarter, while our comp sales from our stores declined in the low single digit percentage range. Gross margin for the second quarter was approximately 37.4% as compared to approximately 38.1% of net sales in the second quarter of last year. The decrease as a percentage of net sales was primarily due to in order of magnitude a decrease in merchandise margin and an increase in coupon expense as a result of an increase in redemption, partially offset by a slight decrease in the average coupon amount. Also contributing to a lesser extent as a percentage of net sales was an increase in net direct-to-customer shipping expense which reflects a reduced free shipping threshold of $29 at Bed Bath & Beyond for much of the quarter. The inclusion of One Kings Lane reduced total company gross margin by approximately 12 basis points in the second quarter. SG&A for the second quarter was approximately 28% of net sales…

Thank you, Sue. As retail continues to evolve, there's been a democratization of shopping enabled by technology and the Internet, which has resulted in an ongoing shift in the way the customer shops. We now have more choices, more transparency and more convenience than ever, all resulting in significant investments in technology and dramatic shifts in the retail landscape highlighted by both new shopping options on one end, and retailer consolidation and closing the website and stores on the other. Over the past several years, in this environment that we have been transforming our company have laid the groundwork for future growth. We are excited about the opportunities to do more for and with our customers and to strengthen our business as a world class omnichannel retailer. We are making great progress in improving our capabilities everyday. We are taking a systematic and logical approach. We are evolving toward providing a more inspirational and personal shopping experience, with an expanded offering which includes a more differentiated product mix and enhanced services and solutions for our customers. This is to earn the reputation with our customers as the experts for the home and their accompanying life stages and life interests. Our investments over the past several years have furthered our foundational ability to do so. The opportunity to do more forward [ph] with our customers have never been greater. At the same time, while we make the investments necessary for our transformation, we remain disciplined in our efforts to achieve positive returns and improve the long term profitability of our company. Today, I will provide an update on some of the developments since our last call. We announced the purchase of One Kings Lane on June 14, about two weeks into the second quarter. As we've said previously, One Kings Lane…

Thank you, Steven. [Operator Instructions] Adrienne [ph], we're now ready to take questions.

Thank you. We’ll now begin the question and answer session. [Operator Instructions] We have Seth Sigman from Credit Suisse in line with a question. Please go ahead.

Thanks for taking the question. Good afternoon guys. So my first question is on gross margin. The decline this quarter was, I guess less bad relative to prior quarters. The factors you discussed are pretty similar. But I guess the question is which components are getting better sequentially? And then as you think about the current sales trends, how do you think about the promotional levers and perhaps the need to be a little bit more aggressive as we move through the year to achieve the comp guidance that you provided? Thank you.

Hi Seth, it's Sue. So for the second quarter we did see a decrease in merchandised margin and increases in coupon expense and to a lesser extent, direct-to-customer shipping expense in that order. That is consistent with what we also saw for first quarter. So that's been our general trend for what we're seeing. Regarding your second question, if you don't mind repeating it?

Yes, I'm just wondering about what promotional levers you have to potentially improve sales as we move through the rest of the year. And I guess, the point was that gross margin the decline this quarter was less bad relative to prior quarters. And is there a need to perhaps get a little bit more aggressive as we head into this important holiday period.

Well regarding the back half and the promo levers, I mean, we do have in for the back half of the year. Our third quarter is anniversaring a slight decline in comp from last year. It was our weakest quarter so we have that. We also have two additional shopping days between Thanksgiving and Christmas, and we also have some of the advertising changes we mentioned including our Welcome Home catalog. We're going to continue to work managing the deleverage of our gross margin. We do believe that for the year, the gross margin deleverage will be slightly less than last year, and so that's what we're modeling for the full year.

And Seth, this is Steve. The only thing I would add to that is that we built into the -- our expectations that it will be a fairly promotional back end of the year. We don't see any indication from other retailers that, that would be different, that our expectation should be different from that.

And Seth, this is Gene. Also, as far as different promotional levers we have been testing different shipping thresholds and we are planning on the $29 free shipping threshold that we currently have through the holiday season.

Okay, thanks for that color. And then my follow up question is about the SKU expansion that we've seen online. We've certainly seen it in the furniture category, and then I think you talked about a number of categories that you've added online most recently. Can you give us a sense of the inventory commitment required to really grow these businesses? And then also, if you're starting to see any sort of incremental sales lift as a result of this SKU expansion? Thank you.

Sure. A good deal of the inventory we are adding is vendor [ph] direct, so that's really no additional inventory requirement on our part. And we are seeing stickiness and good performance across many of the categories that we're adding. In the big picture, it's just -- it's incremental. I wouldn't call it significantly meaningful at this point, but we're showing -- it is showing that the customers starting to recognize it, it's appealing to the customer and it's growing.

Thank you.

And our next question comes from Kate McShane from Citi. Please go ahead

Hi, good afternoon. Thanks so much for taking my question. My question is centered around more of the dorm business I know Steve you mentioned a little bit about this in your prepared comments. But I just thought specific to the quarter what you saw for the back to college, back to dorm business. And how much did Memorial Day contribute to the second quarter?

I'll start and Sue could jump in. I think we said that starting with the back and Memorial Day, I said that, what we do call it? That we said it would be...

It was a marginal impact.

A marginal impact on the first quarter, so a marginal benefit to the second quarter.

That's correct.

And with Back to College, there's so many ways for us to measure it. There are certain things that indicated good strength. We measured the number of events, the number of attendees at events, the number of high school kids we reached, the number of pack and holds we do. From a sales perspective, it's a little bit more difficult for us to measure it because we peg items each year that we call back to college items, and they don't -- they're not the same necessarily year-to-year. And sometimes even additional categories might drop off or get added year-over-year. So when we looked at the entire quarter, which was relatively flat for us, I think it's fair to say that directionally, you could conclude that our Back to College business is probably similar.

Okay, great. And my second unrelated question is differentiation was a big focus also prepared comments. And I know you've achieved a lot of differentiation by acquisition whether it be One Kings Lane or Cost Plus, so could you maybe remind us how you are thinking about this acquisitions going forward especially in light of the focus on differentiation?

Sure. While you know in terms of a capital allocation structure, obviously we first invest back into the company. And then second, it would be acquisitions. And so we're constantly looking at things that we did would be beneficial or complement our business. And so that’s where we look at acquisitions. We have done in the past as you've seen recently, One Kings Lane. And it's something that we would consider but it's -- again, it's part of our capital allocation review that we discuss with the board on a regular basis.

Thank you.

And our next question comes from Alan Rifkin from BTIG. Please go ahead.

Thank you very much for taking the question. My first question is, as you continue to expand these noncore categories, be it e-commerce or the catalog or spending merchandising categories. Steve, could you maybe tell us how you are managing the risks of getting into these categories with respect to some of your return requirements?

Yes. Its -- we've had the historically very high return. The Bed Bath business that we developed was a very profitable business. And basically a lot of the things, basically I think everything that we've added of significance has been impacted; you know the margins that we operate under. But when you talk about noncore categories, Alan, we wouldn't all e-commerce our noncore category. E-commerce is a core category for us. I mean again, how we reach the customer, how we do more with the customer, how do we satisfy the customer, the digital experience is part of the entire experience, and we have to be great at it. So, -- but again, the things that we're doing, we do tend to do things incrementally. When you mentioned or when Kate mentioned acquisition, the things that we purchased were always done in a way that we didn't have to – have being able to form [ph] on it. So we always try to test into something, to make it work, to get better at it and to roll it forward. Similarly, all the things that we're doing with these categories that -- they're very -- they're not highly -- they're not risky, in the sense that if it's furniture or home decor, it's vendor direct for the most part. The categories that we are bringing in and how we show them, we do them in a way that it’s not to the detriment of our core categories so it doesn't confuse the customer or doesn’t [indiscernible] the site in a way they can't find what they're looking for. So even as we add categories to our website, it's very important that we improve the left side and our marketing and communication and personalization so that the customer can find what they're looking for. And we're not just adding a bunch of nonsense to customers or noise to a customer. So everything we do is with an eye towards being better in the eyes of the customer and with an eye towards not betting the house on anything but doing things systematically, deductively, logically, testing them out, proving them out and then rolling them forward.

Okay, thank you. And then it appears for the second quarter in a row, you slightly reduced your revenue estimate despite keeping comps in your earnings guidance the same. Can you maybe just tell us where the incremental gains on the EBIT margin is coming from?

There was a little bit of noise at the end of your question, I'm sorry. What'd you say, Alan?

Unfortunately, that line disconnected. We'll move on to...

Well, we want to go on record that it wasn't us.

And we'll move on to Budd Bugatch from Raymond James. Please go ahead.

This is David Vargas on for Budd. I think I'll take a stab at that previous question that was asked. Kind of the results this quarter kind of imply that you're keeping -- you're taking down a little bit of your sales guidance for the year, but keeping the EPS window roughly the same even though it is a wide margin. Could you tell us where some of the levers are maybe in the P&L that might help you achieve that, continue to achieve your earnings number, but potentially on a little bit softer top line?

Well, some of the items that we've been discussing is we do have our gross margin that we've talked about how we do things, the deleverage will be slightly less than last year. We have initiatives, ongoing initiatives. We're always trying to optimize our couponing and marketing strategy as we discussed before with our data analytics team. And we'll continue to try to be -- look at the SG&A line items and try to be a focus from a cost cutting initiative. We've always been a cost-conscious organization and ongoing culture of cost reduction.

And also, I'm not sure but we did maintain our comp guidance

We did maintain our comp guidance of relatively flat to a 1% increase.

Right. So David, are you talking about the spread between comp and non-comp? What are you talking about?

Yes, exactly. So the results came in a little bit weaker than what we were looking for but keeping – you know we ended up keeping our EPS roughly the same, keeping EPS guidance roughly the same. But I think the results this quarter were a little bit weaker than -- they were weaker than what we were looking for. So I was just wondering where in the P&L there opportunities to take costs out.

Right. One thing I would say is that they are really fun for us there's been no fundamental change. But that actually this quarter was what we had expected. And so you know whether -- our maintenance of the guidance, I know that you're saying that we were higher than when it came in perhaps. But again, for us there's been no fundamental change to where we are, you know that we expected that foot traffic to be down and sales to be where they are in the stores and basically where sales were digitally to be about where they are. So for us, we're still able to maintain that flat to 1% comp range and can maintain the historical range that we've been during this time of heavy investment for earnings. So I'm not sure but for us again we remain basically on course as we anticipated it.

Okay, thank you very much.

Thanks, David.

And the next question comes from Simeon Gutman from Morgan Stanley. Please go ahead.

Hi, good afternoon. It's Simeon Gutman. First question is a follow up to the first question that was asked regarding sort of sales and gross margin. I'll just ask it a little differently. So your gross margin was down a decent amount but a little bit better on a run rate if you take out One Kings Lane. But the top line decelerated, it got a little worse. And curious if there's anything to read into it. The current state of your promotional intensity, if you got less promotional, if there's some delivered strategy where you are seeing, if you take your foot off the promotional lever what type of response you see at the top line?

You mean, promotional versus last year? First quarter -- or this last quarter versus last year less promotional?

Yes, or look at it sequentially, right? The top line looks like it got a little worse, it decelerated. And the gross margin also got a little better. And so and thinking about if there is anything you are tinkering with on either side or if just this is how the business played out?

Yes. I mean, the promotional environment is consistent. We're always tinkering and trying things, maybe switching from print to digital -- or trying to become more efficient. Yes, and try and become more efficient but there has been no significant change in the promotional environment last quarter. There are some advertising changes that as Sue described that we have in the third and fourth quarter we have a new catalogue coming out, there’s also some additional advertising changes but nothing -- and they all continuously testing in between store and digital advertising, but there's nothing significantly different.

Okay. And a follow up on One Kings Lane. Can you talk about what you think, what was hurting them or their chances of success as an e-tail business? And then how does that change, like what are you doing differently, why did they become more successful within the Bed Bath portfolio?

I think they've always been a very successful merchandising organization. We've always admired the way they sell product and tell a story about product. Some of the things that we can add to an organization of that size are just capabilities that a large company has that we can observe within our structure that David have to bear on their own, so sometimes you just get the leverage of scale joining a larger organization like ours.

And your next question comes from Alan Rifkin from BTIG. Please go ahead.

Thank you very much. I think I got cut off on the middle of my last question. Can you hear me okay?

We can.

Okay. Thank you. It appears for the second quarter in a row, you've slightly lowered your revenue outlook while maintaining your comp and earnings guidance. I was hoping where the incremental improvement in EBIT margins was coming from that gives you the confidence that you can still hit that earnings range. Thank you.

The third and fourth quarter?

Yes. So in terms of improvements, we continue to try to manage our expenses and believe that we can achieve that by still maintaining the range the historical range we've previously provided.

And as Sue said earlier, the third quarter was the quarter last year that we did have a negative comp so slightly weaker. And the fourth quarter this year we do benefit from, I think, it's two additional shopping days between Thanksgiving and Christmas. And also the timing on the weekend of when Christmas flows benefits us and some slight shift in our advertising through this -- down again?

Adrienne?

[indiscernible] is online.

We can move on to the next.

[Operator Instructions] And Michael Lasser from UBS.

Good evening, thanks for taking my question. It’s on the productivity of your coupons; you think you are seeing the same level of customer response, especially as the world becomes a bit more dynamic and transparent. And are you seeing the same level of return that you might have historically?

Well we did see an increase in coupon usage for the second quarter, with a slight decrease in the average coupon amount. I mean price transparency continues to be prevalent and the coupon helps bridge that gap if there is a difference.

And the coupons critically -- it's always been an important part of our value proposition, but at the same time we're committed as an organization to smarter, more intelligent marketing, personalized, targeted, being more meaningful and being more efficient and optimizing that over time as well. So it's -- I think when you go back to question in the '08 and '09 when people became much more cost conscious, became aware of pricing when things started to go down this track, you know that coupon is clearly and has been strongly associated – strongly associated what has been very important, but really we need to be working and we are working on becoming a lot more intelligent about our marketing and making it much more personalized.

But do you think that the consumer is responding the same way to your coupon that they have in the past?

You know while I think that we had as Sue said, I guess in this last quarter, that the coupon redemption was actually up. So at the same time I think that people aggregate, they gain intelligence about it over time in terms of how they aggregate them, how they use them so that does change. And I think what other competitors do and availability of coupons impacts, things as well and their marketing. So, but I don’t think if you're looking for a thesis that has become a lot less responsive or a lot more responsive, we cannot support that thesis.

Okay, and you are expecting your comps to get better over the next few quarters in the fourth quarter, due in part to more days between Christmas than -- Thanksgiving, Christmas. So do you think that's going to have an equal impact on your stores as it will online or do you expect one channel to get better? I'm just trying to understand like where do you expect to see the improvement business over the next couple of quarters?

Good question. It's funny because it's all integrated for us. So a customer goes into a store and whether they are standing and there are buying online on their phone today, so customers researching online and going into its store. So it bleeds in many different ways, so it's not easy to predict but we would expect and we would be modeling that incrementally both should improve. So again, being up against a weaker third quarter is, in both cases, across our businesses and the additional day’s benefits whatever channel you shop through and whatever concept you are shopping with. So we should see it incrementally across -- everywhere we do business.

And our next question comes from Christopher Horvers from JPMorgan. Please go ahead.

Thanks, good evening. So a couple of questions. Is the $29 freight ship threshold; is that going to be a permanent change? And then following up on the gross margin question. So if you take out One Kings Lane, the gross margin decline did moderate, so curious why that happened. Is it that you're becoming more efficient in terms of the distribution aspect? Is marketing some sort of marketing efficiency driving that? Are investments moderating that's impacting cost of goods? From a big picture perspective, I think the market's trying to figure out when that gross margin rate might flatten out and -- is there something going on underneath that's driving that moderation that you could talk about?

Well, I'll take the first part and you'll take the gross margin. The $29 nothing is permanent, right? I guess, death is permanent. But I’m not even sure are, but the $29 is something that we've planned now through to the holiday but we have to be nimble enough to respond to competitive environment and into things that we learn and see in this time frame. But we are modeling and planning on that through the holiday season. But again that -- so we would not term that as permanent. For the margin question, I'll leave that for Sue.

Sure. So to your point, when you exclude the 12 basis points there was a little bit of improvement I guess in the deleverage. But essentially, we're always looking to improve any aspects within gross margin, the merchandise margin as well as we discussed earlier even though we have increases in coupon expense, we are looking to optimize through coupon strategy to how to improve that. We're always focusing on strengthening our deals with our vendors and the additional differentiated product that helps to mitigate margin erosion as well.

And as I -- earlier in our comments, we had anticipated the pace of gross margin deleverage to be reduced and less than last year.

And the next question comes from Brian Nagel from Oppenheimer. Please go ahead.

Hi, good afternoon. Thanks for taking my question. So I wanted to just dive a little bit deeper into the comment you made, I guess, you made previously about some forthcoming moderation in your investment spend. So the question out there is maybe remind us again of the timing of that, discussion of the magnitude how much -- and I think most of the CapEx that you were discussing. And what investments are you making now that are beginning to wind down? Thanks.

So you're right, Brian, we did -- we had talked about how 2016 is a peak in terms of the CapEx spend for us and that we anticipate coming off that after 2016. One of the items that we've called out for 2016 and previous years is our POS, which we do believe that will not be as anniversaring as much as it has been is a peak for 2016. So there are items that come on and there's items that come off, but POS is one of them that I could call out.

And also, Dave, the new Lewisville distribution facility that we mentioned on earlier that is just opening for inbound freight, this past quarter but will start opening for outbound freight next month. So that's another callout that we made earlier in the year in terms of the part of the CapEx spend for the year. As you recall, it's 800,000-square foot facility. So I think its [indiscernible] again.

And I think as we said on the last call, we will have large investments in the future whether we open up future distribution centers, but we also expanded our cost center. We just had a lot of large expenditures all hit in this year. And we don't anticipate at least for the foreseeable future that we'll have all those large investments like that all hit within one year.

So is the move online towards the omnichannel model, does that keep the investment -- I mean, you talked about this moderation coming this year to next year, but does the online initiative basically keep investment spending higher that otherwise normally would be?

I guess what you're asking Brian is they're a new normal, so it's dependent upon technology. Things change so quickly. We're seeing literally hundreds of vendors that we didn't see three years ago with opportunities of things where we might want to try or do we look at. So I think the best -- that's right to think that we and there's more opportunity, more things that are possible and things that we would be choosing among than historically when you are opening up stores and that the world you lived in and the things that you are doing, whether it be in logistics or real estate or construction office to a point and the things that you are doing were much more predictable. And again, they were stayed whereas the things that we looking at today are rapidly changing. So I think there is a new normal but to what Sue and Gene were saying, I mean for the foreseeable future is that we do see what's on the horizon, a short term horizon and that we see the spend coming down, but I do think there is a new normal.

And the next question comes from Dan Binder from Jefferies. Please go ahead.

Yes, thank you. Just following up on that question I mean, versus when you started this investment phase, do you foresee it being longer and deeper as you respond to new competitive threats? And I know you commented on the CapEx, but as you think about the gross margin investment, the expense side and the P&L, is that something that you think peaks this year as well or do we need more time?

I would say that we need more time. I mean, the pressures on gross margin continue to be an aid to all of retail as retail's just going through a transition, and we've been going through a period of investment for sometime.

And I would say a lot of the things we're investing in today we wouldn't have foreseen years ago. There's a lot of opportunities and this is our forecast for now and if we think at least for next year or so, we should be in that position. But we're always going to be looking at opportunities to improve the company and improve our future. And like Steve said, there's a lot more to review and decide and invest than they have historically been moving to simply opening stores.

And hopefully with the new POS system, the back end and the front end put into place for the Web businesses, there’s been a lot of the big expenditures, hopefully the things that we'll be building on won't be as expensive as putting them in place initially.

And then with regard to the new categories, I know you had some questions on the call about it. I'm just curious, you are obviously adding stuff here to have a bigger presence with potentially a greater share wallet with the customer but, what -- how do you think about your position in the marketplace. What's Bed Bath's angle? Is it going to be price on these new items? Is it the assortment? Is it content? And how do you get recognition for those categories? I mean, I just did a quick search on some of the items you mentioned, Bed Bath doesn't immediately come up as the top place to buy those items so I'm just kind of curious what the strategy is there and where you see yourself providing some sort of a competitive advantage.

Well you're right, Dan. For the moment really there's been little marketing around most of it, and it will be an effort to be better known for these areas. But I think it really starts with us doubling down being viewed as the expert for the customer’s home and everything home-related. And if we start there and do a good enough job there with differentiated product with really getting better services and solutions in place then it opens up the doors for these other things. And the other -- the further you move from the trunk of the tree out to the branches, the more difficult it is to tell the story. But when we are adding lightning and furniture and those type of categories, those will be easier for us. But you know for someone to look like for the chicken coup that will be less likely. But again it is -- so -- but we are not in a rush to make a mistake. We have to do it right and be diligent about it, we also have to vet [ph] all these vendors that have vendored [ph] direct to make sure that they could shift, they could ship on time that their product is what they say it is, that the customer's experience are good before we want to be out there pounding our chest that we have it, but overtime if we execute against the core business and continue to earn the reputation and the credibility with the customer growing to -- these other aspects of the business will be a marketing effort but a lot more easily done, but it's a great question, Dan.

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

Yes, thank you for taking my questions. A follow up on some of the expenses for this year, the $0.23 for payroll I believe you reiterated that number when you reported the first quarter. Is that number still looking good for this year in terms of an expense? And as we think about some of the growing areas that wage pressure is emerging, it does appear from many retailers that it's trickling into 2017 as well. How are you thinking about payroll outlook for next year at this point? Thank you.

Hi, Brad, yes. We did call out in order of magnitude payroll related expenses for Q2 that’s similar to the increase that we saw in Q1 as well. And we believe payroll and wage pressure will continue. We're not immune to it; it's impacting our broader workforce including all of retail. It’s also something that we seeing as you pointed out seeing a more than one year impact that there are scheduled increases depending upon the state or the city or the county for multiple years out. So we'll need to incorporate that as we make our plans going out and provide that communication in the future. But we do see continued wage pressure.

And our next question comes from Peter Benedict from Robert Baird. Please go ahead.

Hey guys thanks for continuing on with the Q&A here. You gave the gross margin and SG&A impacts from One Kings Lane. Could you give us a sense for what maybe the sales contribution was in second quarter?

You know I think that is not something that we directly provided although I'm sure with some of the communication and information that we have you could make some assumptions from there. That's probably not the direct answer and something we could consider in the future. But I do believe, with some of the assumptions we provide or some of the metrics we provided you can make some relative assumptions but overall, it's not material the entire sales activity for One Kings Lane for the quarter is not material.

It's a small part of the overall business.

Fair enough. Thank you. And I guess, can you help us what drove the change in your view about the gap between total sales and comp growth if you narrow that versus your prior view in the first quarter, what drove that change? Thank you.

Yes. There's a multitude of reasons for assumption changes in there. We’ve updated it for Q2 actual. It reflects modeling changes for non-comp businesses such as Linen Holdings and One Kings Lane. It reflects changes in timing for new store openings and closes and reflects changes and shipping in sales return estimates. So it’s a multitude of items in there and we'll continue to update that as the year progresses.

And our next question comes from Mike Baker from Deutsche Bank. Please go ahead.

Thanks. So we talked a lot about investments and CapEx peaking. I guess, this was kind of asked, but I'll ask it again more directly. Should we expect a similar trajectory in terms of investments that more directly impact the P&L, i.e., cost of goods sold or SG&A? And then I guess the follow up to that and related to that is, you have been saying for a while that earnings would be in that range of $4.50 to just over $5 during this heavy investment phase, and then it sounds like this could be the peak year of that heavy investment phase. So is the proper conclusion that earnings will break out of that range next year? Thanks.

Right now, we're working on our fiscal 2016 year. And when you get closer to fiscal 2017, we'll provide information on where we think that model in EPS range will look like for next year. And if you wouldn't mind repeating the first part of your question, I believe it was investments in cost of goods sales -- cost of goods sold and SG&A for the year.

Yes. I mean, -- I'll just ask it more simply. This year will be the peak year of investments on CapEx. Will also be the peak year in investments that impact the P&L more directly?

As in pricing? I'm not sure I understand.

SG&A, -- expect a lot of...

We are going to continue investing in payroll as we had mentioned, we do have wage increases and we're committed to providing superior customer service in our stores. And so the technology expense also that are associated with our strategic initiatives we'll continue to see some of that as well. It depends on our mix of strategic initiatives as we roll forward in terms of IT projects.

Right. I guess that will suffice.

I'm sorry, Mike go ahead.

I guess that’s the point of the question right there, is that the CapEx investment is peaking, can we say that that technology investment peaks this year as well, or are you not saying that?

Well, in terms of CapEx, if our -- if we invest less in CapEx in future years, so less CapEx you will have over time, you will have less depreciation associated with that's what you're asking about. And considering all your existing assets remaining the same, you would see over time a benefit in the P&L with less depreciation.

Okay, okay, understood. Thank you.

And the next question comes from Matt Fassler from Goldman Sachs. Please go ahead.

Thanks a lot. A couple of quick ones. If you think about One Kings Lane and its impact on the second quarter, were there any transaction costs that may have inflated the SG&A on a one time basis that won't recur going forward?

No.

Nothing significant.

Although we would say, Matt is that a lot of the benefits that derive the closing of the San Francisco offices system conversion and a lot of the benefits obviously we haven't begun to see yet.

Understood. And then secondly, your inventory growth was subdued relative to what you'd seen over the past few quarters, which I guess is good news to the extent that the environment is challenging. Can you talk about what brought the inventory levels down? Do you feel like you're in stock where you need to be particularly as you broaden out the assortment and as you presumably took on some inventory from One Kings Lane?

Yes, we took on some inventory for One Kings Lane. We also took on a little inventory related to the opening of the Lewisville, Texas facility we talked about. Our inventories, we continue to manage them. We're obviously getting ready for holiday and so we think they're in good shape and they're going to continue to be tailored to meet customer demand.

And then also going forward, Matt you still look at that we've said it a few times, the inventory we're adding for the furniture and home decor business, that's heavy BBC. And then if you go into our Hyannis store, the Bed Bath, the new store there, I think you'll see an example of some opportunities to what we call store of the future, which is to show product not carried and make it available to the customer and reduce inventory carrying costs.

Great. Thanks so much Steve.

You’re welcome.

And our next question comes from Seth Basham from Wedbush. Please go ahead.

Good evening and thanks for taking my question. My question revolves around differentiated products when you spoke about in this call. If you could give us a sense across the enterprise what percentage of your sales mix is from proprietary or exclusive product that will be really helpful?

Here's the answer. The answer is that we don't have a target. So -- but we do have the objective to drive differentiated product. You probably heard it from us before and everybody will cringe, but differentiated product is life and death to us. So it really is -- so if you look at Bed Bath & Beyond, which does depend a lot on branded products, we work on lead time first to market with product, but we've worked very hard on if you look at artisanal or you look at bedding or you look at what we've done with Wamsutta, very important. You look at concepts like Cost Plus World Market, Christmas Trees Shop and Bath, largely proprietary, significant proprietary projects -- products. If you look at One Kings Lane and that we've now launched this private-label program, if you look across Harmon, where we measure costs and growing our private-label product. In each of the categories that we do business in, it's essential for us to drive differentiated product and to, over time, be known for it. So but we don't set a goal because it goes down to what we're able to execute and customer acceptance of it. So in certain categories, things that you have applauded plug, it's very difficult for us to drive a lot of differentiated product. So I can't answer the question with a percentage or a number, but I can tell you that it's larger in certain businesses, smaller in others and being driven passionately across all.

That completes the question and answer session. I'll now turn the call back over for closing remarks.

Thank you, Adrienne and thank you all for joining us on the call today. We look forward to having you join us on our next quarterly earnings call which is scheduled for December 21, 2016. Have a good night.

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