Bob's Furniture (BOBS) Q3 2026 Earnings Call Transcript

DATE

Thursday, Nov. 5, 2026

CALL PARTICIPANTS

• Vice President, Investor Relations and Strategy - Edward Plank
• President and Chief Executive Officer - William Barton
• Executive Vice President and Chief Financial Officer - Carl Lukach

TAKEAWAYS

• Net Revenue -- $680.4 million, driven by new store expansion and 3.8% comparable sales growth.
• Comparable Sales -- 3.8% growth, reflecting higher average order values and increased e-commerce traffic despite lower in-store traffic.
• Adjusted Gross Margin -- 45.7%, a decrease of 30 basis points due to elevated fuel and inventory-related costs.
• Adjusted EBITDA -- $75.5 million, representing 17.6% growth and a margin of 11.1%.
• Adjusted Net Income -- $38.8 million, an 18.5% increase compared to the prior-year period.
• Adjusted Diluted EPS -- $0.28 for the quarter.
• New Store Openings -- 11 locations opened in the third quarter, bringing the total store count to 229 units across 28 states.
• E-commerce Performance -- 28% growth in sales, with digital penetration reaching a record 17.6% of total revenue.
• Omnichannel Order Value -- Customers shopping across both digital and physical channels spent nearly 20% more per order than the average customer.
• Pricing Actions -- 3.5% price increases were implemented during the quarter to help mitigate margin pressure from rising fuel costs.
• Inventory -- $373.6 million, an increase of 10% to support sales growth and new store inventory requirements.
• Liquidity -- $287.9 million, consisting of $109.9 million in cash and $178.0 million in available borrowing capacity.
• Full Year Revenue Guidance -- $2.6 billion to $2.625 billion, supported by comparable sales growth of 1.5% to 2.5%.
• Full Year Adjusted EBITDA Guidance -- $255 million to $265 million, implying an approximately 10% margin at the midpoint.
• Full Year Adjusted Net Income Guidance -- $121 million to $129 million.
• Capital Expenditures -- $110 million to $115 million projected for the full year, primarily for store footprint expansion.
• Financing Penetration -- 40% currently, with management targeting a return to historical levels of approximately 50% via a new Synchrony partnership.
• 53rd Week Impact -- The additional week in fiscal year 2026 is expected to contribute $46.0 million in net revenue and $6.2 million in adjusted EBITDA.
• Preopening Expenses -- Approximately $23 million, reduced from the previous estimate of $26 million due to occupancy timing for the Georgia distribution center.
• Delivery Efficiency -- 80% of customer deliveries occurred in under two weeks.
• Customer Demographics -- Households with annual incomes exceeding $100,000 now represent 45% of the total customer base.
• Debt Management -- The company repaid $350.0 million in principal on its term loan during the nine-month period ended Sept. 27, 2026.
• Tariff Exposure -- Upholstered furniture tariffs are scheduled to increase from 25% to 30% on Jan. 1, 2027.

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RISKS

• Lukach stated, "Diesel prices are up roughly 80% year-over-year, affecting our raw material costs, ocean freight surcharges, line haul and delivery expense," noting this as a primary gross margin headwind.
• Lukach warned that "higher fuel costs began to more materially impact gross margin in the third quarter and are expected to remain a headwind through the balance of the year."
• Barton noted that while the industry appears to have stabilized, brick-and-mortar traffic remains a consistent headwind for the furniture category.

SUMMARY

Bob's Discount Furniture, Inc. (NYSE:BOBS) reported increased market share and profitable growth during the third quarter, supported by a record number of new store openings and strong e-commerce momentum. Management indicated that despite a challenging industry backdrop for physical store traffic, the company achieved higher average order values as customers traded up into premium product tiers. The company utilized pricing actions and sourcing efficiencies to mitigate inflationary pressures in fuel and raw materials, while maintaining a liquidity position with no debt. Strategic focus remains on expanding the store base in the Southeast and enhancing omnichannel capabilities to streamline the customer purchase journey.

• Barton stated, "AI is becoming an increasingly important enabler of both growth and efficiency across Bob's," highlighting its role in delivery scheduling and supply chain packing optimization.
• Management reported that the simultaneous opening of four stores in Nashville followed a market entry playbook refined in North Carolina to establish immediate local brand awareness.
• The company is rolling out a new primary financing partnership with Synchrony, which management expects will support improved approval rates and higher transaction volumes.
• The Macon, Georgia distribution center remains scheduled to open in the spring of 2027 to support planned unit growth in the Southeast, including an entry into the Atlanta market.
• Barton noted, "In times like these, as we like to say, value is always in vogue, never more so in difficult times," reflecting the company's strategy to attract price-sensitive consumers across income cohorts.
• The company launched a furniture removal service that leverages existing delivery teams to provide a high-margin service while reducing friction for customers replacing old furniture.

INDUSTRY GLOSSARY

• Adjusted EBITDA: A non-GAAP financial metric that excludes interest, taxes, depreciation, amortization, and one-time items such as tariff refunds or restructuring charges.
• AOV (Average Order Value): The average dollar amount spent by a customer each time they place an order.
• Designated Market Area (DMA): A geographic area where the population can receive the same television, radio, and broadcast offerings.
• IEEPA (International Emergency Economic Powers Act): A federal law that, in this context, relates to the recognition of specific tariff refunds from the U.S. government.
• Omnicart: A unified shopping cart tool that allows customers to begin a purchase in a physical showroom and complete it online, or vice versa.

Full Conference Call Transcript

Operator: Greetings, and welcome to Bob's Discount Furniture 2026 Third Quarter Earnings Conference Call. [Operator Instructions] 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, Investor Relations and Strategy. Eddie, please go ahead.

Edward Plank: Good morning, everyone, and thank you for joining us to discuss our third 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.

William Barton: Thanks, Eddie. Good morning, everyone, and thank you for joining us today to discuss our third quarter earnings. Before I get into our results, I want to thank our outstanding team members across the company. Their commitment to serving customers, supporting one another and executing our strategy continues to set Bob's apart. Our strong third quarter performance reinforces a simple, but important point. Our differentiated business model continues to resonate with customers. Demand remained healthy as we continue to gain market share, reflecting the strength of our value proposition, the relevance of our assortment and the disciplined execution across our omnichannel model.

We generated strong profitability growth and continue to see solid performance from our new stores as we expanded our presence into the Southeast to Nashville, Tennessee, an exciting new market for Bob's. In addition, broader furniture demand trends appeared to stabilize during the quarter, providing a more balanced industry backdrop. Turning to our third quarter performance. Total net sales increased 10%, driven by new store expansion and comparable sales growth of 3.8%. We opened a record 11 new stores during the quarter, bringing our total to 20 year-to-date. Strong sales and disciplined execution more than offset gross margin headwinds this quarter, allowing us to deliver solid net profitability. For the quarter, adjusted EBITDA grew 18% with a margin of 11.1%.

Importantly, we achieved these results despite an inflationary cost environment in certain areas of the business, particularly fuel. Starting with demand, comparable sales accelerated to 3.8% in Q3 despite lapping a strong double-digit comparison last year. We saw healthy engagement across stores and digital channels, along with continued trade-up into our premium assortments. Collectively, our Better and Best tiers represent the majority of total sales, a mix that supports higher average order values and profitability, while still giving customers exceptional value across our assortment. Comparable sales also benefited from a portion of our 2025 store cohort entering the comp base and outperforming our expectations. Our laser focus on delivering the best customer experience continues to resonate.

Customer feedback remains strong, supported by high satisfaction scores, exceptional service from our store teams and fast fulfillment with many customers receiving orders in as little as 3 days. With a meaningful portion of our customers shopping across both stores and digital channels, the customer journey is increasingly omnichannel. These customers are growing faster than our single channel customer base and spending nearly 20% more per order than average, underscoring the value of our integrated shopping experience. With that as the backdrop, let me highlight several drivers behind the quarter. I'll start with real estate and development, where we opened new stores across both greenfield and infill markets, including Charlotte, St. Louis and our exciting entry into Nashville.

At Bob's, we often say we don't simply just open stores, we develop markets. Our Tennessee launch demonstrates the power of that approach. Over Labor Day weekend, we simultaneously grand-opened our first 4 stores in the Nashville market, supported by a marketing and operational effort designed to establish Bob's as a destination from day 1. While it's still early, we're very pleased with the customer response and initial productivity we're seeing across the market. Nashville builds on the positive performance we've seen in the Carolinas and further validates the portability of the Bob's model.

More broadly, our 2025 and 2026 store cohorts, including the stores we opened in the Carolinas earlier this year, are generally performing ahead of our initial expectations and competitive closures are creating additional opportunities to take locations and share in attractive markets. Looking to 2027, we continue to target 10% unit growth with strong visibility into a pipeline that includes our next major Southeast market, Atlanta. Our Macon, Georgia distribution center also remains on track to open in the spring of 2027, supporting the next phase of expansion and giving us added confidence in the infrastructure behind our growth plans. Marketing played an important role in our Nashville entry.

Our approach was informed by a market entry playbook we've developed and refined through recent expansion in the markets like North Carolina, where we've invested in understanding customer preferences, shopping behaviors and how customers engage with our brand, both online and in-store. We applied those insights in Nashville, tailoring our strategy to the local market while leveraging the strength of the Bob's brand. Our goal is to build awareness quickly, create local relevance and establish a strong share of voice. To support our 4 Labor Day weekend openings, we hosted live music and community events, welcomed the Tennessee Titans new head coach, featured our NASCAR showcar and made a meaningful donation to the Dollywood Foundation.

These efforts helped establish an immediate presence in the market in a way that was both high energy and locally connected. That same focus on relevance carries through to merchandising. Our merchants have strengthened the product architecture across Good, Better and Best, creating clear differentiation and more compelling reasons to trade up within Bob's. In Q3, strength in living room, motion and recliners helped offset relatively softer performance in mattresses, and we saw outsized mixed shift into our best offering, led by living room and dining. The result is a healthier sales mix that supports AOV, helps to offset cost pressures and reinforces the breadth of value across our assortment.

We also took selective price action in certain categories in Q3 to help preserve our margins. Even still, our prices remained at least 10% below our competitors' lowest promoted prices on average, maintaining our advantage in a highly promotional market. That balance is important. We are expanding choice across price points, styles and features while protecting the everyday value that defines Bob's and continuing to invest in sophisticated analytics that help us optimize pricing decisions across local, regional and national markets without compromising our value position. Finally, we remain encouraged by the breadth of engagement across income cohorts.

We have seen continued strength from higher income households above $100,000, which account for a growing share of our customers and currently represent over 45% of our total customer base. Importantly, we have also seen lower-income customers increase their AOV and continue to trade into our premium assortment. That gives us confidence that our value proposition continues to resonate even with a more price-sensitive consumer. Moving to omnichannel. Our capabilities are strengthening the way we serve our customers across channels. More customers are using Omnicart to start, continue and end their shopping journey because of the flexibility and seamless connection it provides across our physical and digital channels.

In Q3, those Omnicart transactions were a meaningful contributor to e-commerce growth as many customers begin their purchase in store and then completed it online. Total third quarter e-commerce sales increased approximately 28% year-over-year, with penetration rising roughly 250 basis points to 17.6% of total sales, the highest level we've seen to date. Importantly, we do not view e-commerce penetration as a goal in and of itself. Our focus is on meeting customers wherever they are in their purchase journey. That flexibility is an important part of our comp story and a good example of how our stores and digital capabilities complement one another.

It is also why we continue to invest in a more unified view of our customer and apply those insights across merchandising, marketing, service and capital allocation decisions. Operationally, we continue to make progress on the elements that most directly affect the customer experience. In-stock availability remains strong with approximately 80% of deliveries occurring in under 2 weeks. We also made progress reducing freight storage costs while continuing to manage fuel and driver-related cost pressures with discipline and flexibility. Across these areas, our goal is straightforward: improve efficiency, support profitability and preserve the service levels customers expect from Bob's. In addition, AI is becoming an increasingly important enabler of both growth and efficiency across Bob's.

First, we're using AI to drive sales through the customer journey by improving how we engage customers and personalize the shopping experience in both stores and online, helping to enhance the customer experience. Second, we're applying AI to reduce costs through better delivery scheduling, smarter purchasing and greater supply chain efficiencies, including packing and container optimization. Third, we're enhancing corporate productivity with AI-enabled forecasting and analytic tools that support faster insights, better decisions in a leaner, more efficient organization. While we're still in the early innings, we're encouraged by the opportunities we see to improve both growth and profitability over time. We're also encouraged by the early traction following the transition to Synchrony as our new primary financing partner.

While the rollout is still in its early stages, we continue to expect the partnership to support stronger approval rates, higher average order values and a gradual return of financing penetration towards historic levels of approximately 50% compared to our current level of roughly 40%. Taken together, these initiatives reflect how we are running the business, improving customer experience, investing behind the areas that can drive growth and finding efficiencies that support profitability over time. That balance is central to our long-term model. We're focused on building a larger, stronger and more profitable Bob's by expanding the store base, growing comparable sales and using scale, operating discipline and execution to drive margin expansion over time.

In the near term, we remain clear-eyed about the fuel cost backdrop. Our teams are addressing the expense pressures we can influence while staying focused on the customer promise that differentiates Bob's. We've navigated a range of economic cycles over our history, and that experience gives us confidence in our ability to manage through the current situation. Carl will cover the cost environment and our mitigation plans in more detail. But from a merchandising perspective, we are working closely with vendor partners, sharpening sourcing decisions and optimizing the assortment to protect profitability without compromising quality, style or value.

As we look to the balance of the year, we're encouraged by the trends we're seeing across the business and the continued resilience of our customer. Our performance year-to-date reinforces our confidence in the direction of the business and opportunities ahead. We're gaining share. Our merchandising initiatives are working. Our newest markets are performing well, and our omnichannel capabilities are strengthening the customer journey. We continue to see a long runway for profitable growth as we bring Bob's to more customers and keep executing the fundamentals. With that, I'll turn the call over to Carl to review our financial results and outlook in more detail. Carl?

Carl Lukach: Thank you, Bill. Building on Bill's comments, our strong third quarter results reflect solid execution against a challenging comparison to last year and a fluid cost environment. Our teams remain focused on the levers we can control, delivering healthy top line growth and year-over-year adjusted EBITDA margin expansion through strong expense discipline and meaningful SG&A leverage even as external pressures weighed on gross margin. Our performance demonstrates the leverage in our business model even as we continue to invest in the next stage of growth. In the third quarter, net revenue increased 10.3% to $680 million, driven by comparable store sales growth and contributions from new store openings.

We opened a record 11 new locations in the third quarter, bringing us to a total store count of 229 stores across 28 states. Comparable sales increased 3.8% in Q3 on top of an adjusted 12.3% gain last year. Performance this quarter was driven by higher average order values across both our retail and e-commerce channels. While traffic remains a headwind, we continue to outpace the industry as a whole in our key markets. Importantly, our newer store cohorts were a meaningful contributor to comp growth in the quarter, demonstrating the power of our development playbook and how our brand resonates in new markets.

Average order value continued to benefit from a mix shift into our premium pricing tiers, primarily Best, reflecting the targeted improvements we have made in our value class architecture and continued omnichannel selling capabilities. While we believe there is still some tailwind to this favorable mix shift, we begin lapping these improvements in the current quarter. Third quarter adjusted gross margin, which excludes a $4.9 million tariff refund benefit, decreased 30 basis points to 45.7%. This was slightly below our expectations as higher fuel and inventory-related costs more than offset margin benefit from favorable targeted pricing actions and mix shift into premium product values. Looking at fuel costs moving forward.

Diesel prices are up roughly 80% year-over-year, affecting our raw material costs, ocean freight surcharges, line haul and delivery expense. We expect elevated fuel costs to remain a near-term incremental gross margin headwind that is likely to persist into the new year. With that said, we are actively pursuing opportunities across sourcing, transportation and operating efficiencies, and additional price adjustments to mitigate a portion of that pressure consistent with how we have managed through prior inflationary environments. SG&A as a percentage of net revenue was 36.7%, a decrease of approximately 100 basis points compared to the prior year as strong revenue growth drove expense leverage and more than offset investments in new store growth, advertising, technology and the supporting infrastructure.

Overall, we continue to exercise cost discipline across SG&A, optimizing efficiencies through the business and aiming to keep dollar growth at or below sales growth. Adjusted EBITDA was $75.5 million and excludes the $4.9 million in tariff refund benefit. Adjusted EBITDA margin was 11.1% compared to 10.4% last year, driven by the previously mentioned SG&A leverage. Adjusted net income, excluding the tariff refund benefit, was $38.8 million compared to $32.7 million in the third quarter of fiscal 2025. Adjusted diluted EPS was $0.28. Turning to the balance sheet and cash flow. We ended the third quarter with $110 million of cash and cash equivalents, and a strong total liquidity of roughly $288 million.

With no debt and ample liquidity, we remain well positioned to fund our growth objectives and respond with flexibility as the macro environment continues to evolve. Inventory increased approximately 10% compared to last year, consistent with our revenue growth. We are comfortable with both the level and composition of inventory as we look to round out 2026. Year-to-date, total capital expenditures, net of tenant allowance were approximately $71 million, largely driven by investments in new store growth, distribution center expansion and strategic technology initiatives to support growth. Now turning to our outlook.

Thus far in the fourth quarter, we are encouraged by sales trends and momentum in the business, which continue to track in line with our long-term framework of low single-digit comparable sales growth. However, as discussed earlier, higher fuel costs began to more materially impact gross margin in the third quarter and are expected to remain a headwind through the balance of the year. Accordingly, we now expect full year gross margin to decline approximately 20 to 30 basis points year-over-year compared with our prior expectation of approximately flat. As Bill noted, our track record of successfully navigating a range of market conditions gives us confidence in our ability to execute our plan while remaining agile.

It also incorporates actions already underway to offset a portion of these pressures. As stated in our earnings press release, we are maintaining our outlook for net revenue of $2.6 billion to $2.63 billion, supported by comparable sales growth of 1.5% to 2.5%; adjusted net income between $121 million and $129 million; and adjusted EBITDA between $255 million and $265 million. As a reminder, our guidance remains in line with our long-term algorithm of low single-digit comparable same-store sales growth, 10% unit growth and 10% to 12% adjusted EBITDA growth. At the midpoint, our outlook implies an adjusted EBITDA margin of approximately 10%. Regarding tariffs, our guidance assumes continuation of the current tariff structure.

Applicable Section 301 tariffs generally range from 10% to 12.5%, depending on country of origin, and we continue to view that exposure as manageable through our mitigation playbook. Separately, certain upholstered furniture remains subject to a 25% tariff, which does not stack with the Section 301 tariff and is scheduled to increase to 30% on January 1, 2027. At this time, we do not expect any additional tariff refunds. Our 2026 capital plan remains unchanged, and we continue to expect net capital expenditures of approximately $110 million to $115 million.

The majority of this investment is directed towards expanding our store footprint and supporting infrastructure, including the cost associated with our new Georgia distribution center, which remains on schedule for an early 2027 opening. On the store growth front, we plan to open one more store in the fourth quarter. We expect preopening costs of approximately $23 million in 2026, which is lower than our prior expectation of $26 million, largely due to some favorability on occupancy timing for our new Georgia D.C. Finally, to be helpful with modeling, we expect a full year tax rate of approximately 28% and full year share count of approximately 135 million.

Before I close, I want to recognize our teams across the organization for the discipline, focus and hard work they continue to bring to the business. Their execution was central to our third quarter performance, driving double-digit revenue growth and adjusted EBITDA margin expansion despite gross margin pressure. As we look ahead, we remain confident in the durability of our model as we pursue the growth opportunities before us. Our flexible balance sheet provides us with the ability to keep investing behind our long-term priorities while creating sustained value for shareholders. With that, I'll turn the call back over to Bill for closing remarks.

William Barton: Thank you, Carl. We're pleased with the progress we made this quarter and proud of how our team is executing. The fundamentals of the business remain strong, and we're focused on continuing to bring Bob's quality, value, style and service to more customers over time. With that, we're happy to take questions. Operator?

Operator: [Operator Instructions] Our first question today is coming from Michael Lasser from UBS.

Michael Lasser: One of the big debates on the stock is still the degree to which Bob's will be able to accelerate traffic into 2027 and perhaps some of the benefit of all the good work that has been done around ticket may start to lose some of its power. So are you seeing any improvements in traffic in certain regions? And if you are not, what actions are you going to take in order to drive better traffic?

William Barton: Michael, this is Bill. Great question. Thank you so much. Look, traffic in the category in brick-and-mortar continues to be a headwind. But one thing I would point out is that as an omnichannel retailer, we think about traffic overall between the website and the stores, and we're very encouraged by the response that consumers are showing into our omnichannel channels. So while the industry backdrop with traffic continues to be challenged, we -- from the data that we see, we're continuing to pick up traffic market share. And then on the operating side, we maximize every opportunity.

The way we respect and treat our consumers, whether they're visiting the website or the stores, driving higher average order value, helping them find just that perfect furniture solution for their homes, you've seen our AOV continue to grow as consumers trade up to better invest. So while we're not expecting any upturn necessarily in traffic, last quarter feels like the industry stabilized a bit, was kind of our description. We look at it through the omnichannel lens, and we're very pleased with the traffic we're getting overall in the omnichannel world and how we're converting that with higher average order value.

And then I would punctuate all that by saying that most importantly, the customer experience and the feedback we're getting from our customers, be it on the experience they're having with us, the furniture that they're getting and their future view of coming back to Bob's, remains very, very strong. So in this kind of an environment, we're maximizing every opportunity we have to bring new talent in and the new consumers. One last thing I would say is on the new store front.

We've talked about this before, but as we think about entering new markets and exposing Bob's brand to new consumers, we spend a lot of time studying and planning that entry and again to maximize our reception in that market and to get our stores off to a great start. As we've already shared, the new store cohorts over recent years, especially in the South and most recently in Nashville, we're very pleased with the reception we're getting from consumers in these markets and how that's translating into business that at or above our expectations.

So again, I think this is a market overall, Michael, that execution matters, maximizing every opportunity matters, and we have the proven playbook to achieve all that. Carl, do you want to add something to that?

Michael Lasser: Sorry, that was all super helpful. My follow-up question is just how should we think about the gross margin into 2027? If these pressures persist, are you going to be able to take price in order to offset it? And do you think that there's going to be an elastic response to that?

William Barton: Yes, Michael, thanks again for that question as well. So pricing analytics is a core competency of ours that we've developed over recent years and really expanded. First off, let me remind everyone that as we think about our cost mitigation playbook, which is time tested through many cycles of challenges, taking price is the last thing that we do, and it's always the last thing because our commitment to the consumer is rock solid, and we will always protect our value proposition to the consumer. So as we think about this year and going into next year, #1, making sure we have the right merchandise and the right architecture at the right prices at every tier.

And as Carl shared with you in the opening commentary, we've seen a great reception from the consumers at every price tier. Even though our premium tiers are growing slightly faster, we're still getting a great reception at the good and opening price points. So as we think about taking price, again, it's part of our cost mitigation playbook. It's the last thing we always do and always with an eye towards protecting our value proposition to the consumer. Carl, do you want to add anything to that?

Carl Lukach: The one thing I'll add here is that in the third quarter, we did take more price than we have on a year-to-date basis. So we took about 3.5% price in Q3. And the elasticity we saw in that price was generally in line with our expectations. We tend to see unit elasticity. So that continues to build our confidence that as we see opportunities to take price, given our sophisticated pricing capabilities, we're able to take it in line with our expectations from a customer response perspective. And one other point. During the quarter, we did expand our pricing capabilities.

We've entered into new pricing zones, and we're continuing to get new -- more regional and really locally focused in terms of our ability to expand our pricing ability to come look at competitive dynamics.

Operator: Our next question today is coming from Bobby Griffin from Raymond James.

Robert Griffin: Congrats on managing a difficult quarter. I guess, Carl, I wanted to start maybe with your comments on the waterfall impact. I think you referenced the new store productivity on some of the stores rolling into the comp base was helping lift comps. Curious if you can expand a little bit more on that. What regions that's coming from? And is that something that you're doing maybe a little differently on those stores as they're newer cohorts? And is that something that can be maintained as we think about trying to build this out on a multiyear basis and what that waterfall impact could be?

Carl Lukach: Sure. So third quarter comps, some of the benefit there was the improvement in the value class -- Good, Better, Best -- and the maturing new stores that we see, as you pointed out. When we saw the outperformance in Nashville -- and that really builds our confidence on an expansion into the Southeast, we did see some of those -- sorry, expansion into North Carolina, we did see some of the North Carolina locations begin to enter the comp universe, and they gave an outsized comp performance than we typically have seen historically. So typically, our long-term algorithm is low single-digit same-store sales for existing stores.

There's a benefit of around 100 basis points for the flywheel of maturing new stores and then about 100 basis points of cannibalization impact. So that maintains you at a low single-digit same-store sales. This quarter, with North Carolina coming on board and the outperformance there, we did see that outperformance. Again, that builds confidence in the Southeast as we continue to expand. But it's early. We're still entering into Nashville. We just entered this quarter. We have Atlanta on our sites now. So it's early in terms of thinking of that as an algorithm. So I keep leaning into that as the comp algorithm go forward.

Robert Griffin: Absolutely. That's helpful, but encouraging to hear about the Southeast outperformance. And I guess, secondly for me, you gave some detail on the prior question on pricing. When we take the updated gross margin and kind of see what's implied for 4Q, it's still implying gross is up year-over-year in 4Q. So are we getting close to whole on pricing versus cost dynamics? Or is there other offsets you feel are still there to help you kind of get that gross margin outlook, if I did the math correctly?

Carl Lukach: Sure. You did the math correctly. In the fourth quarter, one thing to keep in mind is that we are going to anniversary a gross margin impact in fourth quarter of '25 related to unfavorable product mix shift into the Good category. That's what we saw last year in the fourth quarter, and that has since normalized. So we're encouraged by the value class mix. Better and Best represents around 60% of the business now. It's where we want to be, and we're now anniversarying and lapping that impact. So from a comp perspective, we see that as an anniversary. And then from a gross margin perspective, you would see that benefit in the fourth quarter of '26.

Operator: Your next question is coming from Oliver Wintermantel from Evercore ISI.

Oliver Wintermantel: Carl, maybe can you break down the 3.8% comp into traffic conversion and average order value, and remind us how that trended versus the second quarter, please?

Carl Lukach: Sure. So what we saw in the third quarter predominantly was driven by average order values. So that was the primary driver. Traffic was the unfavorable headwind. Conversion was mixed online on our e-commerce business; we saw a slight favorability or positive comp contribution. And in brick-and-mortar, we saw just slight unfavorability; it was modest. As a reminder, we're lapping a 12.3% comp last year, and that was all predominantly driven by the investment in our Omnicart. So we're now lapping that business, and we are continuing to see benefit in the Omnicart tool that we put in place last year. What we're seeing now is increased Omnicart penetration even sequentially.

In third quarter, the penetration was up versus second quarter this year. And store carts that were converted online, that penetration has also increased sequentially versus the second quarter of this year. So Omnicarts continuing to be a benefit as we think about that as a tool going forward.

Oliver Wintermantel: Got it. And the in-store traffic, is that the decline there -- just to make sure I get this, is that shifting towards e-commerce? Or is it really less customers shopping, just to make sure I get the difference there?

William Barton: Oli, this is Bill. I'll take that one quickly. That's a really insightful question. We have seen consumers converting a cart online that they started in the store or vice versa. And what we're beginning to see, and again, it's anecdotal at this stage, but consumers' confidence in closing online is because they've been into the store, they've got expert help, they sat in the furniture, they've experienced it, and they close online. So we're beginning to see, and to your question specifically, a shift in traffic between online -- between store and online.

It's hard to quantify the exact amount, but we believe there's a bit of an effect with consumers instead of coming back to the store, which would have been a second visit, they're closing the cart they created on the first visit online. And as a reminder, these Omnicarts have some of the highest AOV that we have among all of our sales. So with the penetration increasing, with the consumers' confidence to close the cart online after they visited the store and the fact that it's one of the fastest-growing carts that we have or sales that we have in our store system, we're very pleased with the outcome and receptivity. And I would add one more thing.

The receptivity of our Omnicart in the new markets, where this is the first exposure that consumers have to the Bob's brand, has been very, very high. So we're getting compliments left and right that being able to take a cart away from the store and close it online without any kind of pressure, which is the Bob's model, customers are calling that out and recognizing it. So Omnicart continues to be a driver of growth for us.

Carl Lukach: And then specifically on the traffic point, in our top DMAs, we're outperforming the market from a traffic share perspective. This has been consistent. This is taking share both in existing and new markets. So we're really encouraged as we lean into not just the regionals, but then the DMA level that we're taking share from competitors on a traffic basis as well.

Operator: Our next question today is coming from Peter Benedict from Baird.

Peter Benedict: Maybe just a follow-up there on the comments on industry stabilization, so you're taking share outperforming even at the DMA level. I guess you guys are doing better, which is great. But the signs of the industry stabilizing or getting better, that what sounds like you're trying to convey here. What else are you seeing that would suggest the industry is starting to improve here? That was just my first question.

William Barton: Yes. Peter, this is Bill. Yes, it's a great question. Look, our observation about stabilizing, first off, I want to be very clear, we're not calling the bottom, we're not calling necessarily that there's going to be an upturn. We just -- what we've experienced in our numbers is that the declines have seemed to stabilize into a range declines in traffic. And as Carl mentioned, we're picking up market share with traffic in virtually all the markets we serve. So it's really too early to tell any kind of turn. But what I would remind you and others is that furniture is often bought at life milestones, right?

You think about the young person setting up their first apartment or the young couple starting a family, all these milestone moments generate demand for furniture. And that continues even with the difficult macro backdrop. And in times like these, as we like to say, value is always in vogue, never more so in difficult times. So a lot of these young people, families, people downsizing are finding Bob's and they're coming in greater numbers. And obviously, we're being very effective at converting them into customers and sales. But again, the overall industry feels like it's stabilizing for us, but I want to be very clear, we're not calling for an upturn just yet.

Now what we've seen thus far is that Q4 continues that observation. But I'll let Carl add on to that with any more specifics. Okay.

Peter Benedict: Yes. No, that -- look, that's helpful. And my follow-up would just be on the new stores, obviously, a big part of the story is the new store opportunity and really nice to hear the performance so far here. You're going to do 21 this year. It's a little more than 20. I'm curious kind of is there upside to the view you can do 20 or so a year? And as we think about next year, the mix that you're thinking about in terms of kind of new markets versus kind of existing markets? Any color you can help us with the near-term pipeline.

William Barton: Yes, you bet, Pete. Yes, we're very pleased with our 10% growth long-term algorithm. This year, we're executing against that. You already called out that we've opened 20 stores. As we think about 2027, we have high visibility into that entire pipeline. Most of them are already under lease. Some of them, in fact, are already under construction, the ones will open in the first part of the year. So our long-term algorithm of 10% new stores, right, which obviously means we're going to be growing the absolute number every year, we're very confident in our pipeline in '27 with very high visibility into that pipeline.

Operator: Our next question today is coming from Chris Horvers from JPMorgan Chase & Company.

Christopher Horvers: I was hoping to try to bring together a series of the questions that have been asked. The acceleration to 3.8% comps here in the third quarter, can you help us think about sequentially what changed? So for example, you referenced higher level inflation in the third quarter. To what extent did that actually drive some of the improvement given the elasticity comment? Do you think the market backdrop improved? I know, Bill, you talked about stabilization. Is it share gains from Value City? And to what extent that the new store waterfall came in better than expected and also accelerated?

William Barton: Yes, you bet, Chris. Good to hear from you. This is Bill. First off, you mentioned the Value City. Look, over the years, we've continued to be the beneficiary of chain closings that have provided a number of benefits to us, right, real potential real estate locations, qualified customers that we can pick up and service, et cetera. So that Value City American Signature closure that happened in the spring of this year continues to be a benefit to us as we think about our Midwest and Mid-Atlantic regions, continuing to grow really strong. So as I think about the impact there, we feel very good about it.

We went into eyes wide open and welcome these consumers and they're responding adequately. And we're very excited about it. And this should continue. Carl, do you want to add on to his question?

Carl Lukach: Sure. And Chris, just to reiterate, the comp was driven by acceleration in our value class: Good, Better, Best. We're beginning to lap that now, right? So we're seeing where we want to be from a value mix perspective. We want to be around 60% Better and Best. We want to preserve and maintain the 40% Good that a lot of our customers come in and they look for. We were encouraged by the maturing stores that entered the comp base. That's North Carolina. So that's been an accelerant here. As I think about the quarter-to-date in fourth quarter and pulling this forward, so we're continuing to see healthy demand.

So demand that we saw in the third quarter, a lot of those dynamics have remained consistent. So really no change. We are lapping the value class, and we are lapping fully now the Omnicart benefit that we had that as a compare in the third quarter. So I want to make sure we pull forward into how we're looking at the business trending to date, it's really consistent.

Christopher Horvers: You read my mind one of the follow-up questions, which is like so is it -- but I guess to what extent, as you talked about October being in the historic low single-digit range, do you think the election had any impact in terms of -- and gas prices rising again, driving some uncertainty to where you could see some delayed demand? And then my original follow-up was just on the gross margin, is it your inability to fully pass this through to price? Is that something different relative to history? And is it more you're not seeing your value-oriented peers pass it through to price yet?

William Barton: Yes, Chris, this is Bill. I'll take a few parts of that, and I'm sure Carl will jump in as well. As far as the condition of the consumer, we haven't really seen any measurable change even anecdotally. And when I say not seen any change, I'm talking over the last few years even. The consumer has been very value conscious, which is really our sweet spot, right? When the consumer is really focused on value, we really shine in that area. And you can see that in our performance over the recent years. That's kind of continued. So the consumer is coming in, they're very value-oriented.

And we make sure through our merchandising that our compelling values are obvious at every level of Good, Better, Best. So we've just seen a consistent performance with the consumer from Q2 into Q3 and then into October and into the election season. So no real change there. What was the second part of your question? I'm sorry, Chris, what was the second part of or your question?

Christopher Horvers: It was more of the -- historically, you've done a great job about managing to gross margin rate. And so is it the sort of not fully passing through the -- to price the impact of fuel cost? Is it just a delay? Or is it simply that the environment is more promotional. So you're not seeing your peers pass it through and thus, you want to maintain that value proposition to the customer, and that's creating the pressure?

William Barton: Yes. Yes. I'll take a part of that, and I think Carl probably want to weigh in. Look, as we think about our cost mitigation playbook that we deployed, we've been deploying for years, taking price is always a part of that. It's always the last part. As I said earlier in this call, protecting our value proposition and really maintaining our commitment to the consumer that will be the best value in the markets we serve is of paramount importance to us. Now on the promotional front, what we've seen this year is that our competitors are more promotional, but more in duration than in depth, meaning that they're staying promotional longer, but not necessarily taking price down.

We've seen some prices in the industry go up recently, and we watch that carefully. Again, our pricing analytics team studies pricing movements in every market that we serve, always with an eye towards making sure, number one, we're the best value in those markets. And number two, it informs our decisions around whether we're going to take price up or down. But again, what we've seen from the competitors thus far is more promotion by duration rather than depth. Carl, do you want to add anything to that?

Carl Lukach: What I'll add to that is that the playbook really is across the full P&L, Chris. So as you think about pricing as a lever, it certainly is, and Bill walks through the dynamics. But the mitigation playbook goes through the whole P&L. And we're encouraged by the third quarter performance as it relates to our total profitability and ability to manage through this environment. Look, the fuel impact is real. We mentioned that diesel is up 80% year-over-year. But we've seen these environments before. We have a distinct cost advantage. Our business is built around low-cost operations. So the fuel dynamic is specifically impacting us real time across line haul and delivery.

We've seen some of those impacts from the second quarter into the third quarter, and we've been able to fully mitigate that. We've had AI-driven stop efficiencies within our route economics. We've added furniture removal as a competency now for us to better serve the customer, but also help drive a high-margin area of the business. So this is areas where across the whole P&L, we're driving efficiencies to look at the real-time impact. The lagging impact is the cost of raw material and ocean freight.

It begun hitting the P&L in the third quarter, and we anticipate that to continue into the fourth quarter as you think about the timing of getting inventory into your D.C. and the moving average accounting treatment that we have for our inventory. So we're continuing to mitigate these impacts on a go-forward basis.

Operator: Our next question is coming from Simeon Gutman from Morgan Stanley.

Pedro Gil Garcia Alejo: This is Pedro Gil on for Simeon. Nice job, Bill, Carl, delivering a Bellagio comp on top of the double-digit comp third quarter last year. That's encouraging. A couple of questions from me. First one, if I could follow on -- follow up on the topic of inflation that you see in the pipeline. You've mentioned diesel, also a little bit of on ocean freight. Could you remind us what the exposure is, how you're hedged there? How much you're forward contracted? Were you able to contemplate or how much of that were you able to contemplate as you put in your orders for 2027?

And then if and when the industry moves to take pricing, does that make your value positioning more relevant? Does that put you in a better position to take share from the industry and to get trade-in into your value tiers?

Carl Lukach: Sure. I'll start with the fuel impact. So the fuel impact in the business is across several areas. The first is cost of raw material and ocean freight. From this perspective, we are in long-term contracts with deep, long-standing relationships with our vendors. These are negotiations, and we have great partners that we've had for years and years. So this is a cost-sharing opportunity for us with these vendors as we think about navigating dynamic landscapes. And this is how we always do it. We've seen these kind of environments before. And there's no cost opportunities as we think about continuing to manage this dynamic.

From a line haul and delivery perspective, the line haul is a business where we do, from time to time, enter into direct fuel contracts. We're fully hedged in the rest of 2026. We have no hedges in place for 2027 or beyond. So we're encouraged by our ability to help navigate that landscape. Delivery is a surcharge. So that's just an area where, as you see increased fuel costs, this directly passes through to us, and we see that impact real time. Bill, do you want to jump in on the second part?

William Barton: Yes. The second part -- Pedro, this is Bill. The second part, you were asking about competitors' price moves. So I think as I mentioned earlier, but I just want to expand on this. We have a very advanced pricing analytics team that's been developed over recent years. And they watch in every pricing zone we operate where the competitors are, what they're doing on like-for-like items, sort of the overall trends. And that leads into our own pricing decision. But it's not necessarily conclusive because, number one, we're committed to being the everyday low price leader in every market we serve. So number one, making sure that we live up to that commitment to the consumer.

Obviously, when the competitors make price moves, we watch that. And we say, okay, how does this translate through to elicit our prices, and we'll make decisions based on that. So again, in this very dynamic cost environment, that's one of the inputs that we use to make pricing determinations, but always with that commitment to being the everyday low price leader in our markets.

Pedro Gil Garcia Alejo: Okay. Great. That's very helpful. And my second question, I'd like to ask you about agentic commerce. There's been a number of retailers partnering up with the AI platforms. Given your omnichannel model, your logistics footprint, your value positioning and how fast you're growing in digital channel, what is the opportunity for you to partner with these new technologies over the long term?

William Barton: Yes, Pedro, that's a great question. Thank you. Listen, we think that agentic commerce could be a huge opportunity for us. Our digital commerce team is very active in this space. And while we're not necessarily disclosing many details, I can assure you that we're already working hard, for example, to make sure that agentic commerce finds Bob's and finds us in a positive way and recommends us. But we're still in the early stages, but we're very active in that space.

I think it's -- if you step back a second and look at our strategy of being an omnichannel player, it's obvious that we're going to have to make sure that as the different channels that make up omni emerge and that we need to be a leader in those areas. So agentic commerce is high on our priority list. We're very active in the early stages of it with a number of partners. And I'm very excited for what it could mean. Remember, as the everyday low-price leader of quality stylist furniture, we love being compared side by side. So we love being in this kind of environment.

But we're going to make sure that we are going to take advantage of that under the heading of our omnichannel strategy.

Operator: Our next question today is coming from Kate McShane from Goldman Sachs.

Emily Kech: This is Emily Ghosh on for Kate. We wanted to ask how you're thinking about trends between the Good, Better and Best pricing tiers for the remainder of the year. And then you mentioned that Better and Best represents the majority of total sales. So how are you thinking about that mix over time?

William Barton: Emily, this is Bill. It's one of our favorite questions actually because at the core of Bob's strategy is our merchandising strategy. And it's been a real strength of ours, obviously, for many, many, many years. So as we think about bringing new product to market for our consumers, we don't just think about the individual article or family they're bringing to market, making sure as a stand-alone purchase opportunity, it has compelling value. But even moreover, how it sits in what we call our product architecture, which we describe as Good, Better and Best, which are really price ranges. And as an organization, we like to call ourselves a learning organization.

We study all the consumer reaction to our merchandise with the different price tiers. And obviously, first off, number one, compelling values at every price tier. Number two, compelling reasons for the consumer on their own to observe and step up, right? So just for a little bit more money, you can step up from Good to Better and get more style or more quality, a little more different characteristics, maybe larger pieces, et cetera. But we always look at it through both lenses: the stand-alone value of the article itself and then how it sits in the architecture overall. Carl mentioned that roughly today, 60% of our sales are in our premium tiers, Better and Best.

And we continue to make sure that the consumer steps up in a way that they feel that they're getting great value. And we'll continue to invest in that. Newness for us is a consistent strategy. So every year, between, I think, roughly 20% and 30% of our articles are new, and they're coming in to reinforce this Good, Better, Best structure. You'll see -- you'll hear us talk about this probably virtually every quarter going forward. And what we'll find is consumers will love the value at every price tier. They're giving us great feedback on it. In general, each price tier, as you step up, is better margin for us.

So we put a lot of energy and make sure that we are architecting the strategy in every piece that we bring to market.

Operator: Next question today is coming from Robert Ohmes from Bank of America.

Unknown Analyst: This is [ Vicki ] on for Robert Holmes. So just following up on the trade-up question. Can you talk about what is driving the trade-up into Best versus last quarter, you've talked about customers just trading up to Better. What are you doing in merchandising that's different to drive the trade-up to the Best tier versus just Better?

William Barton: Yes, this is Bill. Let me start with that. So as you pointed out, last quarter, we talked about trading up into Better. In this quarter, we're emphasizing more on the Best. A couple of things. Number one, it was intentional by our merchandising team. We brought in some new articles and families at the Best price tier in the spring time, and we're seeing a great reception by the consumer. And again, as I mentioned before, and I'll just summarize, when our merchants are looking at new product, they look at it through both lenses: the individual articles value as well as where it sits in the architecture.

There was a concerted effort in the last 9 months to make sure that we really beefed up our Best price tier, which obviously has the highest retail price, but it also, in most cases, has the Best margin as well. But it was intentional. It was a focus of our merchandising team to make sure that we shored up the Best. And we're never done, right? There's continual improvement in Good, Better and Best every year. We watch what articles are selling, what articles are being traded up, and then we beef up our product architecture accordingly.

So -- but again, the call out for the trade up to Best in the last quarter was really a result of an intention to bring even greater value at the Best price tier.

Unknown Analyst: That's very helpful. And my follow-up question, you've now added the furniture removal service. How is the attachment rate trending there? And how much of a contribution can this new service be to margin?

Carl Lukach: We're very early there, but we're really encouraged. When we add furniture removal, we already have our delivery team in a customer's home. So the ability to help them reorganize their home to fit in their new products or actually give them a compelling reason to make a purchase now that they have that as an option or ultimately remove furniture from their home, which we recycle. So it's a great opportunity for us. We're very early. Given that the team -- the delivery team is already in the home, it's a high-margin business, then they're leaving with an empty truck already. So we see this as an opportunity, but it's early, and we're encouraged.

And we're starting with some of this as very targeted marketing. So within specific DMAs, we're being a bit more targeted in terms of the intent of adding furniture removal as part of an order.

William Barton: Yes. And let me add one thing to this, Vicki, real quick. If you think about our omnichannel strategy and our long-term goal of taking friction out of the omnichannel purchase cycle, one of the things we've heard from customers over the years is, I'd love to buy your sofa, but what do I do with my old one, right? So this idea of furniture removal has been something that the consumer has been asking for, for a while. And as Carl said, we were able to engineer an offering that is being very well received. Consumers love having that option. And again, it's leveraging a team we already have in the home, which means it's high-margin business.

Early stages, but I will say I'm very encouraged by the reception we're getting by the consumers.

Operator: Our final question today is coming from Brad Thomas from KeyBanc Capital Markets.

Bradley Thomas: Congrats on a great quarter here. Maybe I could squeeze in one more on the sourcing and supply chain dynamics and understanding this is very much an industry issue, not a Bob's issue. But as we think about 2027 at this point, do you still think it can be shaping up to be an algorithm year? Or is it just a backdrop where this might be more realistic to have an EBITDA range that might include something a touch lower in the initial thoughts?

William Barton: Brad, this is Bill. Great question. First off, we remain committed to delivering on our long-term algorithm, right? And so everything that we do in our tactical planning and execution, including supply chain, working with our vendor partners, sourcing, dual sourcing, moving sourcing between countries is all in alignment with our long-term algorithm of 10% new unit growth, low single-digit comp and growing profitability faster than top line. And we feel confident in our ability to execute. I mentioned earlier that one of the capabilities we've really invested in recent years is our pricing analytics team. We've also really beefed up our strategic sourcing function.

So while our merchants and buyers are out there dealing in real time with vendors and supply chain, we have a strategic sourcing team that's out there 2, 3, 4 years ahead of them working on capacity planning and sourcing and so forth. So we feel really good about our capabilities in this area and again, alignment with our long-term algorithm. Carl, do you want to add into what Brad was asking?

Carl Lukach: The only thing I'll add here is that the fuel impact, as we mentioned, is real, and there is some lagging impact in terms of the raw material and freight impact. So that would be a cost headwind. But to Bill's point, we've seen these environments before. We have a distinct cost advantage. We have a playbook that's been tried and true over multiple years of dynamic industry components. And so we continue to lean into the algorithm as we think about that playbook being a cost mitigation strategy.

Bradley Thomas: That's really helpful. And if I could add a follow-up on just the cash balance. You all continue to generate really nice cash flow. Is there any strategic reason to want to maintain a net cash balance? And just as we consider some of the pullbacks that we've seen in the stock this year, where valuations have gotten to levels in our view that have just been incredibly inexpensive, would you all consider a buyback?

Carl Lukach: So as we think about capital allocation in general, we maintain our highest use of cash and capital is for growth investment. That would be our expansion of our white space potential, 500-plus units by 2035, 80% cash-on-cash return by year 5. So we're continuing to invest in new stores. We're continuing to invest in distribution centers, technology, everything to support the infrastructure to really penetrate that white space. As we think about free cash flow generation in excess of growth capital, we would consider some opportunistic returning capital to shareholder at the right time.

Operator: We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

William Barton: Yes. Thank you, operator. Look, we're very pleased with the progress we made this last quarter, and we're excited about how this quarter has started as well. I have to close by the way I opened, which is how proud I am of our team. We have a team that has faced all kinds of macro challenges over several years, developed a very disciplined playbook and knows how to execute that playbook. And you can rely on us to continue to follow that disciplined approach as we deliver on our long-term growth algorithm. Thank you for spending the time with us today, and we appreciate the questions, and that's it from our side.

Operator: Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.

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