Bobs Discount Furniture Q3 2026 Earnings Call Transcript
Bobs Discount Furniture (NYSE:BOBS) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Bobs Discount Furniture reported a 10% increase in net sales for Q3 2026, driven by new store expansion and a 3.8% increase in comparable sales.
The company opened 11 new stores in the quarter, bringing the total to 229 stores across 28 states. Strong performance was noted in new markets like Nashville.
Adjusted EBITDA grew 18% with a margin of 11.1%, even amidst inflationary pressures, particularly in fuel costs.
E-commerce sales increased by approximately 28% year over year, with online penetration rising to 17.6% of total sales.
The company is leveraging AI to improve customer engagement, reduce costs and enhance corporate productivity.
Future outlook includes targeting 10% unit growth, with plans for a new distribution center in Georgia to support further expansion.
Bobs Discount Furniture expects full-year net revenue between $2.6 billion and $2.63 billion, maintaining its outlook despite gross margin pressures from rising fuel costs.
The company is focusing on maintaining its value proposition, with strategic pricing actions and expansion of its premium product offerings.
Full Transcript
OPERATOR
Greetings and welcome to Bobs Discount Furniture 2026 third quarter earnings conference call. At this time, we kindly request that all participants remain in listen-only mode. A question and answer session will follow the formal prepared remarks. As a reminder, this conference call is being webcast live and recorded for replay. I will now turn the call over to Eddie Plank, Vice President, Investor Relations and Strategy. Eddie, please go ahead.
Eddie Plank (Vice President, Investor Relations and Strategy)
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 Lukac, 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 G Barton (President and CEO)
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 Bobs Discount Furniture 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 disciplined execution across our omnichannel model. We generated strong profitability growth and continued to see solid performance from our new stores as we expanded our presence into the Southeast, to Nashville, Tennessee, an exciting new market for Bobs Discount Furniture. 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 three 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 Bobs Discount Furniture, 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 four stores in the Nashville market, supported by a marketing and operational effort designed to establish Bobs Discount Furniture as a destination from day one.
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 Bobs Discount Furniture 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 into 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 strengths of the Bobs Discount Furniture brand.
Our goal was to build awareness quickly, create local relevance, and establish a strong share of voice. To support our four Labor Day weekend openings, we hosted live music and community events, welcomed the Tennessee Titans’ new head coach, featured our NASCAR show car, 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 clearer differentiation and more compelling reasons to trade up within Bobs Discount Furniture. In Q3, strength in living room motion and recliners helped offset relatively softer performance in mattresses, and we saw outsized mix shift into our best offering, led by living room and dining.
The result is a healthier sales mix that supports AOV, helps offset cost pressures, and reinforces the breadth of value across our assortment. We also took selected 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 Bobs Discount Furniture 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 began their purchase in-store and 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 two 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 to improve efficiency, support profitability, and preserve the service levels customers expect from Bobs Discount Furniture.
In addition, AI is becoming an increasingly important enabler of both growth and efficiency across Bobs Discount Furniture. 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 and 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 were 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 toward 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 Bobs Discount Furniture 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 Bobs Discount Furniture. 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 Bobs Discount Furniture 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 Lukac (Chief Financial Officer)
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 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 cost, 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 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 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 allowances 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 and $129 million, and adjusted EBITDA between $255 and $265 million. As a reminder, our guidance remains in line with our long-term algorithm of low single-digit comparable same-store 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. Temporarily, 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 costs 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 pre-opening 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 DC. 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 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 G Barton (President and CEO)
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
Thank you. We’ll now be conducting a question-and-answer session. If you’d like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you’d like to remove your question from the queue. We ask you please ask one question and one follow-up, then return to the queue. Our first question today is coming from Michael Lasser from UBS.
Your line is now live.
Michael Lasser (Analyst at UBS)
Good morning. Thank you so much for taking my question. 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 G Barton (President and CEO)
Yeah, Michael, good morning. This is Bill. Great question. Thank you so much. Look, you know, traffic in the category, 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, 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 environment, we’re maximizing every opportunity we have to bring new talent in and new consumers. One last thing I would say is on the new storefront, you know, 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, 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 at or above our expectations.
So again, I think this is a market overall, Michael, where execution matters. Maximizing every opportunity matters, and we have the proven playbook to achieve all that. Pearl, do you want to add something to my follow-up question? Oh, sorry,
Michael Lasser (Analyst at UBS)
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? Thank you very much.
William G Barton (President and CEO)
Yeah, Michael, thanks again for that question as well. So, you know, 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 that we will always protect our value proposition to the consumer.
So as we think about this year and going into next year, number one, making sure we have the right merchandise in 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 toward protecting our value proposition to the consumer. Carl, do you want to add anything to that?
Carl Lukac (Chief Financial Officer)
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 more regional and really locally focused in terms of our ability to expand our pricing, our ability to look at competitive dynamics.
OPERATOR
Thank you. Our next question today is coming from Bobby Griffin from Raymond James. Your line is now live.
Bobby Griffin (Analyst at Raymond James)
Good morning, guys. Thanks for taking the questions and congrats on managing a difficult quarter, I guess. Carl, I want to start maybe with your comments on the waterfall impact. I think you referenced the new store productivity on some of the stores rolling 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 were doing maybe a little differently on those stores as they’re newer commercial 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 Lukac (Chief Financial Officer)
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, we saw the outperformance in Nashville, and that really builds our confidence. Our expansion into the Southeast, we did see some of those expansions 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. You know, we’re still entering into Nashville. We just entered this quarter. We have Atlanta in our sights now. So it’s early in terms of thinking of that as an algorithm. So I’d keep leaning into that as the comp algorithm go-forward.
Bobby Griffin (Analyst at Raymond James)
Absolutely. That’s helpful, but encouraging to hear about the Southeast performance. 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 are 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 Lukac (Chief Financial Officer)
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 4Q25 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 represent around 60% of the business now. That’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 4Q26.
OPERATOR
Thank you. Next question is coming from Oliver Wintermantel from Evercore ISI. Your line is now live.
Oliver Wintermantel (Analyst at Evercore ISI)
Yeah, thanks, guys. 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 Lukac (Chief Financial Officer)
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 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 Omnicart is continuing to be a benefit as we think about that as a tool going forward.
Oliver Wintermantel (Analyst at Evercore ISI)
Got it, thank you. And the in-store traffic, is that decline there—just to make sure I get this—is that shifting towards e-commerce, or is it really fewer customers shopping? Just to make sure I get the difference there.
William G Barton (President and CEO)
Hey, Ollie, this is Bill. I’ll take that one quickly. And that’s a really insightful question. We have seen consumers converting a cart online that they started in 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, they close online. So we’re beginning to see, and to your question specifically, a shift in traffic 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 consumer’s confidence to close the cart online after they visited the store—in fact, it’s one of the fastest-growing carts that we have and sales that we have in our store system—we’re very pleased with the outcome and its 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 Lukac (Chief Financial Officer)
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 regional, but then the DMA level, that we’re taking share from competitors on a traffic basis as well.
OPERATOR
Thank you. Our next question today is coming from Peter Benedict from Baird. Your line is now live.
Peter Benedict (Analyst at Baird)
Oh, hey guys, thanks. Appreciate taking the question. Maybe just a follow-up there on the comments on industry stabilization. So you’re taking share, outperforming even down to the DMA level. I guess you guys are doing better, which is great. But the signs of the industry stabilizing or getting better—that’s what it 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 G Barton (President and CEO)
Yeah. Hey, Peter, this is Bill. Yeah, it’s a great question. Look, our observation about stabilizing—first off, I want to be very clear. We’re not calling the bottom and 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 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 to us. But I want to be very clear, we’re not calling for an upturn just yet. Now, what we’ve seen thus far into Q4 continues that observation. But I’ll let Carl add onto that with any more specifics. Oh, okay.
Peter Benedict (Analyst at Baird)
Yeah, no, that’s helpful. Thank you for that clarity. And next my follow-up would just be on the new stores. Obviously, a big part of this 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, 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 new markets versus existing markets, any color you can help us with that near-term pipeline?
Thank you.
William G Barton (President and CEO)
Yeah, you bet, Pete. Yeah, 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 that will open in the first part of the year. So our long-term algorithm of 10% new stores, 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
Thank you. Our next question today is coming from Chris Horvers from JPMorgan Chase & Co. Your line is now live.
Chris Horvers (Analyst at JPMorgan Chase & Co.)
Thanks. Good morning, everybody. I was hoping to try to bring together a series of 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 that 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 G Barton (President and CEO)
Yeah, you bet. Chris, good to hear from you. This is Bill. First off, you mentioned the Value City look. You know, over the years we’ve continued to be the beneficiary of, you know, 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, you know, 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. You know, we went into eyes wide open and welcomed these consumers and they’re responding adequately and we’re very excited about it and this should continue. Carl, you want to add on to his question?
Carl Lukac (Chief Financial Officer)
Sure. And Chris, just to reiterate, you know, 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 we’re 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 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 omni car benefit that we had as a compare in the third quarter.
So I wanted to make sure we pulled forward into how we’re looking at the business trending to date. It’s really consistent.
Chris Horvers (Analyst at JPMorgan Chase & Co.)
You read my mind on 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 G Barton (President and CEO)
Yeah, Chris, this is Bill. I’ll take a few parts of that. 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. You know, the consumer’s been very, 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’s coming in, they’re very value oriented and we made 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, you know, into October and into the election season. So no real change there. What was the second part of your question? I’m sorry, Chris, that was the second part of it.
Chris Horvers (Analyst at JPMorgan Chase & Co.)
That was for the, you know, historically done a great job about managing to gross margin rate. And so is it the sort of not fully passing through to price the impact of fuel costs? Is it just a delay, or is it simply that the environment’s more promotional, so you’re not seeing your peers pass it through and thus, you know, you want to maintain that value proposition to the customer and that’s creating the pressure?
William G Barton (President and CEO)
Yeah, I’ll take a part of that and I think Carl will probably want to weigh in. Look, you know, as we think about our cost mitigation playbook that 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, you know, protecting our value proposition and really maintaining our commitment to the consumer that we’ll 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, but by duration rather than depth. Carl, do you want to add anything to that?
Carl Lukac (Chief Financial Officer)
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 these are 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. These began 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 DC 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
Thank you. Our next question is coming from Simeon Gutman from Morgan Stanley. Your line is now live.
Pedro Gill (Analyst at Morgan Stanley)
Good morning, this is Pedro Gill on for Simeon. Nice job, Bill, Carl, delivering a Volago 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 up on the topic of inflation that you see in the pipeline. You’ve mentioned diesel, also a little bit 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 Lukac (Chief Financial Officer)
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 kinds of environments before and there are 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 for 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, you want to jump in on the second part?
William G Barton (President and CEO)
Yeah, the second part. Hey 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, you know, they watch in every pricing zone we operate where the competitors are, what they’re doing on like-for-like items, what are the overall trends. And that weighs into our own pricing decision.
But it’s not necessarily conclusive because, number one, you know, 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 how we’re setting 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 Gill (Analyst at Morgan Stanley)
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 G Barton (President and CEO)
Yeah, Pedro, that’s a great question. Thank you. Hey, listen, you know, we think that Agentic commerce could be a huge opportunity for us. Our digital commerce team is very active in this space and, you know, 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 Bobs Discount Furniture 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.
You know, I think 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, 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, stylish 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’re going to take advantage of that under the heading of our omnichannel strategy.
OPERATOR
Thank you. Our next question today is coming from Kate McShane from Goldman Sachs. Line is now live.
Emily Ghoshon (Analyst at Goldman Sachs)
Hi, this is Emily Ghoshon for Kate, thank you for taking our question. 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 represent the majority of total sales. So how are you thinking about that mix over time?
William G Barton (President and CEO)
Yeah. Hi, Emily, this is Bill. It’s one of our favorite questions, actually, because at the core of Bobs Discount Furniture’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 standalone 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 at 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. Just for a little bit more money, you can step up from good to better and get more style, a little more quality, a little more different characteristics, maybe larger pieces, et cetera.
But we always look at it through both lenses: the standalone 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. You know, newness for us is a consistent strategy. So every year, you know, 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 hear us talk about this probably virtually every quarter going forward. And what we’ll find is, you know, consumers 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 in to make sure that we are architecting the strategy in every piece that we bring to market.
Emily Ghoshon (Analyst at Goldman Sachs)
Thank you.
William G Barton (President and CEO)
Yeah. Thank you, Emily.
OPERATOR
Thank you. Next question today is coming from Robert Ohms from Bank of America. Your line is now live.
Vicki (Analyst at Bank of America)
Hi, good morning. This is for Robert Ohms. 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 talked about customers just trading up to better. What are you doing in merchandising that’s different to drive the trade-up up to the best tier versus just better?
William G Barton (President and CEO)
Yeah, yeah, this is Bill. Let me start with that. So as you pointed out, last quarter we talked about trading up into better, and this quarter we’re emphasizing more into 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 springtime, and we’re seeing a great reception by the consumer. And again, as I mentioned before, and I’ll just summarize, you know, when our merchants are looking at new product, they look at it through both lenses: the individual article’s value, as well as where it sits in the architecture.
There was a concerted effort in the last nine 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. There’s continual improvement in good, better, and best every year. You know, we watch what articles are selling, what articles are being traded up, and then, you know, we beef up our product architecture accordingly.
So, but again, the callout 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.
Vicki (Analyst at Bank of America)
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 Lukac (Chief Financial Officer)
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 product, 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.
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 G Barton (President and CEO)
Yeah. 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’s 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, you know, a team we already have in the home, which means it’s high-margin business. Early stages, but I will tell you, I’m very encouraged by the reception we’re getting by the consumers.
OPERATOR
Thank you. Our final question today is coming from Brad Thomas from KeyBanc Capital Markets. Your line is now live.
Brad Thomas (Analyst at KeyBanc Capital Markets)
Good morning, Bill and Carl. Congrats on the 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 Bobs Discount Furniture 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 than the initial thoughts?
William G Barton (President and CEO)
Hey Brad, this is Bill. Great question. First off, you know, 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, it’s 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. You know, I mentioned earlier that one of the capabilities we’ve really invested in in recent years is our pricing analytics team. We’ve also really beefed up our strategic sourcing function. So, you know, 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 two, three, four 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 Lukac (Chief Financial Officer)
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.
Brad Thomas (Analyst at KeyBanc Capital Markets)
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? Thanks.
Carl Lukac (Chief Financial Officer)
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 five. 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 shareholders at the right time.
OPERATOR
Thank you. We’ve reached end of our question and answer session. I’d like to turn the floor back over to management for any further closing comments.
William G Barton (President and CEO)
Yeah, 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. You know, 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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