But again, the incremental sales from new stores have far outweighed the cannibalization impact. And I think the last part of your question was getting at what happens as we ramp up new store openings. Of course, we anticipate that, that comp headwind will increase, it’s very likely it could exceed a point of comp each year over the next couple of years. But again, the total sales benefit will be significantly higher.
Operator: Lorraine Hutchinson with Bank of America, your line is open.
Lorraine Hutchinson: Kristin, you said in your prepared remarks that shortage was favorable in the second quarter, which is very different to the broader trend across retail. Can you talk through the reasons for this improved shortage?
Kristin Wolfe: You’re right, in the prepared remarks, I noted our storage expense was lower on a year-over-year basis. This was because of the adjustment we made to our shortage accrual in the second quarter of last year based on that quarter’s physical inventory. Last year’s adjustment was a function of a higher accrual in Q2 as well as a catch-up accrual in Q1 of last year. This had a negative impact last year and the anniversary of this accrual is what drives some gross margin leverage in the second quarter of this year. So that said, we had expected an improvement in our shortage results based on this quarter’s physical inventory. Unfortunately, we did not see the benefit we were expecting as the retail industry wide shrink challenges continue and just have not abated.
So while we did see a year-over-year shrink benefit in Q2 as compared to the significant headwind we incurred last year, it was just not as much of a benefit as we expected. [Fortunately] our improvement in merch margin taking out the impact of the shrink change still enabled us to have a strong merch margin performance in the quarter. And I’ll just — last point, want to acknowledge that we continue to take steps to control shortage and continue to make significant investments in shortage control initiatives. We believe based on these continued investments, we can mitigate the higher shrink rates over time.
Lorraine Hutchinson: And then my second question is for Michael about the Bed Bath stores. Can you provide any more details on these stores, what kind of process did you go through to select the locations and also what kind of financial hurdles did you apply?
Michael O’Sullivan: We looked very closely at all of the available Bed Bath & Beyond stores. As I’m sure you know, there were several hundred stores. We had a large internal team of people, real estate experts and legal and finance experts that pull over the data. Typically at retail bankruptcy, the majority of store leases revert back to the landlords. In fact, it’s usually our preference to deal with the underlying landlord. That said, it’s not uncommon in a bankruptcy process for many locations to be picked off before then. If a retailer has a strong interest in a particular location then it makes sense to acquire it directly rather than to wait. Now there were several specific criteria that we used to identify the Bed Bath & Beyond stores that we were most interested in.
Those included nonfinancial and financial — the nonfinancial criteria covered things like strategic factors, for example, is the site in a strategically important location or market. It also covered competitive and, I would say, location-specific factors, for example, do we like the demographics in that trade area and what do we think of the quotas. And then thirdly, we looked at whether or not the site would still likely be available to us if we just waited for it to revert to the landlord. We then, having looked at those nonfinancial factors, we then layered on all of the financial analysis that you would expect. We looked at rent levels, including the dark rent that we would incur before the store would open, we looked at expected sales volumes for the store, projected operating margins, CapEx requirements and perhaps most important of all, we looked at the expected rate of return versus our hurdle.
And so based on all those factors, we identified the stores that we were most interested in acquiring directly from Bed Bath & Beyond. I would say that was a fairly rigorous process and we’re very happy with the stores that we came away with. I’d also make the point that many other former Bed Bath & Beyond stores will now revert to the landlords. And it’s likely that we will pursue many of those stores, again, directly with landlords over the next couple of years. And those locations were just [formed] part of our normal new store pipeline. Before I leave this question though, there probably is one point of clarification that I should make. We may be able to open some of the newly acquired Bed Bath & Beyond stores this fiscal year. As you’d expect, given the fact that we are incurring occupancy costs on those locations, we have an incentive.
We will push to get them open as soon as possible. But in prioritizing those stores, it may mean letting some of our non-Bed Bath & Beyond openings slip to early next year. So that’s the reason we’re saying that we don’t expect these newly acquired Bed Bath & Beyond stores to have a material impact on our net new store count or on our total sales in 2023. These stores are really going to largely benefit us in 2024.
Operator: John Kernan with TD Cowen, your line is open.
John Kernan: I have a couple of [modelling] questions for Kristin. Just first on Q2, the comp growth for the quarter was at the high end of the guidance. Operating margin was also well ahead of the 10 to 50 basis points you had originally guided to, EPS was ahead of guidance. Can you walk us through the main drivers of the margin beat versus your expectations?
