Q3 2019 Earnings Call
Good morning, My name is Sharon and I'll be your conference operator today at this time I would like to welcome everyone to Bjs wholesale clubs third quarter fiscal 2019 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question answer session. If you'd like to ask a question. Please press star one on your telephone.
Keypad withdraw your question press the pound Keith we ask that you. Please limit your questions to one for participants entering Q for any follow up question.
I'd now like to turn the call over to Falcon Free Huh, Vice President Investor Relations you May begin your conference.
Thank you. Good morning, everyone. We appreciate you joining <unk> wholesale club third quarter fiscal 2019 earnings conference call first of all been chairman and CEO , Bob Eddie Chief Financial and administrative officer, and Bill one or a senior Vice President strategic planning, an investor relations or on the call.
And Bob will provide you with an overview of our results followed by Q1 day session. Before we begin please remember that during this call. We may make forward looking statements within the meaning of the federal Securities laws. These statements are based on our current expectation and involve risks and uncertainties that could cause actual results to differ materially from our expectation [laughter].
This call and in today's press release.
I see the risk factor section of our Form 10-K filed with the FCC on March 20, since 2019 for a description of those risks and uncertainties.
Finally, please note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors.
Resins. Each one of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with.
Please refer to today's press release listed on the Investor section of our website for reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with.
With that I'll turn the call Verdigris.
Good morning, and thank you for joining us in Q3, we continued our progress in expanding margins, maybe enabling us to deliver another quarterly record earnings with adjusted EBITDA of $154 million, an increase of 4% over the prior year.
We posted merchandise comp sales of 1.1% or ninth consecutive quarter of positive comps quarter got off to a strong starts as we built on the momentum from Q2, but we faced some unique challenges of October , particularly in general merchandise that we don't expect to repeat.
These headwinds included the shift in the timing in scoop football promotions and warmer than normal weather in October which affected our seasonal apparel and cold weather related drilling merchandise products.
In the press release, we updated our guidance to reflect our year to date not some current expectations Bob will provide more details on the uptick his remarks overall, we believe we are well positioned for the fourth quarter funding assortment and promotional standpoint, we expect our two year stack comps to improve compared to the first half a year and continue to drive solid margins adjusted.
EBITDA and earnings growth for the full year.
Our transformation has been and we'll continue to be built on investing and making strategic decisions that will benefit our business over the long term.
We've made so much progress, but we all know we have more work to do let me give you an update on our strategic priorities.
First acquiring and retaining members membership is the foundation of our company and as we have discussed in prior calls we're investing in the overall quality of our membership base.
It's important to note that we finished the quarter with record on my part driven by increases in paid members and higher tier memberships that it's more important to note that the dividends that this higher quality membership base will yield will pay over the long term.
First let's talk about new members.
I know we changed our approach to first your membership offers moving away from trial members with a goal increasing the number of paid members. As a result, we finished the quarter with the highest percentage of paid members in our company's history.
We continue to make strides in shifting our membership acquisition to digital channels. That's a result, the percentage of members acquired through digital channels doubled in the quarter year over year.
Members acquired through these channels tend to be younger than those acquired through traditional methods. We're very pleased with the progress in this area as we continue to invest an innovative ways to acquire members.
Higher tier memberships represented 23% of our member base at the end of last year and is now with a 28% number again the highest in our company's history.
The progress has been anchored by our ability to offer beaches Mastercard at the register a new capability, we invested in this year.
As a reminder, fire to your members include all members that hold a credit card as well as our rewards members.
We'll continue to invest in this area, which will benefit for the <unk> the company for a long time.
Finally from a renewal perspective, we continue to make progress in our easy renewal offering with more than 60% of the member basin enrolled in the program.
Yes, what progress in this area.
Our second strategic priority is to deliver value is to get our member shopping.
Providing outstanding value to the families. We served as the fundamental commitment of our company. We've continued to make investments that will ensure we can offer unbeatable prices on quality products. Let me address our three growth platforms in this area assortment promotions and services.
First we're making a sustained effort to transform and simplify our assortment, including continuing investments in private label.
Our simplification efforts began and general merchandise, which was up 5% on a two year stack basis as well as for 2019 year to date.
The work we've done in this area leaves us in a strong position for Q4 and beyond we're moving forward with the transformation in our edible not edible grocery business with the goal of driving sales growth with a simpler assortment.
In Q4 will continue to wrote out rollout.
Simpler edible grocery assortment.
We're also seeing good results from the clubs we had this where we had this assortment in place. We're also testing simplified assortments that are not edible grocery business and have plans to continue to reduce skews over the next year, we're taking a very deliberate approach in this area, taking time to make sure we get to simplify the assortment right.
Our own brands are central to providing great value to our members to assortment simplification into our category profit improvement efforts.
We continue to increase own brand penetration during the quarter. It's currently above 20% and we remain on track to get to 21% for the full year.
We're particularly pleased with all performance in prepared foods, which we introduced this year, our new clubs in Michigan were launched with an expanded assortment of prepared foods showing very strong early results I'll provide more details on our performance in Michigan shortly.
The assortment transformation will go on throughout 2020, we strongly believe in limiting our assortment will offer better clarity of offerings provide opportunities for sourcing savings and free up space to drive growth.
Broke through entry into new categories.
Next we continue to invest to take advantage of our new promotional capabilities. This work enables us to deliver highly personalized offers and targeted promotions.
Personalized offers are based on members person purchase history, giving us a powerful vehicle to engage members and dry trips and baskets. While this is still in the very early innings, we're confident that our investment in the system will deliver outstanding value to our members by trips and enable us to use our promotional dollars more effectively in addition, we'll leverage as capabilities to improve our promotional.
That's.
Finally, we're making rapid progress and transforming or services business. We're pleased with the performance of our new optical offering as members have responded to our improved assortment that feature strong brands are outstanding value.
We're excited to launch next phase of our services for information. We recently began offering our members outstanding value on cellular services through 18 to.
We believe that this new arrangements will offer a member significantly better value than the best deals in the market on the latest smartphones everyday of the year.
This offer will be live in the vast majority of our clubs for Black Friday.
Our progress and optical and cellular services. It's just the beginning of our services for information run the right track to delivering outstanding value to our members and driving growth through services.
Our next strategic priorities to make it more convenient to shop, if you just.
Omni channel is another area, where we've invested for the long term and our progress in this area continued in Q3 late in the quarter, We launched same day delivery for beer wine and liquor and 74 clubs in seven states. We also expanded our mobile ordering for deli items to 64 clubs in New York, New Jersey in Boston.
Which lets members placed the orders in advance and save time once they're in the club or convenient services, while still small compared to the rest of the business continue to grow in resonate with our members buy online pickup in club and same day delivery continued to accelerate in the third quarter about half of our Baltic users make additional purchases months during the fourth.
Second the biggest holiday season ever in digital driven by a fully integrated marketing campaign strong assortment free shipping for a premium tier members and of course outstanding value.
Finally, we plan to expand our strategic footprint.
We opened two clubs and gas stations in Eastern Michigan. This month as we've said before we took a very new approach to marketing to raise awareness and these clubs. We open these clubs with about 1000 fewer items than our typical clubs along with new items, such as expanded an expanded prepared food assortment localized apparel local craft beers and the snow.
Extra.
So still in the early days were very pleased with the initial membership response, and our short and our near term sales trends our performance in Michigan, along with our performance and other recently added clubs is very encouraging for the future of our company.
Weve opened six gas stations in 2019 and remain on track to open eight to 10 across the portfolio.
We're also on track to open our club in Pensacola, Florida around the end of the year, followed by our third Michigan club in Chesterfield during the first half of next year, a new club pipeline remains strong and we look forward to providing an update on next year's plans and our next call.
Looking forward to Q4, you have strong plans in place for the holiday season, we feel confident in our promotional cadence and our ability to deliver unbeatable value to our members or combination of fresh items in general merchandise is crucial to delivering value to our members during Thanksgiving period and beyond.
Focused on executing the marketing merchandising and operations program. So we'll get our member shopping and to drive sales remain committed to driving topline results. While also delivering on our bottom line goals with that I'll turn the call over to Bob will review our results in more detail up.
Thanks, Chris Good morning, everyone.
Turning to our results in detail for the third quarter.
Sales were $3.2 billion merchandise comp sales, which exclude gasoline increased by 1.1% and were driven primarily by ticket.
Comps in our general merchandise business were flat, reflecting a 5% two year stack comp.
Our general merchandise business was impacted in the third quarter by changes we made in our TV assortment, how does the holidays as well as a shift and the timing of promotions. In addition, as Chris mentioned sales of seasonal apparel and other related items, such as heaters slowed due to warmer than expected whether late in Q3.
And our Perishables division comps were flat for the quarter as we work through assortment changes, particularly in our dairy and frozen categories.
Although we experienced a small level of inflation in this division compared to the prior year period.
It was more than offset by assortment changes on the timing on scope of promotion.
Comps in our edible and on edible grocery divisions were up by 1% for the quarter.
We continue to simplify the assortment and increase our own brands offering and these two businesses as we work to deliver outstanding value to our members.
Membership fee income grew by 7% during the third quarter approximately three quarters of this growth was driven by increases in members with the remainder driven by our membership fee increase.
Higher tier penetration is now at 28% of our membership base up from 23% at the end of last year.
More than 60% of our membership base is enrolled in our easy renewal program.
The continued growth in M.F.I. underscores our focus on continuing to improve the quality of our membership base.
If I as the cornerstone of our business model and paid members now represent about 97% of our total membership base.
We continue to acquire members with innovative vehicles and have doubled the number of Congress acquired digitally.
Excluding the gasoline business, our merchandise gross margin rate increased by approximately 50 basis points over last year, driven primarily by continued benefits from our procurement initiatives. This reflects two year stack improvement of approximately 110 basis points.
Our Cpis program remains strong and we see continued opportunities to drive merchandise gross margins through <unk> and private label penetration.
SGN expenses were $510 million in the third quarter compared to $496 million in the prior year. After excluding prior year expense associated with a secondary offering and other onetime expenses.
This year over year increase in SGN, a primarily reflects the continuing run rate of investments we made earlier this year.
Interest expense decreased to $28 million from $33 million, a year ago, primarily due to de leverage and effective rate on our first lien thats step down by 25 basis points at the end of this years first quarter.
For the quarter, we recorded income tax expense of $18 million compared to $3 million in the prior year period, the variance between our normalized statutory tax rate or approximately 28% and the reported rate of approximately 25% for this quarter was driven primarily by $2 million at windfall tax benefit.
From stock options exercise.
Adjusted net income for the third quarter was $57 million or 41 cents per share compared to $54 million or 39 cents for share in the prior year period, reflecting 5% growth on a per share basis.
Our press release includes a table that reconciles GAAP net income to adjusted net income, including on a per share basis.
Adjusted EBITDA was $154 million, reflecting 4% growth over the prior year period.
Moving out of the balance sheet RFP to inventory ratio remained solid at 77%.
Free cash flow for the year to date period came in at $77 million and we remain on track to deliver more than $200 million or free cash flow for the year.
As we expected our free cash flow third quarter was impacted by the timing of our capital expenditures, which increased as we purchased land for our new clubs in Michigan.
As we previously noted we plan to enter into sale leaseback transactions on these new clubs and would expect that net of related proceeds our capital spending to be approximately $160 million for the year.
Let's now turn to capital allocation.
During the third quarter, we completed a body of work together with our board of directors to determine a capital allocation plan that reflects our priorities.
Our first priority is and will always be to invest in our business for the long term, we will first direct our capital towards our growth avenues, adding new clubs and gas stations, attracting retaining and engaging our members.
As well as expanding our omni channel business.
Next we expect to continue to de lever well, we achieved our near term leverage target of three times six months ahead of our plan. We currently believe on appropriate medium term target is two to two and a half time is funded debt to adjusted EBITDA.
We anticipate achieving this level within the next two years.
Finally, we have an added an element of returned to shareholders through a stock repurchase program.
Yesterday, our board of directors authorized to repurchase of up to $250 million and our intent would be to opportunistically execute this program over the next couple of years, allowing us to more than offset dilution from equity compensation.
All of these priorities investing in our business continuing to de lever and providing returns to shareholders.
Our growth plans as well as the strength of our cash flows.
We look forward to executing against these priorities and as we achieve our new leverage target, we will look for other opportunities to increase shareholder returns.
Let's now turn to the guidance for the remainder of fiscal 2000 my team.
With three quarters of the year behind us, we're updating our guidance to reflect year to date performance and our current expectations. Our press release tables provided the full details.
While many components of the guidance change their resulted in EPS range with the same midpoint is our previous guidance. Let me walk you through some of the highlights.
Our updated full year merchandise comp range implies a merchandise conference for the fourth quarter of 1% to 1.5%.
This reflects a two year stack comp north of 4% an improvement from the third quarter and the first half of the year.
We believe we are well positioned for the holidays in the fourth quarter from an assortment and promotional perspective.
Our updated adjusted EBITDA guidance range for the year as now $585 million to $592 million and reflects the impact of the change we made to our topline.
Along with an updated view of tariff exposure, partially offset by continued improvement in our gross margins delivered by our CP program.
From a tariff perspective, we did not currently expect further risk through our adjusted EBITDA guidance.
The remainder of the year, we're continuing to monitor the situation and are hopeful that a long term agreement can be reached.
And we continue to execute against our mitigation strategies, while maintaining the value that our members have come to expect.
As I said before the changes to our guidance, resulting in adjusted EPS range of $1.44th or $1.48 for the year.
It's one of which is the same as our previous guidance range.
Before turning to cure Renee I'd like to reflect on our results for the first three quarters of the year looking at the top line, we've generated 1.5% comp through the first nine months of the year.
Our priority remains to focus on growth and continue to drive strong traffic and sales trends.
Looking at the bottom line, you'll see that we've grown adjusted earnings per share by more than 18% in the first nine months of the year due to strategic decisions on investments, we made to transform and enhance our business for the long term.
We believe in our ability to provide strong EPS growth in future years.
Further the strength and predictable predictability of our cash flows has enabled us to launch a capital allocation plan that will further drive total shareholder return.
Bottom line a cash flow performance is a testament to the strength of our underlying business model and our strategy.
We remain optimistic about the long term health of our business and we continue to invest in our transformation to drive growth in sales and profitability.
Look forward to delivering on our goals for the remainder of the year.
Now I'll turn the call back over to the operator to begin the QNX session Jared.
I'd like to ask a question at this time. Please press Star then the number one on your telephone keypad. Your first question comes from Robby Ohmes with Bank of America Merrill Lynch.
Hey, good morning, guys.
My my question.
Chris is I was hoping you could talk more about the SKU reduction program and maybe give us a little more color on the edible a non notable reduction the you mentioned and I think you mentioned it had a negative impact on Threeq you any can you remind us or give us some numbers maybe on the number of skews your percent reduction in assortment.
And also kind of walk us through you know as you're making these SKU reduction changes is the expectation. It has a short term negative impact and then.
No rebalanced on down the line or or where should we be little concern that as you keep reducing skews there could be some pressure on your comps over the next several quarters. Thanks.
Thanks for your question, rather good morning and.
So as I think about one of the things we've talked to investors about over the course over the last year and a half is.
How do we simplify our assortment in order to grow so let me be clear our simplification work overall that Lee and his team are leading is about driving growth.
I'd also in the last couple of quarters spoken to you about edible not edible grocery where we're disrupting just about everything we do in order to create a better long term algorithm for our company on the top line and we feel good about being able to deliver on just that the range of disrupt the range of reduction across category.
He's varies category by category, we've talked specifically, let me give you some real texture on diapers as an example.
So we've talked in very great detail about diapers, we have reduced diapers from two brands to one added private label.
And and use the space to expand our assortment for young families.
Largely in general merchandise. So that's a shift out of Gen out of grocery the general merchandise in that example, other categories are like that as we reduce trash bags assortment, we're adding that space to Matson grooms as an example, so think about it as you know a double digit kind of percentage skew rescue changes.
That we think there is some short term disruption, but it's very short term and we feel like this is all about driving growth. We think we can do a much better job of being more efficient also pointed to or the encouraging progress, we're making in new markets, where we have a simplified assortment at hello, when we.
Open.
You know our we're really encouraged by what we're seeing in Michigan, where we've opened with more than a thousand fewer skews you know and this week, we've actually had parking lot capacity issues, where we had.
Well, we had members not being able to park. So we're very encouraged by the progress we are seeing where we delivered a where we are delivering.
Reduce assortment the number is to your specific question in the double digit percentage of skews kind of number on and it's all about growth and while we've taken a couple of short term hits as we make the transition we think it's the right long term move to make.
Great. Thanks, so much.
Very helpful. Next question comes from Kate Mcshane with Goldman Sachs.
Thank you for taking my question.
Good margin improvement has has been a great part of your story and and again in the third quarter I'm wondering if there's been any thought behind using some of that doesn't margin flow through to be a little bit more competitive on price is there any issue do you think in terms of how competitive you are in in your value.
Offering and too wide, maybe the conference in a little bit stronger as a result of that.
Sure Kate first of all thank you for your question and good morning.
So overall it is our contention that we're continuing to find the right balance of sales and profitability. We are priced every day to all of our club store competitors and we feel very good about our balance our.
Our our value proposition the in this quarter, there's no doubt late in October we had some disruption we didnt expect and we are where we are so as we think about going into next year. We're gonna be once again balanced in terms of our ability to continue to deliver margins and improve the topline performance.
And we're encouraged by our ability to do that but what you're talking about is what we debate all the time inside of our company.
If you looked at our quarter Kate at the end of.
August it's a very different picture than it was at the excuse me at the end of September .
Versus where we ended up at the end of October . So yeah. This is a short term disruption that we frankly didn't expect and we think we're going to be back on track as we move forward and we feel good about that but we're constantly driving on the value proposition because its foundational to the way we run our company.
That's helpful.
Thank you.
Next question comes from Chuck Grom with Gordon Haskett.
Hey, good morning, this actually I jumped quite a comp for Chuck.
How do you think the weather impacted the general much in the general merchandise category in the quarter and then you guys talk a little bit about shifting up promotion anyway to quantify kind of what that impact was.
Sure as you know as you're looking through too much of the year. Our business was in great shape, we felt really good about both the topline and Bottomline performance.
And we did see some disruption in October you Havent you have a couple of things going on one is we have made a pretty material shift into more premium TV users. We start the as we start the fourth quarter and that had some lapping impact on the end of the third quarter, where a year ago, we've had some very high value on.
On lower price Pvs.
But the more important thing is as on a year on year basis, you had a very significant cold snap at the end of the quarter in the last year period that just didn't come this year until the beginning of this quarter. So everything from our core apparel business was terrific, but some of the cold weather apparel didn't perform the way we expected it to you.
We also had a very big business for our company in a in both shoulder seasons in this quarter. It is when you get the cold snap and get a big heater business and frankly in the spring when you get the first heat snap, we get a very big air Conditioner business, particularly in our metro locations and those had a material impact on our quarter as we wrap it up we think its transitory in nature and we feel good about where were.
Going moving forward I hope that's helpful.
Next question comes from Edward Kelly with Wells Fargo.
Yeah, Hi, guys I'm, just just a follow up actually Chris could you just give a little bit more color on on how top October wise, you know and the cadence I don't know if you can give some numbers around this and then what Q4 is looking like so far.
You know now that the weather has improved and then if we think about you know you're guiding.
1.3 to 1.5 for the full year looks like at the midpoint would be one even in Q4, which seems like.
So what if a lot. So just kind of curious if you can find color there and how much was tires.
In terms of the impact on EBITDA.
And what exactly that relate to.
Hey, good morning had a first of all there's a lot there let me I'm going to take some of it and then I'll. Let me, let me ask Bob to take a couple as it relates to a guidance in the flow through October was a little bit negative who's a pick about a minus one and it was really the last two and a half weeks and as you look at particularly the.
The last week with rough as we worked into Halloween I in your note. This morning, you noted as we look at going into next year.
Excuse me going into next quarter, we're up against the two nine a year ago, which was artificially inflated by the snap benefits of the from the from the government in the month of January so.
We recognize completely that we trade on your credibility and it's really important that we provide you numbers. We think we can deliver and we intend to do just that so as we think about it we had been operating before this quarter in a hanging around a 4% stack and we expect that you know the the number were providing for the fourth quarter.
And gets us to the low fours in terms of a stack and we feel good about that and when we deliver it will be exiting the year with with a with some strength just as a reminder of the gas benefit at EBITDA in the fourth quarter is about $15 million and we talked very I think very openly about that last quarter.
Last year as we approached it in terms of our guide I'll, let Bob make a comment but in the last quarter, Ed We talk to you about a 5 million dollar terror risk and in our revised guidance as we as we go forward. That's that's gone so it's in there, but I'll, let Bob make a couple of comments on the Guy.
Yeah, Hi, Ed.
Let me start very high I think when do we just think about the Q4 God we most.
Presses, we think about the compare right were up against the two nine from last year, the highest comp of last year there for our toughest comparison, so when we set out our plan for the year, we always thought that Q4 would would be the lowest comp from that perspective.
And and the.
Street.
I don't think really forecasted that in and all of your models.
But we always did and and having seen now the performance and in the first nine months are there and most particularly in this in this last quarter.
You know that.
That informs the revised annual guide.
More than anything else right, we expected to be a little bit.
Better in Q3, and therefore, a little bit ahead.
Going into the fourth quarter, and expecting Q4 to be to be a little bit of a tougher compare.
So that's that's what I would say on the on the revenue side, Chris Chris It exactly what I would say from a from a bottom line perspective.
Again, I don't think perhaps we didn't do the best job, explaining it or or people didn't read it through a very well, but I do think everyone should take into account that $15 million of of gas benefit in last year that resulted from the disruption the gasoline markets I don't see anything as we sit here today that would tell us we're going to have that.
And again in Q4 and so.
We when we normalize our EBITDA for four or with a plan for the fourth quarter.
We see nice growth from from that perspective, and nothing to worry about there and then finally, Chris mentioned as well.
We have baked in that $5 million of tariff for us we talked about last.
Last quarter, where we said last quarter effectively at 5 million, we hadn't figured out yet and we just lifted out there for people to two qualitatively consider in there and they're guide we were still trying to figure it out.
Quite frankly, we didn't figure it out.
Without changing the value, we always want to provide the best value to our members and that's what we're doing so were effectively kind of lowering our margin growth assumption.
And therefore, our EBITDA assumption related to related to terrorists.
And as I said in my prepared remarks, offset by some some better than anticipated.
[noise] CPR performance in the quarter, So all told a where we're not.
You know, we're not we're not happy with where we were for Q3, but we stand ready to execute very well in Q4 against tougher compare.
And then just only get I comment my comments to Kates question, because I think there's only gets here, we probably spend a million or two bucks city a million or two and EBITDA in the third quarter, making sure our prices were right. Despite tariffs and I think everybody who does what I do who use that you folks cover talks about we're going to protect pricing for our consumer because that's what we pay.
To do so it probably cost us a couple million bucks in the quarter.
Next question comes from Simeon Gutman with Morgan Stanley .
Thanks for the Flushing.
I want to clarify again on record fourth quarter, So third quarter was impacted by timing promo.
Well and they break non break told.
Quarter.
Yeah.
We think fourth quarter does recoup a little which it sounds like it but why isn't there.
Especially when the cold side, where you recapture that the TV they get that maybe lumpy.
And then the second question if you back out the 15 me. Thanks.
<unk>.
I think like 87% EBITDA growth.
Can you get to that midpoint.
The lower end.
Perfectly reflective of the range.
But you did.
Yes, Thanks and then.
I think I think.
What we think about Q4 as we.
We did lose some demand to your point I do think there's some element of shifting in the demand as some of the cold weather stuff just moves with cold weather right. If you don't get it and in the end of October you may pick it up and in November but.
You know think about the incredibly Randy northeast whether on Halloween. We that's just that's just lost demand. It just could just be prices for the year and so there's there's a little a little bit of both the TV is again just a total total shift in the in the promo shift as a little a little of both were striving to be much more.
Fishes in our promotions.
And that was a little bit of or hurt in Q3, and we'll we'll try and reinvest some of that.
Q4, you know overall, Chris Chris said, it we're trying to balance all those competing demands record recognize that Q4 as the toughest compare and put a number out there that.
We all think we could happen so.
It's really just the all of that down the amalgam of all that together.
You know the I. I think your question on on.
Sales guidance versus EBITDA guidance is a good one in recognition of the $15 million and.
And gas benefit in last last quarter, and so I do think whether we set the the range out there.
If we hit the sales the sales target will hit the EBITDA target and.
If we don't we may not we certainly will will pull every lever. We can we can pull to hit the bottom line as we go despite any sales of variability but.
When you back all the way out this is retail if you don't sell stuff you don't make the money that you think you're going to pick up so.
We're working very very hard on on both of those angles.
One follow up.
I wanted.
Okay, Great Chris you mentioned in some of the.
Stores.
And it did edible arrangements.
Can you give a number of items per basket growing with fewer in anyway.
Give me the long quantify yet can you give me the number of items dog volume anchors in Europe .
Yeah, I think it's too early to tell at this point so the message I wanted to this end is that.
Is that the assortment moves were taking if you step back Sydney and I think it's a it's a great question, then I'll I'll answer it in our.
In our strategic view.
We're taking a long view like other retailers have been different points of their transformation and are willing to take a couple of hits to get to the right long term answer.
We have.
Started to get much more aggressive on getting assortment in line and I made a comment then in response to lobbies question think about of the double digit percentage of skews that we're working on but it varies widely by categories and were generally moving grocery skews to grocery space the GM.
I talked about that and baby and I talk about that in trash bags versus mops, taking out grocery things and moving to a move into more GM. Because we think this company will be GM led for a long time.
The point I wanted to make on a on Michigan is how encouraged we are by the consumer response to our brand the membership numbers in the sales numbers, while early exceeded our expectations and a big part of our stories about our continued ability to make progress.
That kind of area and we are seeing encouraging results and we'll continue to report on it but it's a bit too early to make a macro macro point on that on that area at this point.
Okay. Thanks.
Thank you next question comes from Peter Benedict with Baird.
Hi, guys.
Thanks, just a quick follow up on that went just the simplification journey that you're on [noise].
Chris how long do you think it'll take to get kind of broader chain.
To get their assortment to kind of mirror, what you've got out in Michigan, I guess, maybe the thousand skew count reduction.
That's kind of fall after that last question and then.
My main question as I was just on the M I find the membership fee.
Income grew 7% in the quarter that was obviously very impressive.
Better than we thought.
5%, plus if you ex out the fee increases that 5% pay something you guys. Thank you Ken can.
Continue were sustained here into the fourth quarter and then the next year just curious how you're thinking about that thank you.
Sure. Thank you Peter and thank you for your question I think overall the way we've talked about him. If I you have a lot of mix within within that number and we've talked about you know a low single digit kind of membership growth overtime as the as the impact of the pricing action to your point fades by the end of this year so thick.
About as low low single digits were route to to the point on trying to manage the company for the long term we've made material investments in.
Shifting the mix of or the member base to give you some perspective when our team started working together the percentage of the member base.
That was paid.
I've been here for five years now it was below 90, and Bob told you that today is at 97.
Then just that fact alone is probably the single biggest transformation in our company and on the skew part.
We're not going to necessarily a set of timeline on skews. We did say we would continue to change assortment story through 2020.
And the price as a practical matter its a lot easier to set a new club.
In a place like Michigan to our new assortment.
And what's really encouraging about it is how you know to give you some sense the that clubs opening up with a dramatically higher percentage on general merchandise prepared food is doing very well some of the systems that many of you have written about have helped us localized assortment and things like beer and spirits and and soft drinks.
So we feel really good about that we're not going to vessels necessarily spent a timeline.
Set a timeline, but we do feel like the assortment work will continue through 2020.
And it's all about growing.
Okay, great. Thanks, so much.
Thanks good.
Next question comes from Chris Horvers with JP Morgan.
Thanks. Good morning, guys can be a couple of marching questions. First can you talk about with gas a net benefit this quarter and then as you look ahead, obviously very strong cpis benefits on a stack basis on an absolute basis. It. This quarter you have a bit of an easy compare on that that.
Front as you went to the fourth quarter given the strength of I think Tvs last year. So can you talk about those in how you're thinking about.
Merchandise margin opportunity in the fourth quarter.
Yeah, I'll take the first part of that spot fix second part gas was a basically a flat there's no net benefit really in the third quarters, but it was exactly what we expected it to be.
You know our stack margins Oh, we don't expect him to be as high as they were in the fourth quarter as a as they were this quarter, though 110 as a big number.
So I'll, let Bob to make a couple of comments about but that yeah, hi, Chris I think.
I think in various answers the various questions we've talked about the pluses and minuses for for margin and.
The way I think about it is that the Sicad program is healthy and and continuing to provide tons of benefits to us. We we really think that continues going forward into next year.
And certainly in Q4, one of the benefits of that program as it provides us pretty good visibility from margin growth perspective, and I will tell you given that visibility.
We know that Q4 will be a little less than than Q3, and then that's exacerbated by including the tariff exposure into.
Into the fourth quarter as Ross I don't think will grow at.
50, Bips again in Q4, but we will see we will see some growth in Q4 and.
And we do anticipate continuing to grow into into next year as well.
Got it.
That's helpful and then on a follow up can you talk about I should look ahead before Q you know the snap that accrue to January and that's sort of a I'd say 40, 40, 50 basis point headwind to the quarter. So.
It seems like you're expecting very strong you know to mid teen kinda comp in November and December .
So just curious if that's that math was was correct and how you're thinking about Chen March growth first is the grocery side of the business in the fourth quarter.
Yeah.
Chris I feel really confident on our are generally met Gen. Merge business. You know we had a disruption in the end of October and like I get it and you know with a 5% stack or on the year end the year to date, we're growing share and GM and we expect to continue your snap number is probably a little light versus.
What we experienced a year ago in them up the January but the big thing is that we feel much better about promotional cadence as we go into the fourth quarter and we're trying to trying to be thoughtful we recognize we trade on our credibility. We're trying to give you a balanced view of where we think the company. This is when we deliver what we said we expect to the the stacks to be equal to or.
A little bit equal to or little bit better than we're in the first after the year and we and we like the into your strong and move into next year. So that's that's that's my perspective on that but we feel really good about promotional cadence and really good about our GM business. Despite the disruption we dealt with in October .
Got it guys celebrate holiday.
Thank you Chris you tourists.
Next question comes from Karen short with Barclays.
Hi, Thanks for taking my question.
Okay.
The assortment I guess, what I want to ask is a couple of questions. One is what do you think the timeline then is to feel that all the clubs are reset dopamine and and I guess the second question is it just seems to me like it so clubs specific in terms of what you need to play.
I think each category, especially in grocery.
It's really.
He left thing to do that.
And then I guess the question on top of added once you've got the reset and you feel like you have the optimal assortment is it literally like a club nightclub decision on how to calm.
Yeah.
Couple of things Karen first of all.
As you think about assortment and promo the work you put out a month or six weeks ago hit exactly what we're doing like spot on.
And.
<unk> at the end of the day, we're not we're gonna we expect assortment work to continue through 2020.
And I wouldn't characterize it as local law in as localized away as you have in that context.
So the work Lee and his team our leading is if you think about our business we have a big suburban business, we have a big metro business.
You know so and we sell the best sellers and every category. So on the margin we do some localization, but we feel very good about or ability to do this and in in what we would consider big chunks or segments of our markets you know to be fair or Metro New York business is very different than I suburban Boston, but.
We think it's going to take a while we think at the white decision to.
Do this in a thoughtful methodical way.
And you know we expected to go on through 2020, but more important while we're going to take a little bit of disruption. This is about growth and our ability to where we've done this particularly in grocery we have all been encouraged by what we're seeing in terms of growth. It's a simplified consumer experience and frankly operational it's a lot better.
But that we couldn't do it until we got the systems and processes in place that you wrote about they that give us the tools to be more effective than this effort, which versus what would have been available to us prior to the investments and those in those systems.
Okay. That's helpful and then I guess.
In terms of the quarter, specifically and I know you don't really like to give us the detailed but it would be helpful to get some context on topics, specifically I mean, excluding October .
Quarter, So I can tell me.
Yeah.
Traffic was up in August September no doubt and as we've dealt with the weather in some of the stuff at a that we that we've talked about extensively at this point.
October wasn't as good it was actually down in October , but we feel really good about where we are at this point.
Okay and then just last question can you just give a little contacts or color on a fuel stacking promotions like how do you see that driving the business and then maybe anything you can talk to you in terms of.
Version into the store I guess any color on not given that that's probably now.
Yeah, this fairly new and its we're pretty encouraged by you know, we're clearly growing share and in a in fuel we're clearly growing share in general merchandise.
We're holding to losing a little bit as we do with a whole bunch of transformation work in a in other parts of our business, but the or the the high octane program. We feel is a very efficient spend of our partners dollars.
And the education process to our members is encouraging but also frankly some of our credit card progress also helps us grow share because we deliver great value on fuel.
As a starting point and credit card holders getting even better value.
So we feel we feel really good about or fuel business and.
That's why we're opening gas stations as aggressively as we are because we have you ultimately think it's a good opportunity for us to drive traffic and drive the value proposition or what are the things. It's worth noting is selling price and fuel was down pretty significantly in the quarter. So that flows through and Bob could make a comment on.
That if you if he wants to.
Bob.
No I think that's absolutely right at the thing that I was.
Thinking about as Chris was.
Just making his his comments was oh, yeah. This is certainly an effort to tie it to better tying the gasoline business to our in club business further to your question Oh.
Are we seeing better conversion.
We see about 30% of our members on the same day go into the store.
Days that they they get gasoline we have tons of headroom against our competitors to get that that number up and that's what this effort is driving.
And it certainly we're seeing seeing good results as we educate members are about this program but.
I'll tell you even even the members.
That that really don't understanding that they're getting this benefit.
And I would count myself on or not.
And that that score at least on my most recent trip to get gas at one of our clubs I Didnt realize I had purchased.
Adam that was that was in this.
In this promotion there are couple of hundred items or or so in the in the promotion at any one point in time.
Went to that the to the pump and I got my 10 cents off for being a visa and Mastercard member and I've got another 20 cents off that I Didnt Didnt expect so it really becomes sort of fund way to surprise and delight members.
On one side of the equation when when they don't unexpected and when they do it's a great way to provide them value and linked to the in club and the gasoline business.
Together.
That's helpful. Thank you.
Thanks, Karen.
Next question comes from Michael Baker with Nomura.
Thank you to really what I wanted to follow up on the on Peters question earlier, the on the M.F.I. increased access to see hike.
5% does that does seem to be an acceleration from what you've taught <unk> you know we come back into over the previous few quarters, which were probably more than three to maybe 4% range. That's what drove that acceleration is that more the higher care, there or just generally more paid memberships.
Hey, Mike It's Bob.
Good question I think what's driven it as is the series of continuing investments we've made and membership. It's certainly the number of numbers, it's certainly a number of upgrades into higher tiers.
It is certainly the to push towards acquiring.
More through digital means certainly the push away from from trial into into paid its all the things that we've been doing over over a number of years here that are that are sort of investments in the long term nature of the business.
The whole the whole business starts with members are I think it but through the lens of of new clubs and the transformation that we've made there.
You know the clubs that we've opened that haven't been as successful as others didn't have enough members and.
The ones are opening today.
A vastly more members and then then.
Sort of a break even proposition would would.
I would put forward and that's on the back of the same the same stuff focusing on the basics illustrating our value telling the story right executing right at the desk every day, making the investments in day to day to capabilities to target numbers, the right way spending more on acquisition a year over year, all the things that.
We've talked to everybody about in prior calls and prior meetings.
With that said you know.
5% New member close this is a pretty stinking good number for us and so I'm a little leery to tell you that we're going to keep going at that at that clip I would certainly love it but I'm not sure I would factored into your tier model certainly not in our long long term models as Chris mentioned its or.
You know low single digits as what we have in our and our long term models, but I think Brian on the membership team a large here have done I've done a great job in this past quarter getting that number to where it was.
Yeah, Hi, and that they can put out if I could fall off but could you talk about the what you've seen the new clubs I'm curious it sounds like we saw in further Michigan is at least on plan if not better than planned by virtue of the fact that parking lot you can fit all the cars.
On the membership there what are you seeing surprising in terms of the complexity in in terms of demographics or who the membership sign in how might that inform your long term growth off store growth prospects.
So look like it's I want to be clear that we're we're really early on Michigan do we're very encouraged.
That the reception, we've gotten to the brand and frankly, we spend some money to get and.
We had been.
Willing to make investments that are necessary to inflect the performance here and in this case, we feel pretty good about what we're getting for.
There is no real change to the families were serving their think about it as you know middle class families and very similar to.
What we've talked about before that's how we marketed that's how we targeted.
And there're a lot of markets that feel like Michigan in the mid south and through the Midwest that are encouraging for us, but Michigan is really important for a company and so we put some chips on the table in order to make that bet and early on we're encouraged but.
Lets be really clear I'm, I always try and be really balanced and how I talk about stuff. This is early but you know you could barely recover in this business from a bad start and we feel good about to start and therefore, we feel like we're on the right track and the little bit ahead of where we expected to be.
Great I appreciate that thank you.
Thanks, Mike.
Next question comes from Michael Montani with Evercore ISI.
Hey, guys. Thanks for taking the question first had a housekeeping one and then a little bit more high level. So first off just on Preopening expense, we had about 12 million for the year is that still the right figure. It just seems to be running a little bit ahead of that.
Yeah, certainly running a little bit ahead of that likes of certainly on a third quarter or was timing of spend.
Versus what we had in our models and likely what you had in your model.
But as Chris just mentioned.
We're going to spend a little bit more this year. So we had we had modeled 12 early in the year, we're modeling closer to 15 right now.
Some of that is timing as we get into into next year, but some of it it's just spending a little bit more as a.
We get into markets like Michigan, taking a wholly new approach to doing it spending a ton more on a on media and getting our our name out there and a new market that's important to the.
To the company long term.
And frankly, allowing us to test whether that type of marketing would work across the whole company too so.
I think you're right I think we've spent a little bit more or some of its timing, but some of it as we will spend more for the for the full year.
Okay. Thanks for clarifying that and then just a follow up I had was you know two parts one was around the new member sign up seem to be coming through strong. So I just wanted to ask about what kind of spending performance you're seeing from them do they seem to be spending in the club at the rate Youd anticipate and then the SEC.
One which is related to that would just be you know we had to one and a half to two and a half compound go for this year it looks like it might come in at the bottom end of that that into next year. Now you know assuming kind of similar market conditions as one of the half the two and a half still the right way to think about it or do we need to adjust that maybe to wanted to just given.
Some of the disruption as you guys resort for long term kinda traffic in topline growth.
Sure.
First of all make the second part of your question as easy as will comment on 2020, when we have our Q4 call I know you expected that answer.
We're encouraged by what we're seeing in the member base. We also recognize that we have responsibility to you to to give you numbers were going to make and also get our topline moving a little more quickly than it did in the third quarter and that's why we're talking about the stacks. The way we are in the fourth quarter, we feel like absent the third quarter the stacks for the first half of the or the.
Fourth quarter will be equivalent to what we thought they would be.
As we started the year.
We feel really good about the proposition, but these transformations are rarely a straight line and we feel like we're doing the right things to get this business going into right direction in the long term feel like we delivered on what we said we would do and we expect to continued to do that.
Okay, and just the membership seasoning component.
Oh, I'm, sorry, pardon me yeah. The membership <unk> the way we talk about that is generally takes a new member about three years to season. So there's a short term drag with that we but we use our promotional cadence to try and accelerate that as best we can we've we've we've seen those members do about what we expected them to do.
And.
The seasoning is about about where we expected, but it takes about three years to get a new member up to what we would consider to be normalized.
Thank you.
That's a little bit of the dried you're seeing from us.
Thank you thank you Mike.
Okay. Next question comes from Rupesh Parikh with Oppenheimer.
Good morning, Thanks for taking my question. So first a clarification quick clarification question I know there was a question on there quarter to date comp performance I was curious if you look in November if you're backing to that plus for stock range, you've seen a recovering some of the cold weather items I'm sorry there.
Yeah were cash we're not going to make any inter quarter comments, but you know as you think about what we've said as we go into the fourth quarter, we thought it was important to.
Make sure. We told you guys numbers that we could make and we think the stacks will.
Give us good performance exiting the year based on what we what we've communicated.
Okay, Great and then on the share buyback program in debt pay down. So clearly you guys are targeting to get that you did you have range. So is it fair to say that it was more of an aggressive focus on paying that paying down debt versus buying back shares are just wanted to get a sense of how you guys are thinking about the interplay between the two.
Yeah, our refreshes a good question on and that's kind of why a tailored my prepared comments the way that I did right, where as we think about our.
Cash allocation the first the first stop as growth, we're always going to throw money at things, where we think the long term of the company benefits.
A second we'll be.
Paying down debt, we we look around the market in our peers and everybody is lower than we are I don't think there's there's any pressing need to get there in a hurry because the the market stable in the debts relatively cheap, especially compared to equity financing.
But in you know you know long long term focus we want to get to tuna.
The two and a half times leverage.
And then you know we at least a recognizing we don't want to dilute the shareholders through equity compensation. So.
We will we will execute the buyback with some some minimum execution to to offset that and then opportunistically execute above and beyond that threshold or if the stock gives us opportunities to do that and if we think it's a value to do so so.
Again, I will execute according to those priorities and and and hopefully exceed our expectations that we can do a little bit better.
Okay, great. Thank you.
At this time ill turn the call over to the presenters.
Thank you for your time I hope everybody has a happy and healthy holiday season, and we appreciate your participation on the call. We'll look forward to follow up conversations are in the first of the day. Thank you. Thanks everybody.
This concludes today's conference call. Thank you for participating you may now disconnect your lines.
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