Q4 2019 Earnings Call
A question and answer session, if you'd like to ask a question. During this time simply fresh start celebrate the number one on your telephone keypad, if you'd like to withdraw your question press the pound Keith Yes, you. Please limit your questions to one for per participant entry Q for any follow up question I would now like to turn the call over to fund Freehoff's Vice President Investor Relations you may begin.
In your conference.
Good morning, everyone. Thank you for joining bjs wholesale clubs fourth quarter fiscal 2019 earnings Conference call, Chris Baldwin Executive Chairman, Lee Delaney, President and CEO, Bob Eddie Chief Financial and administrative officer, and Bill Warner Senior Vice President strategic planning, an investor relations are on the call.
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 current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectation described on this call and in today's press release.
Please see the risk factor section of our form 10-K filed with the FCC on March 27, 2019 for a description of those risks and uncertainties. Finally, please note that on todays call. We will refer to certain non-GAAP financial measures that we believe will provide useful information for investors.
The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.
Please refer to today's press release.
Mr Section of our website for reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP.
With that I'll turn the call over to Chris Good morning, and thank you for joining us and today's call I'll provide some introductory remarks, and then you'll hear from.
Our new President and CEO after that Bob will walk you through our results and guidance for fiscal 2020.
Take your questions in December we announced that we would succeed me as Chief Executive Officer features most of you know league isn't what he was one of the first people at hard after becoming CEO and he's been involved in every aspect of our transformation since then.
This leadership transition was portable plan to deliver process to ensure that feature is well positioned to execute against the strategic priorities and drive long her long term shareholder value.
James performance has improved substantially since 2015, and we see clear opportunities to accelerate our growth, particularly on the topline.
Optimistic about our prospects and are confident in the fundamentals of our business. We will move to copy forward with a clear emphasis on driving sustainable profitable growth in my new role and focused on leading our board and continuing to work closely with leading Bob key strategic direction with that I'll hand over to Lee.
Thank you, Chris and good morning, everyone.
I'm pleased to join you today for my first earnings call as President and CEO of be does I look forward to executing against our strategic priorities and delivering value to members and shareholders.
We have made significant progress in transforming our company and continue to believe in the fundamentals of our business model.
The investments we made in the capabilities, we built over the past four years and able to deliver consistent positive comps with margin growth.
However, our results fell short of expectations in the back half of the year.
Our priority is clear we must grow faster.
This by investing more aggressively into growth opportunities and accelerating those areas of our transformation that are delivering results.
Help your investments in the fourth quarter, we launched project momentum a cost reduction program that will deliver at least $100 million of savings over the next two years. This work included a realignment of our organization to support our strategic initiatives and to remove duplicative work.
Ladies decision from a position of strength.
And the savings will enable us to invest more aggressively behind growth opportunities our investments will be disciplined growth oriented and anchored in our strategic pillars to acquire between members deliver value to keep them engaged make it more convenient and expand our reach.
You highlight a few key areas of focus in Twentytwenty.
I'd like to start with our omni channel business, which is key to delivering the convenience members demand and will be one of our highest priorities. This business grew nicely last year and in the fourth quarter.
Quarter, particularly.
We are investing an omni channel for the long term and believe our capabilities and buy online pick up in club and same day delivery offer the potential for considerable growth.
Members, who leverage these capabilities skew younger and spend more importantly, we have an economic advantage here compared to others. We operated a limited skew warehouse environment with significantly higher average tickets.
Hope excels tend to skew towards higher ticket items and about half of our book shoppers make additional purchases once they are in the club.
We will continue to watch and aggressively market, new omni services to delight, our members and elevate the value of their membership. We expect continued on the investments to attract new higher quality members improved member engagement drive trips and fuel our topline.
A second highlight as membership the foundation of our company.
We continue to invest improving the quality of our membership base in fiscal 2019, we further reduced our reliance on trials, which now represent must be 3% of our membership base compared to 10% five years ago. We've also increased or higher to your penetration through increased rewards members and the number of members that hold if you do as Mastercard.
In addition, we improved acquisition analytics and shifted our efforts into digital channels doubling the rate of members acquired digitally year over year.
As a result, we finished the year with record and methodically and a strong retention rate of 87%.
Notably higher quality member base should benefit sales over the long term as these members mature understand and 2020 will continue to invest and you remember acquisition acquire younger members and could you do to retain members by offering unbeatable value on quality products and services.
Third we are focused on curating, the products and services that will enhance the value of our membership we have a tremendous opportunity to enter new product and service categories, where we can offer great member value and deliver growth.
For example, we're under a sorted in key growth segments like healthy organic products plant based foods active nutrition and multi cultural items. We also offer considerably less assortment in general merchandise categories included connected home electronics, the iwai products camping supplies and sporting goods.
We also like a full range of services, we will be adding things like cellular phones home improvement and financial and business services.
The key question is how do we find space to carry all these exciting new products and services.
The good news is we offer a way more choice in central store grocery categories than our members' needs.
For example, we carry forward a half times the pasta in soft compared to our wholesale club competitors, we have four times the amount of deodorant.
This extra choice does not fueled growth and visa overdeveloped and declining and nonproductive categories.
Well, we're taking the time to get these changes right. We've built the capabilities to move at greater speed.
For example, we now have space optimization tools that will allow us to flex space in areas like seasonal goods in apparel to make sure we have the right seasonal items in the right quantities at the right gone.
We're reporting space to achieve a more consistent club experience optimize productivity and allocate space based on demand.
We're piloting these changes and we'll begin rolling them out in a measured way, but at a faster pace.
Importantly, we expect this work to drive growth with minimal disruption.
Our assortment work will enable us to accelerate our owned brands penetration, which currently stands at a little over 20%.
From a service the standpoint, we're making great progress and are pleased with our momentum in our optical and cellphone offerings.
Members are responding to our new ground outstanding savings.
Cellphone offering a still do we launched at the end of Q3, but our members loved the unmatched savings and we're pleased with the early success.
Well be making additional changes in services in 2020 and see this area as a key drove growth driver for us.
Our efforts here will be key to engaging remembers elevating the member experience and making BJ is even better value.
The fourth area is elevating our marketing to drive to ensure that members and prospective members appreciate our transformation and the outstanding value we offer our investment in data and science driven promotional capabilities enable us to deliver highly personalized offers and targeted promotions with unbeatable value to our members will continue to innovate with other personalized approach.
As and conduct our marketing to support omni capabilities drive higher to your penetration and expand spend per member.
We plan to continue to bet on scale promotions that are members love.
Hi, often program where members can save on gas stupid purchases is a great example, relaunch of in Q2 and are very encouraged by the result, so far will also expand and build on our digital marketing capabilities, enabling us to engage with existing and new members across all digital channels importantly, we will integrate and simplify messaging across all channels to ensure that.
Members have a seamless and better overall experience.
Lastly, I'd like to touch on club expansion route we remain confident in our ability to successfully opened clubs and expanding to new markets as evidenced by our success in Michigan, We're eager to apply these lessons and existing and new markets and are building a more robust real estate pipeline to achieve our goal of faster club growth.
As you May know, we closed two clubs in the fourth quarter.
We continuously evaluate our strategic footprint to enjoy it supports our growth initiatives and drives value for an members and shareholders. As a result, we decided to close one club in Charlotte North Carolina, and one in Geneva, New York.
These closures will based on a review of club performance as well as real estate and market evaluation.
We do not anticipate closing any additional clubs and then in the near term and we remain on track to open new two new clubs in the first off from 2021 in Pensacola, Florida in one and Chesterfield, Michigan.
Before I turn it over to Bob I'd like to note that we continue to monitor the current a virus situation as it relates to our team member safety member demand and supply chain challenges, we've taken steps to protect our key members, including enhanced program of cleaning and hygiene awareness and all of our facilities plus the cancellation of our operations leadership Conference, which was plan next week.
In Orlando.
At this time, we foresee some shipping delays for minor portions of our summer seasonal items, but the full impact on our supply chain remains uncertain.
And the short term, we are working to manage our inventory appropriately to respond to short term member demand for some stuck up items like cleaning supplies and cancel it.
Given the fluidity of the situation the guidance that Bob will discuss for fiscal 2020 doesn't reflect any impact from Corona virus.
In summary, our transformation has been and we'll continue to be built upon investments and strategic decisions that will benefit the business over the long term we've made much progress, but we still have much work and opportunity ahead of us.
As I've said before our top priority is to accelerate growth.
We'll do this by executing on our strategic priorities, we remain committed to driving topline results, while delivering on our bottom line goals with that I'll turn the call over to Bob Who'll review our results in more detail Bob.
Thanks, Lee Good morning, everybody, let's first touch on our results for the first quarter fourth quarter.
Net sales for the quarter were $3.4 billion merchandise comp sales, which exclude gasoline increased 5.3% and were driven primarily by ticket.
As a reminder, our fourth quarter comps reflect a headwind associated with lapping last year's timing change and government assistance benefits.
We estimate that this had an 80 basis point effect on our merchandise comps for the quarter.
In addition to that you'd be to change our comp sales for the quarter were negatively impacted by the compressed holiday period.
Our two year stack for the quarter was 3.2%.
Well the general merchandise Division led the growth for this quarter and posted a 3% call. It fell short of our expectations and key fourth quarter categories like toys.
Well, we estimate that the effect of whether on the total business was likely at push the warmer weather did impact PGM categories like apparel and Windsor supplies.
Our perishables and edible grocery divisions were impacted by the BG headwinds I discussed earlier.
As well as by the compressed holiday season.
The calendar fewer shopping days led to fewer trips unless shopping for holiday party essentials and related goods.
These two factors resulted in comps in our edible grocery and perishables divisions of negative, 2% and negative 1% respectively.
In addition, our non edible grocery division comps grew by 1% in spite of a slate.
[music].
Membership fee income grew by 6% during the fourth quarter performance was primarily driven by improving the quality of our membership base.
As we noted we continue to execute well on membership acquisition and reduced our reliance on trial numbers.
For the year, we made good progress with higher to your penetration and the easy renewal program and maintained our all time high renewal rate of 87%.
The last benefits of our January 2018 fee increase had a minimal effect on the quarter's growth rate.
Excluding the gasoline business, our merchandise gross margin rate increased by approximately 20 basis points over last year, driven primarily by benefits from our procurement initiatives, which were partially offset by tariffs as expected I noted on our last call.
We continue to grow our gasoline business in the fourth quarter and margin performance was in line with our expectations recall that the prior year included approximately $15 million of unusual gasoline profitability due to a significant dislocation in the fuel market in last year's fourth quarter.
SGN expenses were $536 million in the fourth quarter compared to 500 of $17 million in the prior year.
Our SGN expense for the quarter included $19 million of charges approximately $15 million of which was associated with the closures of two clubs and $4 million, resulting from the severance related to labor reductions primarily in our home office.
Excluding these charges and other nonrecurring items of approximately $2 million S. You name It was <unk>, 0.5% for the quarter.
Interest expense decreased to $26 million from $27 million a year ago interest expense for the fourth quarter included approximately $2 million of fees associated with the repricing of our first lien term loan, which we completed in January 2020.
It's opportunistic transaction reduced the margin rate of our first lien debt by 50 basis points and the savings from this transaction will pay off the transaction cost by the end of the first quarter.
Excluding these fees interest expense would have decreased to $24 million, reflecting our continued debt reduction.
For the quarter, we recorded income tax expense of $14 million compared to $19 million in the prior year period.
Our reported tax rate of approximately 25% for the this quarter differed from our normalized rate of approximately 28% due to a reduction in our tax reserves.
Adjusted net income in the fourth quarter was $55 million or 40 cents per share compared to $62 million or 44 cents per share in the prior year period.
Our press release includes a table that reconciles GAAP net income to adjusted net income, including on a per share basis.
Adjusted EBITDA of $150 million for the quarter came in below our expectations driven primarily by topline results.
As a reminder of the prior year period included the benefit of approximately $15 million from outsized gasoline margins.
Moving now to our balance sheet.
Peter inventory ratio was approximately 73% and was impacted by the timing of inventory purchases around year end.
Importantly, we feel good about our inventory position and expect this ratio to be back in the high 70% range in fiscal 2020 similar to prior years.
The shift in timing of our working capital flows also impacted our free cash flow, which came in at $180 million for the year.
Before turning to our guidance for fiscal 2020, but I'd like to take a few seconds to reflect on our performance for the full fiscal year 2019.
We delivered a 1.3% comp sales increase well that was a bit below our full year range reflects a two year stack of 3.5 person.
Adjusted EBITDA came in at $582 million for the year, reflecting approximately 3% growth after considering last year's outside outsized gasoline income.
Additionally, we grew adjusted earnings per share by 10% generated $180 million or free cash flow.
Paid down approximately $120 million in debt.
And returned approximately $60 million in capital to shareholders through share buybacks.
These solid results came as a result of progress across the business, we saw significant growth in our omni channel business during the year.
Enhance the quality of our membership base and launched a new capital allocation plan that enables us to invest in the business de lever and return capital to shareholders.
We ended the year with a leverage ratio of 2.8 times.
Dissipate, achieving our medium term target of two to two and a half time sponsors that to adjusted EBITDA within the next three years, while opportunistically executing on our 250 million dollar share buyback program.
Let's now turn to our detailed guidance for fiscal 2020.
Our press release tables for by the full details and I will walk you through some of our highlights and assumptions our outlook reflects our confidence in the underlying strength of our business and the benefits from continued investments in our strategic priorities.
As we noted earlier this guidance does not reflect an impact whether positive or negative from the corona virus situation.
We expect net sales to be.
$13.1 billion to $33 billion with merchandise comp sales, excluding gasoline of 1% to 2%.
Certainly as Lee mentioned, we are focused on accelerating our growth and we expect our comps through improved from recent levels.
This improvement was driven by continued expansion of our omni channel business improvement in membership base quality.
Your rating products and services that enhance membership value.
Elevate our marketing and accelerating new club expansion.
Hi, My membership standpoint, we expect to continue to attract new members and maintain our high renewal rate.
As a reminder, our I'm not five this year will no longer benefit from the membership fee increase we introduced in January 2018.
Our assumptions around US you named for the year reflect accelerated investments in the business, which will be fully funded by project momentum.
In the fourth quarter, we eliminated approximately 70 positions in our home office and in the field management structure.
These moves are expected to drive about 20% of the total savings for the year. In addition, we conducted a deep dive on our spend and the work over the next year to eliminate duplicative processes to streamline our entire organization.
Project momentum is expected to deliver $100 million and savings over the next two years.
That's approximately $40 million of these savings to come into the new fiscal year.
And the remainder of the falling in the room in the greater in the following year.
We expect all the savings to be fully invested back in growth. This means savings from project momentum will not flow through to the bottom line.
As we said the purpose of this cost reduction is to aggressively fund our growth investments in order to capitalize on the exciting opportunities ahead of us.
Further we will work to make project momentum part of the fabric of our company, allowing us to generate even further savings to invest in growth.
As a result full year adjusted EBITDA is expected to be in the range of $595 million to $625 million.
I think 5% growth at the midpoint of that range when compared to the prior year.
Our interest expense guidance is 85 million to $90 million.
And reflects our plans for debt pay down as well as our recent rephrasing.
Our tax rate is expected to be 26% to 28%.
The biggest potential variable here is expected to be windfall tax benefits, which are extremely sensitive to the price of our stock into the behavior of our team members in response to those prices.
Net income is expected to be $214 million to $237 million or $1.55 to $1.72 per share for the fiscal year.
We expect our fully diluted share count to be level with the current year and approximately 138 million shares, reflecting the offsetting impacts of stock buybacks and stock compensation.
I'm.
Blended jurors are expected to be approximately $200 million to $220 million, reflecting an increase from the prior year, we're tilting capital towards growth and have begun the acceleration process of our real estate pipeline.
Back to open three to four new clubs this year and approximately six gas stations.
We will deploy capital building, our omni channel and services business and in giving our teams the tools to move faster.
Lastly, we expect to continue to generate strong free cash flow of approximately $250 million.
We continue to transform our business and our top priority is to accelerate growth.
Our past investments and on the membership merchandising systems analytics of laid the foundation for us to drive accelerated growth.
We remain optimistic about the long term health of our business and we look forward to delivering on our goals for the next year.
Now I'll turn the call back over to the operator to begin the QNX session Sharon.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, well pause for a moment tick up how the Q any roster.
First question comes from Edward Kelly with Wells Fargo.
[noise] adverse your line is open.
Hi, guys, sorry, with Lemieux I, just wanted to start with project momentum and and the investment can you just maybe talk a little bit about the decision to ramp investment and growth.
The speed at which you think the investment can occur the confidence around being able to pay with it.
The cost season.
When do you think it begins to register in comps and then lead just kind of taking a step back I think there was a view here you know that you guys were investing enough that that seems to I guess change today can you just talk about that.
About that shifts in strategy as well.
Sure.
Let me start and I'll ask Bob to land here as well so a project momentum starts with a belief in our ability to grow the company at a faster rate.
As you know we've been building systems to allow us to invest behind growth Assortments essence promotional systems et cetera.
We have deployed there was an piloted a lot of initiatives that we're quite excited about.
And we think we can increase and invest at a faster rate and so the question given that was how to fund a greater investment in a in growth going forward.
Well, we hadn't done is really go back and think through how do you aligned the overall cost structure of the business to support that growth going forward and as we dug in we found on meaningful opportunity to reduce costs largely across the us DNA base.
And as we started those two things we realized that we could streamline our DNA structure and fund the growth while continuing to grow the bottom line of the business in mind with kind of our with our long term algorithm.
And so we're excited about that possibility I think it'll give us even more money to invest behind growth, which we have been doing but this is really a step up about.
And we're you know kind of sober about where we are you. The last two quarters, we had aspired to grow at higher rates and we didn't and so we recognize we need to invest more we feel like we found effective ways to do that that will pay dividends over the course of the next couple of years and we're excited to get going.
Can I just ask I want one follow up so if we think about you know membership growth like membership growth is has been good.
Comps is going to just you know that's about where the comps less so what do you think the disconnect has been between the two I guess I'm asking is why haven't why hasn't the membership growth translated into a better comps.
Yeah.
So I think the who as you look at the membership growth is a few things are going on the first we're really pleased with the progress we've made in membership growth and in particular upgrading the quality of that membership growth. So an underlying portion of what is happening with that Maffei is you have trauma.
It is becoming paid members, which is great for the long term health of the business you have more members on moving up into higher tiers.
And so the overall quality of that days has improved pretty meaningfully.
The the key now is to get them shopping at a higher rate and as we've continued to say overtime. We believe that benefit will come and part of what we're doing with the savings for budget momentum is investing behind things to activate that growth I'm, it's everything from continuing to invest behind the right promotions.
Marketing.
But also thinking differently about our assortment and I think.
This will be key for US you know as I highlighted in my prepared remarks, there's a whole bunch of categories and services that we haven't been able to compete and we want to move aggressively into those categories and we think both of those things are going to drive faster number shop right.
Going forward.
Great. Thanks, guys.
Thanks next question comes from Peter Benedict with Baird.
Hi, guys. Thanks, Tom just following up on that just that question there what did I Miss It did you give them the yearend member count kind of where that stood at the end of the year.
Hey, Peter.
As you know we don't we don't disclose it at the end of the are we disclose whenever we hit a milestone and and we didnt.
We didn't do that at the end of this this fiscal year. So we're still the last disclose number was 11 million members and we typically disclose how familiar and member increments and so we are somewhere.
North of.
500, sorry, 5.5 million, but so itself a 6 billion.
Okay. Thanks, Thanks, Bob and it just curious on that on the identified growth that you're you're planning for for 20, Twond <unk>. It looks like it was up 6% here in the fourth quarter, you know, maybe a little bit of help from the from the fee increase but not much but it is you know it's 5% of good level to think about and as you as you pencil out you have to fight.
<unk> for 2020 or should we be thinking something a little less than that.
I think I think the way to think about that as it starts with the the exit velocity out of other fourth quarter.
And consider the.
That that number.
As many inputs it certainly the number of members that we that we attract but it's also the improvement in the qualities there so I wouldn't.
Take a 6% Q4 growth and assume we're attracting six person new members.
There is a significant portion of that that growth is taking regular members into a higher tiers, putting them in the easy renewal program or the visa and Mastercard program.
And things like that it's it's a mix benefit as well as a.
As well as a member I remember count.
Issue.
You know you're right to point out there that we're lapping the last pieces of.
The increase there in those 6% too so I would expect that to.
Obviously fall out of a growth rate going going forward. So we're not projecting to maintain 6% but.
Look slightly lower than that.
Okay. Thanks for that and I guess, just my last question anything [laughter] the timing of some of the I guess, the convenience initiatives that you're you're expecting to kind of roll out for double down on just trying to get a topline in my head around what.
What kind of plan to hit here, let's say in the first half a year that could help with your comps.
Over the back half for the year any any one of the major things we should be looking for that are going to be entering the business here, let's say in the first after the year that would be helpful. Thank you.
Yeah. So you know this is really.
One of my biggest growth priorities going forward, we build.
Platform for a much bigger omni channel business than we currently have on that to buy online pick up and club. It's same day delivery. It's the digital delivery of scar coupons and all the way as we engage members and that is today still a relatively small portion of our business, but it's growing quickly and so.
As we think about continuing to be I'm kind of relevant to the way members want to shop, a where they want to shop when they want to shop. We believe we can invest more aggressively to market those businesses make our members fully aware of them a encouraged trial and then encouraged repeat years and and.
It's been in those areas will be a big part of our growth formula going forward and so we built the platform over the course of the last 12 to 18 months and now we're going to invest even more aggressively behind it we will be.
Announcing a new digital services as we move as we move forward or nothing formal to announce today, but we're continuing to always rethink that set of services and by this most relevant for members.
Peter Tag on to that for one second too we will.
Starting in Q1 give you a little bit more color on the digital business and its impact on our overall business. We chose not to do that to date, because we've been building it and have some periods overlapping that had a zero as are very very little numbers and so we felt like it was.
No not truly a great compare year over year, even though it is growing quickly, albeit a small piece or business. So starting in Q1 will book will be disclosing.
The growth in our omni business and its impact on our overall growth.
Okay. So that'll that'll be helpful. Okay, Oh, well turn it over thanks guys.
Next question comes from Kate Mcshane with Goldman Sachs.
Hi, good morning, Thanks for taking my question.
Excuse me.
Cards to your real estate strategy. It sounds like there's gonna be a slight acceleration there I'm wondering if you could maybe talk about how the team Michigan stores have been performing I believe you said in the past that these stories do you have left that's kids.
Most of your store base and I'm wondering Q, if the new stores will have an opportunity to have more of these general merchandise categories. You mentioned odd because of the if you were skews any opportunity for new real estate.
Okay.
Maybe I'll take the real estate part of that and we can tag on on on the merchandising side of it or we are certainly focused on accelerating our real estate pipeline and building building that pipeline to.
Start opening more stores you you remember the story, there, where we weren't doing that all that effectively and took a little bit of applause to reinvent the process. The stores that we've opened to date have largely.
Met or exceeded our expectations from from that standpoint, that's given us the.
Confidence to move forward at a faster rate.
We've got three done this this fiscal year, we had hoped for higher than not but the.
Vagaries of their real estate process pushed pensacola into into this new fiscal year.
You know when we're looking for for for this this fiscal year, but.
Are cognizant that real estate as a weird thing so we disclose three to four.
But looking even further than that we'd hope to we'd hope to get at higher than than five and.
Continue to build the pipeline out Michigan stores are doing well, although it's still very early they've only been opened up a few months.
They are they're looking looking pretty good so far and that's on the back of that.
You know they improved process of selecting slates and opening sites as well as a the differences and merchandising, but you pointed out and.
[music].
So I'll, let me talk a little bit about that the other thing I'll tell you on just on the real estate funds were having much more success from a gasoline perspective.
Opened six last year, a couple have already been opens this this new fiscal year, so far and we're looking for a for even more than that on those clubs generally have better comps, but a renewal rates then them and on gas clubs and so we'll continue to to double down on gasoline clubs as well.
We could get to leave for the merchandising.
Yeah, I think the its absolutely true that the clubs in Michigan has fewer skews.
But that's not the key as much as they have the right skews and so as we open the clubs in Michigan rebuilt more assortment in general merchandise categories, where we generally are underrepresented and we were a bit leader on some of the traditional grocery skiers and I think this is one of the things about our transformation that has.
Then a bit and if I understood you know a lot of retailers in the past have reduced skews because they had way too many and we're looking for operational simplification.
We are.
I'm not thinking about it is reducing skews, we're thinking about it as we have not carried a key growing items, a healthy foods organic foods plant based foods.
Foods, a whole bunch categories and G. M. A broad line of services that are competitors carry that offer a greater growth prospects and that we we owned by a large I have not been yeah. We are over assorted in either slow growing or declining center store growth three growth a grocery categories.
And we can simplify that assortment without taking much away from a member at all and remember we have a tremendous amount of data to understand who's buying what how to people substitute if we eliminate something but also people by and so we can streamline assortment, there and see growth by getting into things that are relevant in growing today.
And Michigan as a step into right direction, because you don't have the challenge of just transitioning the space and so we started a little bit cleaner and more in line I in Michigan, but the overall growth opportunity that comes through from this effort is pretty considerable.
Thank you.
I could just ask a follow up unrelated question I think part of what weighed on your results in the third quarter was partially due to how youre promotions, where conveyed in the month of October I Wonder if you could peak at all to know how the cadence of promotions when during the fourth quarter and.
If cap was something that was better in your opinion during the quarter, then maybe versus what you today.
Morning.
Yeah, I think you know the.
The fourth quarter is really a story of two key things. So we were facing the edtv headwind from the year ago period, and as we thought about offering guidance for the fourth quarter reflected bad enough called on called a number on the Q3 call.
Well, we weren't fully anticipating was the impact from the shortened holiday season.
And you are having six fewer days between Thanksgiving and Christmas Christmas, we knew would be headwind. It was a bigger headwind than we had anticipated and that's the key driver of the of the thousand messing up in the quarter. When it comes to promotion, we actually feel pretty good about our promotional cadence in a in the quarter yeah.
And the activity, where do you know we have become increasingly increasingly personalized increasingly digital and increasingly scale on the things we're doing a cross but the chance we've had great vendor engagement and support we've had good number response on that all feels like it's working well we were just hit with.
The shorter selling season in the.
You'd be t. headwind.
Thank you.
Next question comes from are already homes with capital be.
Good morning, Thanks for taking my question and we congrats on your new role I had on you know to two follow ups I guess the first elite can you maybe give us more color on the timing of you know doing more in categories like sporting goods home improvement office supplies, you mentioned mentioned, some others and then related to that indeed.
You can chime in here.
He knows we look through you know as you move into in sort of do.
You know project momentum than you move through this year does it change you know when you when you look at the expense savings T., a new category Rollouts and things does it change the way we should think about your gross margin in S. you need ratios over the next year next three years that'd be my first question.
Sure. Thank thank you Robby.
The merchandising changes, we're gonna get layered in over the course of the year and so last year, we tested selective assortments of things like sporting goods, we set a small number of clubs with a sporting goods that understand how would respond if I remember as woods be excited about it on yet we biomark haven't rolled that out.
Across the chain same is true with services, we have tested a new service offerings and had been pretty excited about the results, including cellphones and in Q3, but we're now at a stage, where we can roll that aggressively across the chain and offer. It every day and so you will see those things layer.
And over the course of the coming year on some of it is seasonally dependent some of it is is not and so that'll be the that'll be the flow of it.
And probably as you think about how that flows through the numbers over the next year and in the future I don't.
Expected to have a material change to gross margins overall I would say that some of the new categories that were entering or a little bit higher gross margins, but.
We're not forecasting it to have a material impact on the company's rate and from an S. DNA perspective, certainly we'll be investing more dollars in growth.
And funding that through through project momentum.
I would say, we where we're planning and hoping for SGN a leverage over time coming more from sales upside them from.
So.
You know, it's it's it's the way we're looking at sort of really fuel the considerable opportunities. We think we have which requires considerable investments and and that will impact us DNA dollars, but when they when they yield benefits, we should we should be able to to leverage.
That's helpful. In just a quick follow up we you mentioned you know the younger members. It you guys you're getting in the no I guess the responding through digital channels. More is there can you maybe give us more color on the sort of different sorry, the are they sort of the higher.
Do you expect them I have a higher overall mountain valued Bgs, then sort of historical numbers.
AH you got the short answer is yes, you know, we think a lot internally about a lifetime value of a member and when we talk younger a you know we're not talking people in their twentys or business starts to make sense. When you buy a home when you have kids when you have a real need to buy and and.
Larger quantities and so as you think about firing that a recently recent new homeowner or recent.
Family kind of creation, you have great long term value and the key to that cohort is making sure you have the relevant merchandising and then Tonight is increasingly organic healthy broad based you know items. It is offering the appropriate omni services and making sure.
Our people aware that.
Making sure that people are aware that beaded offers though isn't there a great set of services and then it's offering personalized marketing and so we feel like we've built all of the tools to successfully target someone kind of in their mid to late twenties, and thirtys and roll them into franchise and that will drive great things for us the long term because you have more.
Shopping years I had been if you acquire someone a little bit later in life and so you were kind of coming out at a multifaceted way.
But skewing younger is great for the franchise because of the lifetime value with the numbers.
It makes sense. Thanks, thanks, so much.
Next question comes from Chuck Grom with Gordon Haskett.
Hey, good morning, this actually Jon Clark on for Chuck.
I guess can you got to talk a little bit more about they expect it came to margins in EBITDA growth as we move here through 2020.
Hi, John So certainly you remember we don't don't give detailed guidance on on margins and we don't give detailed guidance one quarter is.
So it's a little bit difficult to give you precise answer to the to the.
The question certainly.
You know the guidance that we've put forward anticipate some margin growth throughout the year.
That is that is fueled by continued.
Impact of RCP I program, a little bit of private label.
Penetration growth, which obviously is higher margin goods and so that that should flow and.
Fluent throughout the year and that the EBITDA growth is fairly similar right. As you go to take a whack at what do you think the cadence for from a sales perspective is because obviously with up all else fails to some degree.
But I don't see really any any big year on year lapping changes from a profitability perspective, you should be thinking about him.
Remodeling.
Great. Thank you.
Next question comes from Chris Horvers with JP Morgan.
Thanks, Good morning, guys. So question jumping back to the membership side. So you know the net number growth. This year seems seems modest a is that about the the pace of the new membership sign up.
You know the renewal rates of that those younger core Hearts that you you know mark and intuitive past few years or is it you know the age members not renewing because you know written at the same time the renewal rate was flat and you had added each renewal and other efforts to make sure that numbers when news so just trying to under.
Stand at the margin member growth and the flat renewals in sort of what what cohort of membership is driving that.
Hi, Chris as Bob.
I guess I guess, what I would say is.
Getting back to.
The story line or anywhere and we're spending all of our time and effort here not only gaining new members, but improving the quality of the membership base and part of that as.
Reducing their reliance on trial memberships that we've had over over.
Over time as Chris So as we said in his remarks.
We're now down to three person a from that from that measure that some meaningful impact goes or folks that.
We're once allowed to sharpen our club for free another paying us numbers they are not the most.
Valuable numbers from a long electrons value perspective, as it was as we just mentioned, but there certainly.
Certainly.
Paid members and that that's a good thing we've improved.
Our higher tier penetration up to 28% at the end of the year are easy renewable penetration of 63%, we're doing great things from Oh.
Quality perspective there.
I don't know that I would characterize them member growth to be modest, though that kind of the one.
I show take with the.
The way you raise your question I'd I certainly would agree that we can attract more members and we would certainly like to do that but we were pretty pleased with the membership growth in the fourth quarter and and throughout the year. The issue really for US is not a member growth. It is activation of those numbers and how do we get them in the box more frequently and buying.
Buying more things from us digitally when when they need to shop.
Got it should then you should think about I think the math all along as bad as you got to 2020 last of the headwinds from you know that the trial membership on coming down as a percentage. So and then at same time that younger member.
Hey, you know sort of AG not been spending more year over year. So can you can you share what.
What you thought the the headwind to comp this year from the reduced travel membership was and then as you're looking for word lighting up that younger customer spend more <unk>. What do you think Ah why has that customer perhaps not age.
Like other members have aged in the past thank you.
Yeah, you know look I think you're on the the on the right issue we need to.
Sure celebrate the success of that we had of getting younger or a little bit limit and attracting more measured members digitally.
And giving those members the the products and services that they want and the waste interact with us that they want.
But we are far from where we want to be from that perspective, and that's the idea behind project momentum and investing in growth as.
Those members, most particularly but all members seem to want to interact with us and other retailers on a more convenient and increasingly digital basis and so.
That's clearly the idea behind the story that you've heard from US today take taking all the the cost cuts that we can find and putting them into omni channel and and other other growth avenues. That's that's the way. This puzzle ends up making sense is given the members the opportunity to shop for.
Yes.
And the ways in which they would like to do that we certainly have built the infrastructure to do it had good success commercializing it.
In the end of last year and and this whole year is about really taking that next big leap.
From a digital perspective.
In that and the headwind from the trial in 2019.
Yeah, Chris we don't we don't really get into that much detail. It was.
It's not something we've we're really shared.
Got it okay. Thank you best of luck.
Extra next question comes from Karen short with Barclays.
Hey, Thanks very much just.
Moving to looking at kind of.
Your philosophy going to 2020, I guess you know in the past what you have been very clear I know you've been very focused on not moving to quickly. So has not to kind of fire members and I guess he put up so I guess, how do we get comfortable that that won't be a bigger rasgas you accelerate space optimization, and obviously also move faster on.
The changes and some of these lower trading scheme.
Yeah, Karen I think it's a it's a great question. So you we have been admittedly I'm cautious on some things because we know I'm getting it right as important we're now at a phase where we feel like we have piloted a.
Host of changes either with our assortment with our promotional activity with our omni channel capabilities that we can move it up faster rate.
And so as we look to you know how to fund investment in those things.
You know said, we can streamline our cost which is what led to project momentum. So that we have the kinda flexibility to invest in growth and things that weve piloted and feel good about well still able to deliver the bottom line growth that we know it's important to.
To investors and so we feel we feel good about where we are.
Uh huh.
Helpful. And then I guess I'm wondering if he could just talk a little bit on some of the other categories. I know you called out toys, obviously was below expectations would you kind of be willing to think about it or talk to what the growth rate would have been or decline I guess and for Q on what your thoughts are for toys and to 2020 in and I asked the same thing in terms of electronic.
Because you did deal it kind of grief that to move to I think higher price points, how how's that looking in terms of.
Success relative to expectations.
Yeah. So.
As a called out in the script toys was below our expectation we think that's a mix of a mix of things, but the shorter holiday season is that the key see a we were happy about you know we we didnt have the Patriots in the Super Bowl this year, which is a new one for us, which depressed b b cell Boston area.
But otherwise the CE reset is a is working well and will scale. It in a bigger way this coming year.
And then just last from me, what's the renewal rate at 87% was that in line with your expectations or was that a little bit lower I like where are you hoping for a year over year improvement.
Well certainly we're always open for a year over year improvement, but but 87 was what we had in our internal plan for the year.
Thanks.
Yes.
Question comes from Canada, Fromer with credit Suisse.
Hi, Thanks for taking my question.
A follow up on on the space optimization and utilizing your data for a promotional activity are you using the data is kind of in the same way ads you rationalize skews to kind of see how members.
<unk> the skews might react.
Hi, yes.
So weve you know we've made an investment in I'm assortment and space optimization tools you know if you went back.
Eight nine months ago.
The merchants.
Couldn't exactly tell you how much space was dedicated to skews across our footprint and history of the company is the clubs have evolved in very different ways. Because we were general manager led general managers have the freedom to sort the buildings from mistakes standpoint, as they sell fit.
And that resulted in a pretty broad range of of stores and so we've gone through the process of a mapping and collecting stays data for all the club's connecting it to the kind of the planning and merchant community. So that they understand exactly how productive skews, our and then connecting it to the membership system. So that we know.
So as we pilot things.
If we remove a skew do members move to a competitive offering do they stop shopping that category entirely and then we pilot in test what to do with those different results can be everything from Veeva skew in stock or promote.
Additives skew more heavily to those individual numbers and so you know the key to getting this right is really understanding member behavior as we flex the space and building those tools was a critically important part of moving faster. We now feel like we have those tools and it will allow us to move the greater pace.
Okay. That's that's helpful and separately I know, it's early but is there anymore color you could give on on the high octane promotion program. Obviously, you know supermarket to that a lot of success with fuel rewards for years or are you getting that message across to the customer that they can get get gas.
As cheaply as they can now it is there any how to push back or slowness to adopt that you're seeing.
Got it said this this program.
And just every them, saying page.
If you buy a high octane item you got 10 cents a gallon of gas for every gallon you buy and the savings are stackable. So if you bought eight of these items you get 80 cents off a gallon as gas on kind of in the world of these programs are program is incredibly competitive the an honest savings you can garner for the outlay ask.
Cash is considerable and we've seen really good growth in adoption from our members with these programs I still think its short of a full potential and so we have marketed this aggressively but weakening market. It even more aggressively going forward and we'll see good we'll see good growth.
And we think we're seeing share gain when it comes to fuel consumption in the market.
Okay, great. Thank you.
Next question comes from Rupesh Parikh with Oppenheimer.
Good morning, Thanks for taking my questions just going back to some of your ecommerce uppers I'm. Just curious what you guys are seeing right now from Instacart installed pick up and if there's any surprises thus far in what you're seeing between both of those offerings.
Surprise is no.
We're seeing great growth with these you know where these offerings again it was important for us to make sure the value proposition was right and the services worked well, but we're seeing strong year over year and really period over period growth and views on these businesses and we're excited to invest behind them.
And so the partnership is a is working well numbers seem to be I'm enjoying the the services and we're seeing great growth then as Bob said, we'll disclose more detail.
On the Q1 call.
Repairs to the one thing I'll take on about as is our same day delivery offering.
Where many digital omni channel offerings or profit diluted same day delivery is a full margin sale for us This week.
But the charge that we.
We offer for that is offsetting food cost of is the car delivery and so.
We aim to push that as hard as we got obviously, if we can gain.
Getting growth at a neutral profit.
Were more than happy to do that.
Great and then just just a follow up question on your on your guidance I'm just curious what your expectations are for fuel costs. This year and then on the capital allocation front is that fair to assume that it just point that share buybacks or are not included within your guidance and your especially going be paying down debt with your free cash flow.
Yeah.
On fuel profit, it's more or less.
Level with this year is the way that we're thinking about promote cents per gallon perspective, and then share gains would come in on top of that.
[music].
And from a capital allocation perspective, as we go through up and the year in the next few years, but first first and we're going to do as and invest in growth.
You know we've seen a put forward guidance with.
Little bit extra capital expenses, we get throughout the year or other things, we want to invest and we will do that first and foremost.
Next we'll continue to de lever a and finally, we will return.
Capital to shareholders or through the buyback.
We did about $67 million, a buyback last year and or.
Well look to do a little bit more than that in the.
Coming year.
The way that we're thinking about it in the guidance is.
Flat overall share count that means where we're buying back enough to cover the dilution from stock compensation grants.
That is more or less.
1% of the float.
And.
Today's prices, we could buy back a little bit more than obviously and so we will look to opportunistically.
Buy back shares and return capital to shareholders, and and ER and and de lever, but first and foremost our mission is to grow the business.
Great. Thank you.
Next question comes from Mike Baker with Nomura.
Hi, Thanks, guys.
So first story about the Patriots, because we'll get a championship from the Bruins or Celtics or maybe bull [laughter] [laughter]. So that'll help this summer.
The I get that you are just two questions on the hates me. So short term focused on the comp but to two questions. There one I get that your guidance does not include the impact from the virus, but what are you seeing from the virus.
You know sort of offsetting the idea of people maybe stocking up.
Compared with people you know probably in the house and not going to store. So that's one question and then the second one doctor the fourth quarter. It's the issue is the six fewer shopping days does that mean that December was the worst month of the year in January was a little bit better. Then then the full quarter comp. Thanks.
Yeah, so to make them in reverse order like the.
Quarterly cadence.
Quarterly cadence in the fourth quarters.
Let's see what she said December was the worst month over quarter.
And and January was was better.
Not that really just highlights the compressed holiday calendar as you said.
With respect to Corrado virus, it's certainly a.
Probably the most fluid situation I've.
I've seen in my history here, we're monitoring it we've got a team came on top of it.
And we were spending all of our time trying to make sure that we do the right thing for our members on our and our team members as weak as we go through it.
We're not going to really talk about in any detail on the.
On the comp effect, but we are seeing some some businesses. Some of our members are stocking up on cleaning supplies and canned food.
Yeah, I don't know, how we would predict what what happens from here and so we've chosen to exclude it entirely from the guidance that was that we've put forward them.
We will react appropriately as best as we can and talk about it and the results as they as they come out.
Thank you fair enough.
Next question next question comes from Simeon Gutman with Morgan Stanley.
Good morning, Hey, I would be I wanted to go back to the very first question regarding the space optimization and it seems like this and it's a very sensible strategy. It seems like it was being discussed in some form but now it's being a fast track.
So I guess why why wasn't this obvious a year or even a little bit to go and did you not have the resources and then <unk> was a contemplated that this could be funded with with <unk> and I'm just trying to make the connection that this doesn't there's not a commentary on the amount of margin potential that's going to still come from C.P.I. going for.
<unk>.
Right.
You know I think the the pacing was really tied to making sure. We were getting this right and thinking through what new categories. We want it to enter Hollywood optimized space, how was it probably would communicate to members and how we would balance the the change we're now at a place where we feel pretty good about.
Our ability to do this and do it well yeah as it relates to the Cpis.
Program.
You'll see pie has been a tremendous a profit a lever for us we do anticipate <unk> as we go forward, you're gonna have a little bit less gained from that but.
<unk> project momentum will help fill that gap and then when it comes to thinking about the assortment. The other thing that happens as you.
Yeah, that's right as you create more room and had space for our own brand portfolio, which as we've talked about before as meaningfully more profitable than the national brands and so.
The overall algorithm hangs together reasonably well, but the key on pace to just make sure. We had it right from a a member standpoint and that we have confidence to to move more quickly.
And the comment around no disruption is that because you you we've begun to execute this or because the the resets are pretty minimally I guess intrusive into that into the shopping experience.
Yeah, I don't I'm not sure thing no disruption there you know mineable small disruption, but the the keeping we're trying to do here, which I think it's different from other.
Other retailers programs in the past is we're focused on growing the business, we're not focused on operational benefits as the primary lever we're focused on adding.
Products and services that we don't have that we know members want and are on on trend and so your expectation as well there could be some small disruption it will be accretive very early on in the process.
Got it and then just one follow up maybe for Bob the 1% to 2% comp side.
I don't think you give all this detailed but if you can numbers drill what's in that and that guide their spend per member or I guess that the ticket and you know any any color. This building blocks of how we should think about the wanted to so we can assess.
The degree of difficulty of getting there or lack thereof.
Yeah, I mean, certainly would we.
I don't disclose those those metrics there what you're looking for but they are the right ones right. We've talked about some of them on the call here today, where we've we've been growing members at a nice pace.
We don't see a reason why that would.
That would slow down.
[music].
The primary thing we need to do is activate those numbers and not that's that's the challenge so.
That comes across in both traffic and ticket how do we get them.
Come see us more often and how do we get them to put that extra item and their basket.
As we plan to the comp for the year, we've effectively planned those two items to be pretty balanced.
And as we always do we not included Uh huh.
Pack from inflation or deflation and.
We always always just love that flu, let that flow through and then tell you what we softer and during the quarter. So.
You know, where we're looking for a little bit a member growth a little bit of activation of those numbers and pretty balanced traffic and ticket.
Okay. Thanks, good luck.
I do think your <unk>. Our last question comes from Chuck Cerankosky with North Korea of course research.
Good morning, everyone Oh.
Oh, what did you quantify these merchandise mix changes you're talking about in terms of.
Skew count reductions in the number of new categories. You didn't increase and then Bob I think you really want talking about layering. It in are we going to see that by regions or does it happen to all the clubs at the same time yeah.
Certain playing through <unk>.
Uh Huh, maybe I'll take them the last part of that question Chuck.
We can.
We can give any detail he chooses to on.
If you count we're projecting as they come in through.
Through the year, it will come in and and de centralized chunks, though so so back to the overall storyline of.
Sort of prudently testing last year to make sure that we could do it in a we were getting the results that we were.
Desirous of having a now we want to suppress accelerator pedal little bit it so.
First half of the year, we will we will set a.
Pretty sizeable chunk of the chain this way.
And then continue throughout the year.
A couple of stops and so you'll see you'll see benefits from it.
Hopefully throughout the entire year and I will go from there.
Yeah, and then in terms of just the quantification we are.
Not issuing externally or internally guidance on SKU reduction because that's not what this is about we're asking the merchant team to go find products and services, where we can offer a great value in our members will love them.
And when we have those were creating space by reducing places, where we know we have more choice than our members need and are in categories that are not growing or declining and so that balance will sort itself out over time, but the key is saying how do we get more of the stuff that we know people want.
And is already growing and making sure we're participating in it.
Lately, how do you keep the process dynamics of that you don't get stuck with an assortment.
That that needs to be changed two years from now.
Well I think the that's where it needs to be changed every quarter [laughter] and so you know part of this is just making sure. We're being you know really dynamic and moving with the market and as there are new categories that that come along were growing into those in the sorting them. So.
Your plant based protein as a great example of that that category by and large didn't exist a year or two ago.
It's going really quickly and we should be other than a much bigger ways and then we happen and so it'll be a constant evolution of our assortment to stay current and relevant with our members.
Thank you have a good.
Good enough for school Tony Tony.
Thanks, Chuck you.
At this time I will turn the call over to the presenters.
Great. Thank you everyone for for joining the call we look forward to talking to you against it.
This concludes today's conference call you may now disconnect.
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