Q2 2020 BJ's Wholesale Club Holdings Inc Earnings Call
During the session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Sachin Freehold Vice President of Investor Relations. Thank you. Please go ahead.
Good morning, everyone. Thank you for joining bjs wholesale clubs second quarter fiscal 2020 earnings conference call.
Delaney President and CEO, Bob, adding 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 our current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectation described on this call.
Please see the risk factor section of our form 10-K filed with the FCC on March 19th 2020 for a description of those risks and uncertainties.
Finally, we know that on todays call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors.
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 todays press release posted on the Investor section of our website for reconciliations of these non-GAAP financial measures to most comparable measures prepared in accordance with gap with that I'll turn the call over to me.
Good morning, everyone, I hope, you're all safe and healthy.
Let me touch on a couple of things briefly before discussing our performance and go forward expectations.
First I'd like to thank our team members for their dedication as we continue to navigate these unprecedented times this past quarter, we face challenges that impacted every aspect of our business.
I'm extremely proud of how our team responded with resilience and creativity to be ever changing environment and sustained demand for our products and services.
Every function and our company from the field to supply chain teams to the merchants and marketing team to all our support teams in the home office people stepped up to deliver exceptional performance across the board.
Their dedication and efforts enabled us to safely serve our communities and deliver outstanding results. Thank you all of them.
We recognize them through temporary wage increases through July as well as multiple rounds of bonuses, including a bonus that we paid in September.
Year to date, we've invested $83 million in T. remember wages and bonuses. In addition, we continue to support it enhanced benefits package and financial assistance through our employee really fun.
Our talk and most important priority remains the health and safety of our team members as well as the members and communities we have the privilege to serve.
We continue to practice the extensive safety measures we introduced in March.
We will remain vigilant it gets you to work with federal and local authorities to ensure we remain ahead of evolving safety and health standards year to date, we have spent approximately $24 million increased safety and sanitation cost.
Second.
I'd like to take a moment and address the social justice the garnered worldwide attention this quarter.
We stand in solidarity against racism discrimination and violence, we're proud to serve an incredibly diverse membership base and work alongside a diverse population of team members.
These events reinforce the importance of our ongoing efforts to build a culture of inclusion and diversity to support and meet our efforts. We created an inclusion and diversity council to implement training education recruiting and development initiatives that drive inclusion and foster diversity.
The leadership team and I are passionately committed to this work, which we deem inherent to our values in our success as a company.
Now, let's turn to our performance.
Q2 was another remarkable quarter with strong topline growth profitability and free cash flow.
As a reflect on our results today any implications the future I believe that we have turned the corner from really reacting to the pandemic to proactively transforming our business to enable a much brighter future for the company.
We have a radically different company than we had just six short months ago.
In many areas of the company. We are now years ahead of our of how we thought or transformation would evolve.
And we are actively looking for ways to increase the pace of progress.
For the balance of my remarks, let's dive a bit deeper on five key topics membership assortment digital transformation strategic footprint and capital structure.
From a membership standpoint, we continue to see a strong increase in new members joining be Joe's. We now have over 6 million paid members to put this in perspective in the past six months, we acquired and retain approximately 18 months worth of members. This pace should it continue would habits experience three years of membership growth in this one.
Transformative year.
Not only our new members joining at elevated levels. They skew younger and are more digitally engaged.
We believe our membership will be stickier, and we are adding incremental efforts to ensure higher levels of engagement.
We have added incremental marketing to support number outreach and I've been encouraged by the result in new and existing clubs.
We're also focused on ensuring our members remain engaged especially new numbers, we're closely monitoring their behavior and utilizing a targeted personalized approached to keep them engaged in shopping.
We will lean aggressively into membership investments throughout the balance of Twentytwenty.
With assortment strong underlying demand driven by increased food at home trends and consumer investments in their homes allowed us to consider we accelerate plans to change our product and services offerings, we essentially revamped our assortment in real time selling through old inventory at a rapid pace simplifying and expanding into hydro.
In high demand categories, where we did not previously compete.
Let me share a few examples from this past quarter.
First our merchants did a terrific job engaging with existing and new suppliers to keep us in stock into expand into highly relevant new categories. We added 32, new vendors to bolster our supply chain in food paper and cleaning supplies and to participate and new personal protective equipment categories.
Second we dramatically accelerated the reset of our food business with a new sat in nearly 200 clubs that incorporates more healthy inorganic options months ahead of our initial schedules.
We knew changes here would be important to engage younger members and accomplish against so quickly should eat our retention efforts with our new first year members.
Third we continue to expand our general merchandise assortment delivering great prices on well known and new brands, including Sony Puma Lucky and champion.
We also reinvented the way, we buy apparel to be more opportunistic and capitalize on market disruptions.
And finally from a services standpoint, the team continues to build our capabilities. Our ATM T mobile offering is resonating well with members and we have further enhanced it by I Didnt buy online capabilities.
Our optical business is open again, and we continue to offer great value when convenience, including new digitally enabled optical services like pedal telemedicine appointments.
And we relaunched our home improvement in appliance platforms, offering unbeatable value and enhanced member experiences.
Our digital business is crucial to our existing and new members and a stronger than ever we grew digitally enabled cells by more than 300% and made dramatic progress rolling out new digital services.
After a brief test we launched curbside pickup in all clubs earlier this month and we expect biologic picking a club for perishables to be available by the end of the third quarter.
Initial response remembers has been encouraging we will move aggressively to add infrastructure and our clubs to handle these rapidly growing offerings, knowing that our economics, our advantage versus our competitive side.
I'm also thrilled to announce that earlier this month Monica Schwartz joined the team as Chief Digital officer with Great retailers like home depot, and <unk> and her background Monica his extensive knowledge experience and diverse background will be instrumental as we scale our digital business.
We remain focused on expanding our footprint at a much more aggressive fashion, our third club in Michigan opened late in July and while it's still very early days. We're pleased with the initial membership response and sales trends.
We expect opened two new clubs in New York around the end of the fiscal year and concurrently see opening as many as six new clubs next year.
We are moving aggressively to make those numbers or even larger ones a reality.
Our balance sheet is radically different quality today, we have use the massive amounts of free cash flow to reduce leverage to 1.4 times funded debt to EBITDA versus 2.9 times, just a year ago.
And we began to selected we buy back shares to offset the dilutive EPS impact of equity compensation.
Stepping back we expect the consumer trends will likely continue for the foreseeable future. We expect this landscape combined with our considerable transformative investments will increase our relevance to members and prospective members a like.
Almost regardless of the level of economic uncertainty, we should be well positioned versus competitors, given our low price positioning and the fact that we have grown our membership REDAPT, our analog and digital offerings increased our rate of new club openings and transformed our capital structure.
In this environment, we will look for additional opportunity to accelerate our transformation remake our balance sheet and drive step change levels of profitable growth.
We hope to look back on this turbulent period as our moment in time to radically improve our business with that I'll turn the call over to Bob Bob.
Thanks, Lee and good morning, everyone.
Before I begin I would also like to thank our team members.
Our industry, leading results reflect their performance and the investments we've made over the past few years.
As we noted 2020 has been an incredibly transformative year for our business what kind of pulled forward into the future.
Net sales for the quarter were $3.9 billion merchandise comp sales, which exclude gasoline sales increased by 24% and were driven by both traffic and ticket.
We had significantly more members shopping our clubs consolidating their trips and growing their baskets.
These trends were relatively consistent across all of our geography.
We saw consistently strong comp performance during the quarter with comps exceeding 20% for each month.
We ended the quarter with July merchandise comp growth of 24%.
And trends remain strong in August which is running at a 20% comps so far.
Our digitally enabled sales grew by more than 300% and drove about six full points of our 24% merchandise call.
About three quarters of the Q2 growth and digitally enabled sales was driven by same day delivery and buy online pick up in club or bobek.
The complexion of this growth is important as it is centered in those fulfillment methods, where we have advantaged economics as you know we operate a limited skew warehouse environment was significantly higher average tickets, which allows us to be much more efficient.
Oh pick sales tend to skew towards higher ticket items and same day delivery sales have the same margins as traditional sales in our clubs.
Comps in our grocery division grew by 25%, we saw very strong growth rates in expected categories paper products cleaning essentials, fresh meat and produce frozen dairy and beverages.
Team improved our in stock levels during the quarter, including in certain very high demand categories by Innovatively working with both existing and new suppliers.
Our general merchandise and services division saw a comp growth of 22% driven by strong apparel sales TV sales and other home related categories.
Membership fee income or MF grew by 10.4% during the second quarter to $82 million.
I met by growth was driven by new members renewals and membership mix.
We now have 6 million paid members, which is an exciting milestone for this company.
To get here paid members grew by 10.6% year over year.
Cash and five for the quarter was up 15% due to growth in new members and membership renewals.
Despite these gains and the number of members are higher tier penetration increased to 29% and easy renewal enrollment is nearly 70%.
Let's move now to gross margins.
Excluding the gasoline business, our merchandise gross margin rate was flat as CPR initiatives and improved performance in our general merchandise business was offset by covert costs and cost inflation of certain commodities, most notably beef.
We invested meaningfully in price during the quarter in order to sustain our outstanding value to members in these tough times.
SGN expenses for the quarter were $591 million and included approximately $42 million of total costs associated with a pandemic.
These costs came in above our expectations as we extended our temporary wage increase longer than anticipated and we implemented a bonus program tour reward and recognize our team members.
In spite of these additional costs, we leveraged SDMA by approximately 40 basis points, enabling great flow through to earnings.
Please note that these costs have not been adjusted out in the calculation of our adjusted EBITDA metric.
Our adjusted EBITDA grew by 42% to $217 million, reflecting the robust sales be offset by disciplined investments and our team members and their safety and in our business.
Adjusted net income in the second quarter was $108 million or 77 cents per share and reflected an incredible 97% year over year growth.
Our earnings growth highlights the strength of our revenues our disciplined capital expense management.
And reduced interest expense.
As a result of our outsized performance and working capital benefits, we generated free cash flow of $220 million in Q2, and a record $655 million year to date.
We bought back $34 million, rather shares and pay down $150 million or our first lien Doug.
We ended the quarter with $169 million and cash balances and a funded net debt to adjusted EBITDA ratio of 1.4 times.
Our balance sheet has been dramatically transformed in the past year.
Let's now touch on our outlook the current environment remains challenging and unpredictable.
There are several uncertainties and factors that would impact the overall economy, and our business, including the evolution of the pandemic government stimulus consumer behavior, the elections and unemployment levels.
As a result, there remains extremely difficult for us to forecast how the second half of the year will play out in specificity.
What we do know is that our business has strengthened significantly.
We're not the company, we were six months ago, six quarters ago or six years ago. We've added more members and are accelerating investments to improve all facets of our business.
Although we benefited from increased ABT and stimulus benefits in the last six months, we have built an underlying strength in the business that will be sustained in the future even after he BT and stimulus benefits are behind us.
Changes accelerating and we believe we will emerge from the situation transform.
For the long term algorithm that significantly outpaces the plan, we laid out at our IPO.
Let me touch on some high level expectations for the remainder of the year.
First we expect strong comps for the remainder of the year and to continue to attract and retain new members as we invest and transform our business.
Given the uncertainty around stimulus and other matters.
It's difficult to predict sales in the second half of the year in detail.
Based on our new member growth, we've seen in the first half of this year and our current member mix, we would expect identify on our piano to grow by approximately 12% in Q3.
From a gross margin standpoint, our view remains the same as Q1, we expect could benefit from strong sales and CPR and private label expansion.
There are also manageable headwinds to consider including the higher cost of freight and near term inflationary pressures on certain categories.
We aren't planning for margin benefit for our from our gasoline business for the rest of the year and in fact, Mark Jones could potentially contracted but.
Our next Gen. Eight we expect to incur approximately $20 million to $25 million of incremental expense associated with covert 19 in Q3.
These costs are related to team member bonuses and ensuring we keep members and team members healthy and safe.
Despite these cost and uncertainties, we expect to achieve very strong adjusted EBITDA and earnings growth.
Let me touch on capital allocation.
This year has been incredible so far over $600 million and free cash flow has enabled us to repay nearly $500 million in debt repurchase nearly $40 million in shares and accumulate nearly $170 million in cash on our balance sheet as has been truly transformational.
As we look forward our first priority is the growth of our company, we will fully fund all growth initiatives that meet our strategic and financial hurdles.
Next we will look to continue to optimize our balance sheet.
Finally, we may consider returns of capital to shareholders.
Our goal is to ensure that we have the appropriate capital structure that would enable the company to succeed over the long term and maximize shareholder returns.
To wrap up we're extremely pleased with our results for the first half of the year and we feel tremendously well positioned for the future.
Our business is more relevant than ever before and our investments are enabling us to succeed and drive continued profitable growth.
Importantly, we have a team that is executing at the highest level and building a truly transform to bjs wholesale club.
Now I'll turn the call back over to the operator to begin the QNX session.
Thank you as a reminder to ask a question you when each press star one on your telephone to withdraw your question press the pound or hash key please standby will be compiler Q and a roster.
And our first question comes from the line of Edward Kelly from Wells Fargo. Your line is open.
Hi, guys, good morning, and calculations on a good quarter.
First thing Lee I wanted to ask you about.
The they accelerate club growth, maybe could you provide a bit more color here, including the decision to sell.
Salary growth a bit and.
It certainly seems like you're you're more optimistic now about this opportunity where do you think you can get too in terms of a run rate over time, and then how would this impact capex.
Sure. Let me, let me start and then I'll turn it over to Bob to to round out the perspective.
As we talked about in the past on accelerating our rate of New club openings has long been a strategic priority and we spent a lot of time over the course of the last few several years, making sure we have the model right because we were unhappy with.
The success of the openings kind of going back three to four years, and so with our clubs and Carney and Somerville and Michigan.
Really look to revamp that model and make sure that when we open the clubs, we gotta sufficient membership base to make them successful and I will then that we were investing enough.
In the infrastructure in the marketing and the acquisition activities and we've been really happy with our efforts in club, particularly the most recent set of clubs that we've opened in a in Michigan and Pensacola.
And Clearwater and think we have the ability to stuff on the gas that.
We're also hopeful that there'll be some disruption in the broader real estate market that may create opportunities for us and so you know.
And I'd together with the real estate team.
Decided that we would more aggressively look for opportunities to fill the pipeline we've been working on it for a while and our hope is that a that next year will be open we'll be able to open a significantly more than we have in the past. So in those you in the script, we talked about as many as sex.
I'm not sure what the right long term algorithm is but we've seen a bit in the range of three to five and we'd like to pick out a bit higher going forward.
Oh by the you'd run that at all.
I think that I think thats rightly Ed good morning, the question on Capex.
Certainly as we open more clubs, we will incur more capital expenditures.
And potentially meaningfully more one of the things that we've done is look through our own process to see what we can do to speed up our own.
Our own process, the real estate prices in general is fraught with uncertainty and.
Long timelines and some of that as just the real estate thing and some of it as our own process and we've looked to streamline our own process.
And do things like start buying.
Buildings and land as opposed to just leasing them and so.
You may have heard us talk about about a 10 million dollar per club cost that that is particularly associated with at least club. If we start buying clubs in any material nature. It will go up from there.
And I think we will we will do that as we look to accelerate.
Our growth because it's it's a little bit faster to go by the club.
We'll go by the land and it's a little bit more economical as well and now that are our balance sheet is so much different than it was a year ago. We have a flexibility to go do that so as those plans crystallized for for next year later in this year, we'll we'll start talking about the direct impact on Capex, but.
I think your hurt in the script.
Our first priority when we think about what to do with our cash is growth and.
We will look to fund every every avenue of growth we have in this.
Yeah, great opportunity too.
You know take advantage of the situation, we find ourselves and today and make our company great for the long term.
And just stay a so a follow up on on the merchandising side could you maybe just provide a little bit more color on a the opportunities that you're seeing out there I mean, you did mention reset on the grocery side you know some color on.
On on what you did there and what the response has been and then I'm even more curious on on the G.M. side and just what you're seeing from vendors disappoint you know what's happening on the branded side.
Has that actually started to work into.
The business, yet or is that to calm and just taking a step back you know you've been underpenetrated in general merchandise arguably where do you think that can get to overtime or do you have a goal around that.
Sure.
Let me, let me break that apart a little bit you know as we've talked about in the past.
We offer our consumers a large degree of choice in a relatively narrow set of categories and some of that really works well for us and our fresh food offering because we have more people choosing to use us as their regular shopping destination I think that movie has helped us during the the pandemic.
But the reality is in a number of categories. We offer a more choice than our members really need for curated club environment and so the core of what we're trying to do is simplify choice in the right places and an extended into new categories that'll be particularly true in in general merchandise.
Where we've had a fair degree of success entering new categories, while more closely curating our assortment in food.
And so that allows us to get into things and bigger ways like fishing and sporting goods, new consumer electronics are connected home devices and also do engage new branded players and I think the.
The jury is still a bit in terms of the degree of new branded players will be able to add but we are having more and better conversations with a set of a companies than we've had before and our merchants are actively looking to engage new suppliers.
And just given the velocity and the traffic benefit we're seeing.
We are up a unique player in this environment, we have the buying capacity, we have the shelf space and we have the traffic and so we'll continue to invest in new categories. No terms the ultimate a level of.
General merchandise penetration I would expect that in a normalized environment, we would see a general merchandise continued to grow at an accelerated pace and the other piece of that it's important is our services business. We know this is a place where our competitors, most notably Costco have enormous businesses and weve owned by and large.
I haven't participated.
In the past and so we have new offerings in optical and cellular phones in the home improvement.
In major appliances that are scaling quite nicely. Despite the kinda back drop in the pandemic and I think those will be multiyear growth vehicles for us.
Great. Thanks, guys.
Our next question comes from the line, it's Chris Horvers from JP Morgan Your line is open.
Thanks, Good morning, guys. So a couple of follow up questions or is there any sort of capacity constrained.
Around olefins given the timing of opens at the end of this year, you're effectively growing almost.
4% unit growth so.
Could you like.
Could you share the same sustained growth sort of a like a high single digit type units not a number of clubs opening in any in any particular year and as you think about.
Buying the dying to land to speed the process, how would you sale lease back those ultimately or look to build a real estate value.
Good morning, Chris It's Bob.
You know there's the there are plenty of capacity constraints on the openings for the although I talked about the real estate processes surf fraught with them.
We've seen quite a bit of them. So far this year, just trying to covert perspective, the two clubs that will open around to the end of the fiscal year.
I should have opened much earlier in this and this year.
But getting getting county officials and permits and all those things has been has been a challenge so.
The challenge in a normal year this year as a little bit a little bit more of a challenge and we are sort of pulling every lever that we can think of to offset those those challenges and go go faster and buying as one of the ways that.
That will do it another one might be we would typically want to open a new club with the gas station and typically open the gas station a few weeks before hand.
Means of driving membership interest.
You can imagine the permitting complexities with with gas station versus just a retail store.
So now we've.
Sort of de prioritize that requirement, we will open the store before the gas station as a means of of getting the new unit opened earlier.
As I as I spoke earlier about our transformed balance sheet.
I think we will.
We will look at the individual economics of sale leaseback transactions, but I would expect.
Lesser desire to do that given where our balance sheet stands today versus where it stood a year ago.
We were doing that.
Primarily to.
Get cash to payback the bank debt and now that our bank debt as much lower than it was before.
We will sort of Opportunistically look at sale leasebacks, but given where the where rates are in the in the bank market, it's probably a little bit.
Better for us to.
You know to keep our bank that a little higher and not incur the sale lease back that at this point.
Understood and then can you talk about.
A better long term financial algorithm then when you went out on on the IPO you addressed the potentially unit growth acceleration, but.
We originally came out as you know, 1% to 2% type core comp.
And you had margin expansion how are you thinking about the dynamics. There you know clearly with the momentum in the business momentum momentum on membership that one and 2% would seem pretty low but also our we transforming more towards a flow through model, where either the margin Oh.
Operating margin caps out.
Well I think it's a little bit early to get into specifics, but certainly I think you hit a couple of the key points. We have gained so many new members this year that.
That alone should drive the comps higher than what we would have planned free.
Covert in previous to this avalanche of members that have come in.
Only our margin.
Opportunity is not done but it is.
And I'm speaking gross margin related.
Not done, but it is a little bit slower growth than what it was a couple of years ago.
And the other things are really the.
The differences in interest expense and potential returns of capital as well as we think forward. So.
Again, as we get through the rest of this year.
Our thinking about.
Next year's plan and new long term plan, which we will.
Well give you some some detailed thoughts on the long term algo.
But I think in.
Just degree you're thinking about the right way that membership will power greater sales growth.
Combined with with more unit growth.
And.
The balance sheet side of it will help as well.
That's great best of luck.
Thank you.
Our next question comes from the line of Chuck Grom from Gordon Haskett. Your line is open.
Good morning, and Great results, just a lot of momentum on the membership I'm curious what what the new member growth look like in the second quarter last quarter, you said, a 40% for one cubes and Im curious how repeat rates.
Look once you have on board of do shoppers.
Good morning, Chuck It's Bob I'll I'll take that at Lincoln, We can chime in certainly Q2 had a great membership statistics as we've talked about on the call.
Now over over 6 million paid members.
To get there we grew quite nicely on that same basis as that 40% growth last quarter, we are about 28% so year they 36%.
And ER.
Touch slower, but but certainly.
A whole lot faster than we would grow and I'm in a normal year and we're very very happy with that.
You know as we as we look forward.
You know those those members are shopping.
Very nicely their behavior is similar to.
Two other members that are already in the portfolio.
And that leads us to think that things about their long term potential as as members.
Only you've heard us talk about before the more a member spent the more like the they are to renew.
Nearly all of our members are spending more than more than they have before so that bodes well.
For for renewal rates on for sales going forward in the future.
Yes check I'd I'd just add to that.
Inventory that we're really pleased with how broad based them amended momentum as you know across all geographies and all business lines, we're seeing great engagement and as Bob said, we know that have more categories I remember shops, the more frequently become more likely they are to renew and seeing a bigger baskets that are raw.
The based.
Gives us hope that.
Existing members and the new members that have joined I will be stickier than they have been in the past underlying shopping baby behavior is quite robust now the big wildcard clearly as the be impacted the pandemic and how that plays out into next into next year, whether there is a vaccine, though whether there's a treatment. So there's a large.
Amount of unknowns, but what's really encouraging is the underlying member shopping behavior or relative to our normal baseline would suggest that we should see good retention rates of both the existing on the new members we've added.
That's great and then just Bob will be on there.
Compared to the can be said traffic and ticket both contributed I believe last quarter. There are about 50 50, just wondering if you could.
And give us that detail and then I guess I'm also curious how that that the mix of traffic and ticket and moved throughout the quarter. If you don't get if you look at hospitals.
I think it's obviously improved a lot but their basket has actually stayed relatively intact, which is encouraging so it's a little bit of color on that front would be would be helpful. Thanks.
Sure. It's on the composition Chuck is on roughly a.
Third traffic two thirds ticket in the overall comp base, that's held relatively consistent throughout the period as have our overall comp trends. So we saw a good complement them through each of the three months of a quarter, which is encouraging.
We're also noted we're gaining share you were seeing some degree of trip consolidation, we're seeing larger baskets when people come and that is leading to outside outsize growth again across all geographies and nearly all categories, which is which is very encouraging.
Awesome Okay.
Our next question comes from the line ups, Chris Mandeville from Jefferies. Your line is open.
Yeah good morning.
I was just wanted to start off the holiday period I overheard that you have brought in some newer higher quality.
Brands on the apparel side, but can you speak to any other efforts that you're putting forward to ensure you see some continued success in Gen March as we go through the back half year.
And how are you approaching this season any differently versus prior years in terms of purchasing and promotion.
Chris.
I lost trend, which has been the I loved part of your your question, but I think if I understood. It. It was you how are we thinking about the cow.
The assortment, particularly as it relates to general merchandise on and not the holiday season, I think the holiday season overall is gonna be particularly tricky to to plan as you think through on Halloween, We're assuming a there are fewer parties and probably less trick or treating and as you get to Thanksgiving, we suspect there maybe.
You more Thanksgiving gatherings of smaller size, so that would mean buying more turkeys, albeit smaller turkeys and then as you roll through you know to Christmas Hanukkah season, again, we would expect there'd be less large gatherings, which is a pretty meaningful part.
Of our business and supporting those those parties and social with them.
And so we've been thinking through how to pivot and transform our assortment to meet that demand.
And it is on both the food and and the general merchandise side, where a fair amount of work has gone into I'm really thinking through the implications and how we should how we should plan the stores I'm in the and the online offerings.
But on the biggest thing that we're doing that is new is trying to buy into new categories, and then a bigger way, so I'm more or less any investment in the home passed and has been resonating and so we're looking at exercise and equipment and textiles, and consumer electronics and connected home.
Because our baseline assumptions youre still have.
A large amount of people either working from home or spending work onto their homes and the investment and.
People's homes will continue and so we're shifting the assortments pretty meaningfully in that direction.
Okay. That's helpful and then I suppose I haven't heard much on project momentum for quite some time, where do we stand on realizing what savings you expect.
For this year and where do you found said savings and where the opportunities that lie ahead. So.
Yes, we are on target for project momentum for the for this year.
But it's been it's been a bit of a different route to get there than we had projected so.
Beginning of the or we would have thought of it.
Our of our savings.
Our plan would come out of our operations team and that that's still the truth, but is it slightly less today as you can imagine those.
Those folks are out there trying to figure out how to.
Order and less about how to how to save money.
But that's been more than offset by increased savings by by our home office teams.
And figuring out how to.
Okay labor more efficiently how to.
Automate and and potentially offshore certain things.
That that.
Currently done here. So for instance, my finance team has a big project on robotic process automation that as taking some of the lower value add.
Work and having that done by software robots.
And our human resources team has done a wonderful job.
Saving money on our on our benefits program without.
That's available to our to our team members.
So the wide cross section of the things that we're doing a little bit more home office focus this year than than in the field.
Versus what we planned but we are on target overall for this year and expect to be on target for next.
Great I can just one last one in very quickly if you haven't on hand, what was the gallon comps declined in the quarter and how does that look in August.
Our our gas business has been incredibly strong good gallons are actually up 4% in the quarter and so when when we talked about gaining share a few moments ago. I guess is a wonderful example of how we're doing that.
Your question.
Sort of assumes we were with the rest of the market, which which is certainly down from a gallons perspective, but.
We've seen our members.
Consolidating trips and all in all matters.
We've been gaining tremendous share from a a gasoline perspective as well as inside the club.
Got it I appreciate it guys take care thanks, Chris Thank you.
Our next question comes from the line of Karen short from Barclays. Your line is open.
Hi, Thanks, very much I wanted to just talk about memberships. So I've been new members that you gain since year end I'm wondering if you can just provide a little color on the composition of the members interim tears and then.
The actual am I play like reported M.F.I.
You gave that number of 16% cash amount by I'm, 40% increase in new member acquisition in one Q and then it was 15% into Q with a 20% increase in new member acquisition. So can you just walk through how reported and a $5.
Should grow in Threeq and Fourq you based on what you know today.
Sure. Thanks for the question Karen Let me answer the first part and I'll turn the second part over to the Bob you know from a.
Overall quality of the the new members. We're we're quite excited about it you know you think about it quantitatively on engagement of higher to your memberships and then on participation and easy renewal both of those metrics on held strong and actually grew a little bit in the quarter and so the only way you got there as to how.
On the new members contributed roughly the same rate, which is which is very encouraging given typically new members need time to 10 year into the higher to your credit card offerings and so you know we're happy with our credit card program, how that's developing.
And then if you look at.
The demographics and the behavioral characteristics of the new members, they're skewing younger.
They are more digitally engaged and they're clearly shopping more than we typically see from from new members or some of that on is undoubtedly pandemic related but if you step back and think about the type of number that we're trying to acquire a it's a young.
Memory is young new homeowners and the crop of numbers were adding does skew more in that direction than what we would typically see I'm into that's very encouraging to us.
You're talking about them not side of it.
Currently we pick them outside of a tour, where our or call back later, but I think.
What I would say is a lot of what what Lejus said right, we've experienced pretty tremendous new member growth that's driving the 16%.
Cash and a slight growth in Q1 and 15% here in Q2.
And.
And that as that is a combination.
Gives me a combination of new member growth and and member mix and an increasing renewals as well.
So all three things are going well, so we've talked a lot about the number of new members that that we grew.
Are already so I'll skip that I'm not going to give.
A heck of a lot on on renewal rates other than to say that we ever more renewal bodies. So far this year and.
We believe based on people shopping habits.
That that the overall membership and these new members will be will be stickier over overtime.
And from a tears perspective, you asked where we were there in the script, we talked about 29%.
Even into the higher tiers, and almost 70% into easy renewal to to make those numbers happen.
Just strictly from mathematics, definitely you have to be doing a great job converting it at the at the front line.
At the membership death, given the number of just the sheer number of members we signed up.
To go higher on those on those numbers has been who's.
Impressive and thank you to our fuel teams out there for for making that making that happen.
Okay. That's helpful and I just had a question on new units on so so I understand that that you if you own the land and building. Obviously gives you a lot more flexibility, but and you said that the cost would be greater than 10 million. A club can you maybe just got a little more granular on that would it be double kind of.
A new unit if its owned and then if we're thinking about the six for next year, what does that kind of right mix to think of owned versus leased.
Yeah, we're a little early on here on your last question in terms of owned versus leased but at least one of them, we'll be well beyond.
For sure it's it's difficult.
To really answer your first question, because there's such a wide variance depending on the markets.
So you know I don't I don't want to give you a number that is crazy, but that they could be 25 or $30 million versus the potential.
If we bought a club in Metro New York and would be even higher than that for instance, so it's very difficult to.
Answer that.
With any specificity, but what I would put out.
You know have you think about as the additional flexibility that we have with the transformation of the balance sheet and the fact that its overall more economical to buy usually than lease because you're you're taking out though the lease premium but that would go to the developer so.
When you sort of thinking about how it runs through the piano the rent expense on at least club would be higher than the depreciation expense on on an owned building.
So while it's a little bit of a drain on cash to buy things. It allows us to go faster and we save ill dollars on the whole.
Yeah, No I definitely think it makes my sense I was just curious on that's okay.
Thank you.
You bet. Thank you.
Our next question comes from the line up Robby Ohmes from Bank of America Securities. Your line is open.
Good morning, guys actually two questions. Lee I was wondering if you could talk about maybe new things you might be doing on the marketing side to keep that really strong new membership momentum going into the back half.
And then the other question is Bob on.
On gross margin I see you mentioned price investment impact into Q.
Can you kind of tell us what that was and do you think price investment will be sort of larger than normal going forward. In I think you also mentioned distribution cost pressures, maybe some more color on what that looks like in the quarter and what that could look like going forward. Thanks.
Sure. Thanks, Thanks, Robbie from a membership on marketing standpoint.
We're investing more and doing it in different ways than we have in the past.
So over the course of the last few months, we turned on in advertising campaign.
I think traditional channels broadcast TV radio as well as a whole suite of digital channels and saw good results with that program. We saw a lift in shopping in our clubs and higher new member sign ups. We've also on then experimenting and scaling.
Investments and in very targeted membership acquisition. So we.
Bill a database that allows us to market more specifically to individual members across our footprint with the whole set of demographic behavioral katich characteristics. So that we can get very specific and our outreach across both analog and digital channels.
And then we're looking to invest more in Onboarding people into the credit card program from the start and so I'm pretty meaningful investment and and different programs and and tactics to have someone in role in the credit card because we know that if we have people participate in it.
At our current program they save more money.
They spend more and there's much stickier I in a membership standpoint.
So as Weve tried new things scaled new programs and look to invest more we found some things that are that are pretty exciting to us and we're going to ramp the investment in those behaviors in the in the back half now again, we're clearly benefiting from a.
Desire to consolidate trips to buy in bulk to save value kind of the core of our offering but against that backdrop on X exaggerating. It with a marketing is something that is has very attractive to do in very high return. So we'll be more aggressively on to the marketing throughout the balance of this year in.
Into docs.
That sounds great.
And then Bob on gross margin.
Yes.
Good morning, it's hard.
It's a it's a tangled story on gross margin isn't there a lot of puts and takes that we tried to line out in the.
In the prepared remarks, but you generally no. The story right certainly the good guys include continued wins from a steep guy perspective.
Private label penetration improving performance in our general merchandise business. When you think about the markdowns we took in Q1.
Versus versus where we are today in that business and we certainly had some some cost inflation, most notably in beef and that is where.
In instances like that we tend to.
Justin and price.
And lag the inflationary increases.
To help our members out and many of our competitors do that as well but.
You know that our pricing.
Architectures too.
Mass Cosco and Sams every day and maintained a great pricing gaps against against mass and grocery.
That's really sacrosanct and the way that we think about it this year is no different from that.
Perspective, but.
It's just going a little bit crazier with with some of the moves in some some some of the commodities in this quarter. It was it was b.
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We'll continue to invest in price we won't.
We didn't really change that that methodology, it's incredibly important in our membership model to.
Offer our members of value and we believe that's what we're here for until we will continue to do that.
Both in sort of normal normal course events and when we have.
That's a significant inflation like we had this quarter for beef.
The distribution expenses were more or less in line with what we were expecting maybe slightly higher.
And that is just the cost of running our distribution centers is higher given.
Given the incremental expenses that we are encouraged to keep our team member save and keep the goods flowing and then overall freight has been a little bit more expensive than than we had planned but not not materially so.
So certainly we will do everything we can to keep our team members and I remember safe and so those those increased distribution costs I think will continue.
For the foreseeable future.
And and we will.
We'll see how it goes from here.
Got it that's that's really helpful. Thanks.
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Our next question comes from the line of Mike Baker from D.A. Davidson. Your line is open.
Hi, Thanks, My first question, how you've talked a lot about trip consolidation.
I'm wondering if from the complexity of the basket any way for you to.
Discerned, you're becoming more of your customers weekly shopping trip in using you exclusively instead of filling trips a grocery or the like and.
Are you seeing that more with new new younger customers.
I think the short answer that question is is yes, but with a little bit of of complexity layered on I'm. So one is I think.
Frequency across the market is.
Is declining so people are making fewer trips and when they go there making bigger trips.
We are however, with the growth in the membership and with the growth and trips were seeing I know that we're winning for my trip perspective, and then we're winning from a basket perspective as well so we're seeing growth in a in trips.
And we're seeing growth and baskets, which means we're getting pretty considerable share and again that holds true across.
All markets and across you essentially every category and our and our business and I hold true across almost all sectors of the the membership or 10, you're just not numbers and a new members.
And so we just think we are and that beneficiary from people being more choiceful about when and how they make shopping trips and we haven't talked a lot about our omni channel offerings, but on these become pretty important in this and this realm as well where our investments in same day delivery by.
I might pick up in club have have really helped us grow when we know that we have an economic advantage given our larger rings larger baskets and so we made the decision in this quarter to launch curbside across the chain. We will soon add fresh items to that as well and we think that will only help drive more.
Topic to our buildings, where we make the shopping experience more convenient.
Recognize that people at least some people don't want to come into the stores and so all of this behavior is quite encouraging to us.
Yeah that makes perfect sense, I think that curbside and in book what will be very important one more follow up I'm intrigued by the apparently comments in apparel closed out getting back to your TJX routes I guess, a way back in the eighties, but can you talk about is that sort of a temporary phenomenon just because there's a lot it.
Sorry on the market or is that something that could be more of a permanent change and how you guys by apparel. Thanks.
No. We you know we hope for it to be a permanent change.
Typically when we buy apparel, we we'd be buying.
Whole season in advance of the season, which is different from Hell, a lot of discount apparel companies, particularly the teacher taxes and other Ross stores of the world by apparel, where they're buying relatively little in advance of the season, and then being much more opportunistic in the season I.
I think the whole world of apparel is a bit flipped on it its head from what is the norm but.
But we are looking to make bigger opportunistic buys and we believe that'll help us enough in a few regards one it will help our goods be more current and and timely and fashionable it should afford us opportunities to buy more efficiently and then allow us to manage our inventory more tightly so that we don't have.
The season, Mark Downs to the the same degree.
It's a pretty meaningful shift for our buying teams and they're working through how to do this well, but we're hopeful this is Adam and I'm not for us for the long term.
Yeah that makes sense clearly the off price model works in a in apparel. So makes sense. Thanks appreciate the time.
Thank you.
Our final question today will come from the line as Peter Benedict from Baird. Your line is open.
Hi, guys. Thanks for sneaking me in here I guess first question just any color on the the Nixon new members that are coming in full pay versus.
Versus discounted.
That compares to what you typically see and maybe what you saw in the first quarter.
Yes, Peter Thanks for the the question that's an important one.
We have.
Seen more full free membership growth.
Across the board, particularly with new members than we might normally see on why we are marketing arm membership, we're seeing more walk in behavior both.
In line and in store and so that translates into an even better behavior, we didn't or there is now on kind of element of the behavior, where are the more someone pays for the membership the more committed they are two items they tend to shop more and so that should have a halo benefit as those members continue to visit the buildings that are on.
On offerings.
Okay, Great and then for Bob just kind of circling back on the on the margin comments so.
The view on merch margins going forward I guess on the back after the year at this point, you're you're kind of thinking more of a push I guess on merch margins are understanding gascon can throw the gross around.
But just wanted to make sure that where you're trying to say.
Yeah, I ignoring gas I think we should be we should be up a little bit based on what we see here today, but.
But we'll see how it plays out we there we've got a lot of.
Puts and takes that I walk through I don't I don't see anything today that would would make me terribly nervous that it would go down tremendously.
I would say flat to up is probably the way I would think about it.
Hi, Perfect and then just last maybe Leon on the whole category.
And skew adjustments that you guys have been going on now accelerated here.
Maybe just to give us a sense for where you are on that journey in terms of of the category shifts.
And I mean, do you think you're going to be where you want to be by the end of this year or it's just something that's going to go on.
Into 21, maybe them auger and maybe any color on general merck's versus grocery within that discussion back.
Sure. Yes, I think this is a multiyear journey, where I will continue to work closely curated our assortment in that category. As we currently compete to look for opportunities to grow into new categories. We're excited by what we're seeing from the early results. We are on expanding our assortment of healthy food.
Organic foods, which we now will be really important with a younger members. We're doing that at the expense of traditional center of store grocery items.
And then we think that is important for long term, we're expanding the mix of general merchandise categories into a whole set of areas that we haven't had traditionally played on and seeing really good results. An example of that how do we think will be really relevant in the back half is not fitness equipment, where we normally wouldn't play in a in a meaningful.
Okay, but clearly as is on trend and we have the space to do it and then you know the last.
Area that I've I hinted about a bit before is that services where.
We have a kind of a reputation and image with our numbers of offering the best value in market, yet we haven't by and large competed in some pretty meaningful categories. So you know one example of that is in cellular phones, where.
Our offering now in cellular phones is a terrific value.
We have been marketing that in clubs. We've now added the capability of this quarter to do that online and we expect that to be a multiyear growth vehicle for us.
So we'll continue to lead into a into the services offerings and our competitive side clearly points or the way here, where we know that our competitors have much more developed offerings here than we have in the past and it should provide a robust avenue for growth for us.
Okay, great. Thanks, so much and best of luck guys.
Thank you thanks.
I would now like to turn the call back over to lead Delaney for closing remarks.
Well, let me just say thank you to everyone for your participation on this call your ongoing support and engagement with us as a as a team. We're very excited about our result results in Q2 as you can no doubt title, but more importantly for what it means for our future our ability to invest into the strength and.
Really transformed our business. So we'll look to keep up the dialogue with you over the coming months and I wish you all.
All the best of safety and health going forward. Please begin.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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