Q3 2020 BJ's Wholesale Club Holdings Inc Earnings Call
This time, all participants and maybe see only.
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Good morning, everyone. Thank you for joining bjs wholesale clubs third quarter fiscal 2020 earnings conference call.
Lead of Lainie, President and CEO, Bob Betty Chief Financial and administrative officer, and Bill Warner Senior Vice President strategic planning and Investor Relations on the call.
And 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 expectations described on this call.
Please see the risk factor section of our form 10-K filed with the FTC on March 19, 2020 for a description of those risks and uncertainties.
Finally, please note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors.
Other than station of this information is not intended to be considered and isolation or as a substitute for the financial information presented in accordance with GAAP.
Please refer to today's press release posted on the investors section of our website for a reconciliation of these non-GAAP financial measures and the most comparable measures prepared in accordance with GAAP.
With that I will turn the call over to lease.
Good morning, and thank you for joining on.
I hope you are healthy and sales.
Q3 was another outstanding quarter with considerable strategic operational and financial success.
We are clearly benefiting from a unique combination of doctors, allowing us to dramatically accelerate our transformation and strength in our business for the future.
For the balance of my remarks, I will describe the major factors contributing to our success and discuss the implications for our future.
First our team has been amazing and I could not be prouder of them.
They have stepped up to meet incredible challenges all year across our distribution centers club and home office, our teams creativity resilience and dedication has been selling process.
They of Cup safety is our highest priority with extensive protocols to ensure a safe and healthy environment for our entire community.
And partnership with our vendors who to have been incredible Rtms continued abroad for members when they needed and smoke.
Let me offer my sincere thanks to everyone, who has and will continue to power our success on.
We appreciate your contributions and partnership.
We continue to support our team with investments and bonuses and hence benefits and safety measures.
To date, we have invested $128 million and these practices and we'll continue to prioritize our kings wellbeing.
Importantly, we have also upgraded our team's capability over the last six months with key senior hires and membership marketing merchandising digital analytics operations and I T.
We know these recent additions will for other speed our transformation and we expect to continue to invest and great talent as we become and even more attractive employer.
Second and perhaps most obviously we remain on track and numbers are consolidating their trips buying bigger baskets in response to depend on Mac and searching for savings and given broad economic anxiety.
Our industry, leading value book sizes, and broad category participation work exceptionally well and these times.
As a result, we have gained considerable sure.
More than half our gross was driven by share gains based on higher I data.
Furthermore, our growth outpaced the market by more than two fold and we gained share and more than 90% of the categories. We truck.
Example, or perishables business outpaced the market by more than two times and our non edible grocery business grew at eight ex the rate of the market.
Our strongest share gains of occurred outside our core northeast geography, that's more people discovered or relevance.
The share gains outside of our core markets further support our confidence that we can successfully expand our reach and a sort of relevance far beyond the northeast.
And we are gaining share digitally and.
Despite elevated shopping trends will continue well into 2021, given the current standard of Pandemics like we timeline for vaccine distribution and ongoing unemployment drums.
Third I believe our business model is competitively advantaged for current and future times.
We were on large clubs and distribution facilities with capacity for growth and others are closing stores.
We operate efficiently with focus labor and lower margin of expenses positioning us favorably should wages rise.
We sell a limited selection of larger sized items offering advantaged economics, and a more digital world.
We offer industry, leading value critical as price has become more transparent and consumers seek out savings.
All these factors will allow us to meet elevated levels of demand with favorable economics under nearly all potential future environments.
Our Q3 share gain and profit at is evidence of these structural business model advantages.
Finally, we've accelerated our transformation and six key areas growing on membership delivering value improving convenience with digital expanding our footprint lowering our cost position and improving our capital structure, Let me say a bit more about each day.
From a membership standpoint, we are ahead of our expectations on all metrics, we continue to attract new members at high rates and retention remains robust.
Our 10 year numbers and new members continue to shop at elevated levels and driving increased trips to our clubs.
In addition, new members continue to skew younger and engage more with our digital platforms.
We're leaning into membership investments to drive acquisition and engagement.
Through our data driven approach, we are focused on attracting numbers with the highest lifetime value.
Similarly, we are also concentrating on retaining numbers by helping them discover all the ways at which BJ can deliver value.
These efforts have powered and 12% growth and our total number of days year over year.
These investments also drove a meaningful improvement and the quality of membership this quarter, our highest your penetration increased by 200 basis points to 30% of total numbers compared to the prior year period.
Higher tier of numbers renew at much higher rates and have greater lifetime value.
Expect games and membership the size and quality of you'll benefits well beyond the current environment.
Assortment optimization remains a key initiative to deliver value to our numbers. We continue to work hard to remain in stock on high demand essential products and of quickly pivoted to add new suppliers and categories and.
And stock levels improved this quarter and we continue to mitigate supply chain challenges.
Our strategy remains consistent simplified to expand into high growth and high demand areas and remain agile with our space to meet number demand.
This quarter, we expanded our assortment of categories, where we were at historically under penetrated including fitness equipment household goods indoor furniture, and select consumer electronics categories.
We accelerated the reset of our food business with more healthy inorganic options and the first half of this year.
These changes drove of market share gains and several categories, including alternative snacking, where we grew our sales eight times of market rate.
Also saw significant share gains and many perishable categories with growth of two to three times of market.
Our new prepared foods business also gained share.
We know these improvements will serve us well with the younger new members, we have recently at it.
Let me touch on our holiday flattish first.
First we pulled on black Friday deals to start earlier in November with a seamless experience across all channels and and enhanced focus on relevant categories like furniture, fitness and recreation small appliances, housewares and consumer electronics.
We have adopted our grocery offering to account for fewer large gatherings for example by downsizing our party plotters and buying more small turkeys.
While we anticipate some headwinds from fewer holiday gatherings, we feel great about our holiday assortment.
From a service at standpoint, the team continues to enhance our capabilities serve.
Services, including optical cellular and home improvement all returned to growth we.
We recently relaunched our major appliances business with a new assortment and improved digital experience and it is growing at a significantly faster rate we.
We believe services will be a significant growth driver for many years to come.
Our digitally enabled sales grew by approximately 200% this quarter.
The biggest gains came at channels, where economics are most attractive with buy online pick up and club or book and same day delivery, representing three quarters of the gross.
The growth and our digital platforms continues to surpass our expectations and.
The last nine months, we have grown by more than four times all of last year's gross.
This quarter, we expanded book to include Curbside service, including fresh and frozen grocery items Ci and lot of.
Although still early results from this expanded offering cup and very promising for example, roughly 40% of our book orders post launch were delivered curbside.
We will continue to aggressively invest into digital platforms, given their increased relevance and our competitively advantaged economics.
I believe shifts to digital would bode well for us on the top and bottom on.
Our efforts to expand our footprint are progressing well we remain on track to open two new club in New York at the end of this fiscal year for a total of four this year and as many of six clubs next year to further expand our reach we are pursuing additional locations and new and existing markets with a focus on attractive demographics. We are please.
And with the performance of our club, so far, especially from a membership standpoint, where in Michigan. Our members per club average is 20% better than the chain wide average.
We plan to invest aggressively the support on new clubs, given our ability to gain share and new markets and the performance of recent openings. The latter of which continues to run ahead of expectations on.
All told we expect greater unit growth to be of multiyear growth factor.
Our cost reduction efforts and enhanced balance sheet affords us increased flexibility to invest in our business and return capital to shareholders.
We remain on track with our project momentum cost reduction goals and how to use this year's considerable free cash flow to transform our balance sheet.
Our leverage now stands at 1.3 times EBITDA compared to 2.9 times a year ago.
And we return capital to shareholders by Opportunistically buying back shares.
Before I turn the call over to Bob Let me leave you with a few takeaways.
Our business has been transformed and we expect to continue to gain share over the near and long term.
We are well positioned structurally and strategically with and extremely relevant and extendable value proposition of.
Selling and upgraded member base advantaged digital capabilities faster unit growth and geographic expansion and a better cost position and transform and balance sheet as.
As we look past the current environment, we see a stronger business with robust sales higher profitability and strong cash flows.
With that I will turn the call over to Bob Bob.
Thanks, Lee and good morning, everyone.
Before I begin I would also like to take this opportunity to thank our team members for their hard work and dedication during this truly remarkable year.
We continue to execute at the highest standards and drive industry leading results.
Net sales for the quarter were $3.6 billion merchandise comp sales, which exclude sales of gasoline increased by 18.5 per cent and were driven by both traffic and ticket.
We continue to see more members tenured and new shopping and our clubs expanding their baskets and penetrating all categories.
These trends were consistent across our geography.
We saw consistently strong merchandise comp sales during the quarter.
Each month comp was within 100 basis points of our quarterly comp.
October's merchandise comp of slightly over 18% and strength and towards the end of the month.
The consistency of our monthly performance coupled with the expanded market share gives us confidence that the underlying strength. We have gained will outlast the transient benefits of the pandemic.
Merchandise comps of continued to strengthen since the end of the quarter and the first three weeks of November we are running north of 20%.
With strength across almost all categories as we continue to see increased food at home trends and consumer home investments. In addition to earlier holiday shopping.
Well, we are pleased with our early fourth quarter comps, it's difficult for us to predict how the rest of the quarter will play out given the number of significant uncertainties, such as inventory availability and member behavior during the holidays, namely as it relates to entertaining.
Our digitally enabled sales grew by approximately 200% and drove about four four percentage points of our 18.5% of merchandise comp.
As we noted we are aggressively investing behind our digital platforms, particularly at book and same day delivery, which together drove three quarters of our digital growth.
As you know our economics are advantaged versus our peers we.
We operate a limited skew warehouse environment with significantly higher average tickets, allowing us to be much more efficient.
Both book and curbside sales tend to skew towards bigger baskets and same day delivery sales have the same margins as traditional sales and our clubs.
Additionally, digitally engaged members appear to shop much more than those that only interact with us through traditional means.
Comps and our grocery division grew by 19%, we saw robust comps across all categories, most notably in perishables, where we saw strong growth and fresh meat frozen meals and fresh produce.
As we noted our perishables division grew more than twice as fast as the rest of the market.
And edible grocery we saw robust growth and beverages and salty snacks and grew twice as fast as the rest of the market and those categories as well.
And our non edible grocery division, we continue to see strong growth and paper products cleaning supplies and health and beauty items.
Our growth outpaced the market by 20 times, and health and beauty and buy a little bit more than twofold and household goods and cleaning.
Our in stock levels improved throughout the quarter as our team worked tirelessly with both existing and new suppliers.
Our general merchandise and services division saw a comp growth of 13%.
Driven by strong sales of Tvs computer equipment, and other home related categories, such as indoor furniture and small appliances.
Although we made great progress our services business is still ramping back to its full run rate potential.
And represents a great opportunity for growth and the new year.
And our gasoline business, although sales were impacted by lower prices our gallons sold at comp clubs increased year over year by about 2%.
This performance outpaced the significant decline and the overall market.
This is yet another great example of our continued gains in market share.
Membership fee income or MF I grew by 11% during the third quarter to $85 million.
And this growth was driven by new members renewals and membership mix.
We continue to grow total paid members compared to last year, adding a little bit more than 630000 members on a net basis.
To put this and perspective historically, we would have added between 200002 hundred 50000, net new members at year over year.
Along with terrific increases and our membership count we also improved the quality of our membership significantly for.
For example, our penetration of higher tier memberships increased 30% and easy renewal enrollment is at 70%.
Also we recently passed another important milestone by acquiring our one millionth co brand credit card holder.
These are our best members and they renew at significantly higher rates.
We remain very excited about the membership growth we've seen year to date and are focused on retaining these members. We expect will be sticky given their shopping behavior.
Let's move now to our gross margins.
Excluding the gasoline business, our merchandise gross margin rate increased by 10 basis points driven by CPR on initiatives, which were partially offset by increased covert related distribution costs and investments and price, particularly at area is experiencing some inflation and.
Investing and price as a bedrock principle of our business and order that we sustain our outstanding value to members, especially in these tough times.
SGN day expenses for the quarter were $552 million and included approximately $17 million of total costs associated with the pandemic.
These costs were primarily driven by increased labor safety and sanitation costs at our bonus incentive program.
During the third quarter, we were able to better leverage our SGN, a buy a little more than 100 basis points.
Given the current trajectory of the pandemic, we expect to incur more incremental expenses associated with COVID-19 and Q4.
Costs related to team number bonuses and ensuring we keep members and team members healthy and safe are expected to be $30 million to $35 million.
Our adjusted EBITDA grew by 57% at $242 million, reflecting the robust sales be growing margins and disciplined expense management slightly offset by investments and our business and the safety of our team members.
Adjusted net income and the third quarter was $128 million or 92 cents per share and reflected an incredible 124% year over year growth on a per share basis.
Our earnings growth highlights the strength of our revenues, our disciplined expense management and reduced interest expense.
We generated a record $675 million of free cash flow so far this year.
We don't typically generate much cash in Q3, as we position our inventory for the holiday season.
Coming out of Q3 ahead of the game, we feel great about our ability to build on our year to date performance in Q4.
From a capital allocation standpoint, our strategy remains consistent our overwhelming priority is investing in our business and expanding our footprint.
Our next priority and the continuing improvement of our balance sheet.
The current year's tremendous free cash flow has allowed us to repay nearly $575 million and debt.
Ultimately we ended the quarter with a fund at net debt to adjusted EBITDA ratio of 1.3 times.
As we go forward and we will look to target of funded debt level of approximately one times adjusted EBITDA.
Finally, we will look towards returns of capital to shareholders.
From a capital return standpoint, we bought back $50 million worth of shares on the quarter.
And year to date, we have returned approximately $88 million to our shareholders by repurchasing 2.3 million shares.
We will also opportunistically look to optimize our balance sheet.
During the third quarter, we used $100 million of excess cash and borrow at $260 million from our revolver to reduce our first lien debt by a total of $360 million and.
In connection with this transaction and shortly after the conclusion of the quarter, we terminated one of our interest rate swaps with $360 million notional value.
The combination of these changes will result in interest expense savings of approximately $10 million on an annualized basis.
Let's now touch on our outlook.
The current environment remains challenging and unpredictable.
There are several uncertainties and factors that would impact our business, including the evolution of the pandemic government stimulus consumer behavior and unemployment levels of.
As a result at remains extremely difficult for us to forecast, how the fourth quarter or next year will play out and great specificity.
Given these uncertainties, we will again refrain from offering guidance.
With that said, we have a larger and more meaningful business with industry, leading comps and incredible of membership trends and we are accelerating investments to improve all aspects of our business.
Given the current trends on the public health crisis, we believe at the push towards food at home will remain robust for Q4 and well into the next year.
We also believe that with the election behind us on new stimulus package may have the potential to gain more momentum in Washington.
Both of those factors should drive our business even more.
Like others, we continue to work through inventory of availability challenges and a weight how holiday entertaining plays out and the coming months and net of all of these items should be bullish for us.
Well, we've had some good news on the race for a vaccine it will most likely take many months to get enough people inoculated to improve the public health crisis.
Further consumer behavior on our geographies of certainly a change to our advantage and we expect this change to be sustained for the foreseeable future.
As a result, we continue to believe that our long term growth algorithm significantly outpaces. The plan, we laid out at our IPO.
To wrap up we are extremely pleased with our financial performance investments made in prior years of set the stage for our great performance. So far this year.
We continue to invest behind our strategic priorities as we leverage this extraordinary and challenging set of circumstances.
As we look beyond todays environment. We believe we are well positioned given the nature of our business model, our sizable share gains and our transformed the balance sheet.
And finally, we have a team that continues to execute at the highest level against elevated and boulder expectations, enabling us to truly transform bjs wholesale club.
And now I will turn the call back over to the operator to begin the Q and a session.
At say reminder, to ask a question you will need superstar on.
Plentiful.
So we draw your question press the pound Oh gosh.
Please standby wise and part of the Q on Iraq.
Your first question comes from Robbie on many of you will speed security. Your line is open.
Oh, Thanks, good morning, guys and not terrific quarter, just great execution actually two questions. One I just wanted to ask about the the membership.
Growth rate I think it was 11% for the quarter and so its at sequentially accelerated a little bit it looks like from the second quarter, but can you just.
To remind us how to think about how that could look going forward and also you know is there a slowdown in new member growth happening. The further that you're moving into this year and and how how can you give us any thoughts on how we should think about what that could look like for next year and then my second question is just on.
Ex.
Accelerating.
Of store gross.
Maybe some some more color on how much you might start looking to really accelerate outside the northeast given what you're seeing and new stores and.
On maybe what regions you might be doing more stores and as you look out over the next few years. Thanks.
Hey, Robby. This is this is Bob I'll take I think both of those questions. Thank you for for both of them and and for the good wishes on a on a great quarter.
Membership is the is the bedrock of the business I think as we sit here and stare at the numbers we see.
A membership of of record size with strong momentum and great and improving quality.
In terms of the size, we built on our 6 million of member.
Member record from from the second quarter, and and total numbers on a net basis are up 12% year over year. So we're very impressed with the continued growth for a momentum perspective and modified growth accelerated from from Q1 and Q2 on on the on the piano and that's an important and an important feature.
More importantly of members are responding to the investments, we're making and did so throughout the quarter as to the quality point of the.
Despite growing the overall membership we were also able to improve our premium tier penetration to 30% and prove our easier renewal of penetration of 70%.
Get to the 1 million a co brand card holder, which is an important milestone.
And we continue to see robust shopping behaviors across the portfolio, which make us believe at these these gains will be sticky going forward.
You're you're correct to point out there was a touch of a slowdown.
And and we did we did Miss our guide by a couple of hundred thousand dollars.
Yes, what I'd say to that as many things impacts and five including the absolute member count on T Y O Y acquisition campaign timing and performance like cash.
And or a month and hers at quarter end versus the fiscal at quarter end as it relates to easy renewals.
Footsteps, and the club and on and on and on and on and so one way is to.
Look at it is to think about.
On the slate of.
The fleet and miss or a slight slowdown of the.
And better view, I think and our and our estimation as to really consider the record size of momentum and and quality.
We don't see those things are slowing.
Slowing down and in our.
And our view and hopefully as we get.
Through the rest of this fiscal year and into into next year. We continue to build on the gains on all three of those phases right revenue record size and strong momentum and great quality.
As you think about store growth certainly we've talked about that being our biggest priority in terms of investment and the.
And the company.
We've made great strides and building a portfolio of clubs, we can we can bring to bear we.
We are on track this year to get to four clubs as you know, we opened one and Michigan and one and Pensacola, Florida already this year, we have two set to open at January one and Newberg, New York and one on long Island City, New York. Those are those are right on track to open in January is.
As we said on our last earnings call.
And our team is working with.
With great haste to get that and we're excited for for those clubs.
As we get and next year, we've talked about six or more and we are still on track to do that I think you will see us pursue a new markets and and existing markets. So we will hopefully get into the Pittsburgh market next year.
And and then sprinkle some some other clubs of throughout our chain as we look forward to the following year, we see a path towards 10 clubs.
But we are a long way away from that as you know real estate as a as low as it is a game full of.
Full of surprises so.
As we get through next year, we'll certainly give a more robust update on sort of into that but I think the same of the same function will hold where we will look to open at least one new market and not and a year and then and then at into our existing markets as we go.
That sounds great. Thanks, so much.
Thanks Robby.
Your next question comes from Charles Grom of Gordon Haskett and aligned.
Hi, great quarter. Thanks, just wanted if we could just dive instead of the components of the gross margin strength of 10 basis points versus other than on half of the year and then looking ahead of you had any thoughts.
With regards to the how the topic of fourth quarter to play out.
Hey, Chuck and Bob again.
So maybe I'll touch on the gross margin one of them and and we can pile on.
As we go.
So certainly we saw great performance from a gross margin perspective.
In terms of total gross margin definitely and had a great quarter and inside the box at a great quarter, a 10 basis points of merchandise margin inside the box there were puts and takes against that as we talked about in the prepared remarks. The biggest gain was our continuing success with our CPR of program.
That that effort continues to move forward as we've talked about moving.
Moving more towards a assortment changes and getting into growth year and and margin heavier categories.
Versus just a classic negotiation tactics as weve as Weve talked about in the past.
So great success from the CPI perspective, we did see some.
Some increased disc.
Distribution costs that were primarily Cove and related we are doing the same things in our distribution centers that we are doing at our clubs and frankly in our home office.
Just to try and keep everyone, everyone safe and healthy as we go.
And and not that weighed on on gross profit a bit of.
Versus the front half of the year, we had a much better inventory position, particularly and in apparel, and so where we talked about and the first quarter pretty significant markdowns and apparel, we did not experience those.
And and the third quarter, and and finally of where the investments and price. We we typically do that it's just part of the every day as you know, it's a big part of.
The club industry, maintaining the value that we offer to our members, which is which is tremendous and and why they pay their membership fees.
We did see some inflation during the quarter, although not terribly material, particularly in beef and so we did we did invest and price and those categories and a and a few others as.
As we went throughout the quarter so.
Altogether, very very happy with with the Q4 and margin profile and and and what made it up.
Any any thoughts for how Fourq you could play out.
Hey, Chuck and from the I'll I'll jump and on on fourth quarter and used to set the stage for that question. Let me just reiterate some of what Bob said on the membership because it is of the bedrock and we feel great about the membership we have more members of the quality of the on is really strong and so we track on the underlying quality of looking at how many people.
We have and different cohorts, how much they pay and we're seeing more or less every cohort paying more with more numbers the younger the digitally engaged and their shopping bar and.
And so the.
Business began to strengthen in the back half of a of Q3 degree of the last couple of weeks of October and as we said and the prepared remarks, that's continued into a into November.
And if you think about the you know the broader environment, obviously Q3 as it relates to the pandemic was a period of more.
More relative normalcy with warmer weather and the ability to eat and restaurants et cetera, and as that changes in our footprint. We would expect to see a strong business, but the big question clearly is the kind of holiday gatherings and and parties. We are expecting a fewer of those which is a big part of our our business but.
And increase overall and at home food consumption and investment at home and investment and gift, giving and for the holidays and so you know as we sit here today, we feel like.
Like the Q on Q fours and very good shape.
Okay, Great and then just just a follow up on that you guys can do they make.
Great progress on the on the SKU rationalization program.
I guess can you can you talk about some of the things you're changing for the holiday and and I guess just to kind of dovetail of Bob's comments about it seems like the debt the part of getting past a little bit of from CPI.
Being a major driver on where margins could potentially be at some of these assortment changes, helping you guys lean and higher merchandise margin rates and home categories or furniture category at just so maybe if you could just talk a little bit of ups DRAM and then also how that how that can help on the gross margin line. Thanks.
Sure. So I think you know the overall premise of your your question and is right on.
You know and the short term or the team you know the merchants the planning fee and supply chain T. and have been extraordinarily focused on keeping the stores well stocked you clearly when you're running.
At the comp levels, we've been running against and stretch the system and and there's been shortages on key products and so we.
We have made a number of of changes, though to just keeps of keep.
Keep the buildings and stock the numbers are satisfied and you think about other longer term shifts that we're we're driving on your right, where we're thinking about how do we drive a gross in the business that includes the simplification on some of the core categories, where we thought and over assorted and and investment and categories that are on track.
End of things like a healthy organic foods, and we talked about alternative snacking on but also into categories, where we haven't historically played and so as an example, we launched on fitness equipment.
Club this past quarter with a treadmill and an exercise bike at significantly higher and you ours and we normally would carry and are seeing seeing really good results with those items and that that.
Better overall shift away from a real concentration and and places where frankly, we just felt like we were over assorted too on new categories that are growing on trend, where we have a and ability and a right to play a brings more excitement of the club and is that a change we'll make on its also worth.
On a highlighting services and that shift and services is an area, where we're just incredibly excited about about the growth potential on this and historically then our optical business on travel business.
And as we invest more and not including a dedicated merchant team.
We're just finding a really fantastic and exciting growth opportunities and new areas. As we've had this past quarter, we relaunched major appliances and believe that alone can be on material contributor to growth going forward.
And so you'll see us keep going down that path of the only piece that we didn't touch on is is private label that will continue to be a focus area given the ability to offer better value is to members at improved economics for us I'm in the short term. We've obviously been really just focused on getting product and the and the building so a little bit less on.
On private label and over the long term nothing major focus as well.
Yes.
Your next question comes from Peter Benedict of Berg. Your line is open.
Hey, guys. Good morning, two questions first just.
On the on the fly gross.
Just given the dynamics of of what you know today just curious how you think about the shape of the of the growth for women at not asking for and that's their specific numbers, but.
Would you think that the.
At the growth rate kind of peaks and for Q on this year and then starts to moderate a little bit or earlier next year is the peak just trying to and.
First and how you think about that given the current.
And if you have that's my first question.
And I think I think the right answer is a little bit hard to say there is no doubt that of broad trends and the pandemic are or causing numbers to seek on value buying and bulk sizes.
And our particular value proposition and and I think as youve seen that flow through the business.
You know, particularly with the northeast being heavily affected at the start of the pandemic and Q1.
Kind of rolling into the broader geographies and Q2 and somewhat of a return to you know relative normalcy and Q3 and those trends are clearly paying boards and you know.
The the hope is on as we move into the winter and on the.
The public health crisis is more controlled although that doesn't seem terribly well aligned with the headlines and where we're heading and the and the short run and so I suspect you'll see gross but falls out of that and you.
And that overall situation as people are eating more at home or they're seeking seeking value I would just incredibly on trend on.
On a long term question is how many of those numbers will you be able to hold on to.
And as the World hopefully returns and normal and you know the.
You know the middle to the latter part of of next year and you based on what we see now we we feel good about of thought we have members who are engaging with us and of on a.
More elevated way than we would normally see the quality of the membership is high we.
We know that a lot of the changes we've made to the base platform, where things we wanted people to experience and on depend on that because created a platform to do that and so you know our our hope is that we'll be able to to hold on to.
Not at the membership gains and see a multiyear growth story fallout of a kind of a onetime unique at bankers were experiencing now.
Okay and that.
That's helpful and I guess my second question is just kind of alluded to this a couple of times.
Your your sense that were 21 and I would expect some of these trends continue at least through the first half so I'm just curious.
With that with the benefit of of hindsight, we went through the first locked down last spring.
Obviously feel like unfortunately, moving into something similar here. How are you. How are you buying for the first half of 21 and I mean, given the experience you had earlier. This year are there things that you're doing now that that may position you better.
Gable to.
Handle what what could could be ahead on just just curious on how you are just planning the first half overall of 21 and it certainly sounds like you're not expecting any material slow down, but just wanted to hear you out on that thank you.
Yeah, I like where we're buying and as aggressive EPS, we as we can.
You know Doug on the.
The buildings are are very clean from an inventory of standpoint, particularly on some of the general merchandise categories.
And we're still running at at and stock level below what we would like there just and shortages of the number of of categories and the inventory is turning so quickly.
That and.
And frankly hard to hard to keep up if we could trade.
Cash for inventory, we would we would definitely do that at.
And I think we all hope that the public health crisis of dates as quickly as possible and but as you can as you sit here today and you look at the end of the incidence of disease and testing rates.
And on the likely timeline for the vaccine distribution and unfortunately seems like were and for an extended period of apart you of eating at home and renewed bands on on restaurants et cetera, and we hope those things don't come to pass, but as we find and buy for the business I were anticipating that elevated demand continues or certainly for the short.
And.
Okay all.
All right fair enough. Thanks, so much.
Your next question comes from Chris Horvers of JP Morgan Your line is open.
Thanks, guys a couple of expense question and one follow ups. So first on the on the gas.
Profitability side.
How much and wood.
Would you say you sort of over earned on on gas if at all on here in the third quarter as we're as we're building out our models for next year and then on the expense front end can you talk about cold and costs accelerating in the fourth quarter relative to the cost and the fourth quarter, what drives that and then within gross margin.
And would you expect.
Higher coated costs plus higher parcel ship.
And mitigate any merchandise margin expansion and.
For Q.
Hey, Chris its Bob.
You know the expense of the expenses story and Q3 was frankly, a great. One as you can see the the incredible leverage we had on SGN a.
I think.
On the look forward.
And and updating a little bit of guidance from the $17 million of costs and expenses in Q3 more towards somewhere in the neighborhood of twice that.
Really dovetails nicely with with lease comments about our our view of of the course of of the public health crisis and this is an incredibly hard thing to predict but we will do the same thing we've done the entirety of this public health crisis and do everything on our power to protect.
At our members and our team members as their and our stores and distribution centers and home office.
And unfortunately, the path of the disease of looks like it's accelerating and so we are tightening our estimate of of covert related cost to that fact should at improve we'll do better should it get worse, we will spend more on keeping keeping art and members and team member sales it's really.
Simple as that.
And so that's that's why we chose to.
Give that out and then increasing and guidance hopefully, we'll be able to do better than what we what we put out there that the virus won't be.
All that bad.
Certainly certainly.
Certainly the gas business had a great quarter and this quarter and it has throughout the entire year, we've gained tremendous share as we talked about.
The prepared remarks on our comp gallons sold at comp clubs were up two and the markets down.
Double digits call at call. It 15, or so we're we're gathering tremendous market share that's been effect on all year as well.
And and profitability wise or call. It a handful of millions and millions dollars extra and this and this quarter as you think about the set up for a for Q3 and next year or so.
A great quarter of for sure but not.
Not not going to bend the trend of our overall growth for next year as we go.
And.
Maybe I'll, let Lee jump in and talk a little bit about your parcel of question on on gross profit.
And talk about our on new business.
I think.
We're certainly seeing some constraints and the you know the broader freight market, including.
And clean parcel and rates on if you think about our Ami business, which as we noted is it's still growing at a remarkable at rate was up 200% growth on the bulk of that gross and the bulk of the demand comes through by.
Buy online pick up and club same day delay.
Delivery.
Both of which aren't impacted directly by freight expenses other than the other broad supply chain I challenge of getting those items in the store and just like every and just like every other items and so in those regards of.
We expect to see increased.
Demand for those services curbside and particular fresh curbside is working very well for us.
When it comes to the ship to home business.
You know, we we did see this coming and negotiated on.
Contracts and and and parcel rates ahead of time of along with increased levels of demand on and so we feel pretty good about where we are on the levels of inventory, we have likely markdown exposure on the inventory of will will be lighter than normal just given how quickly things are turning.
And so from an overall mark and standpoint.
Tom we're not terribly worried about the parcel cost on a go.
Even those kind of this brought doctors.
Got it and that's very helpful.
Just as a follow up and on the membership side and just any to one I'd guide and Theres a lot of variables and.
Maybe the recent surge help sign ups and re acceleration reacceleration of customer acquisition.
On but maybe you could give us a cash and that's why in the third quarter relative to the 15, 16% that you saw on the first half just as we try to take a shot at building out the model right now the consensus is looking for about another 12% gain and them at $5.
This year over year and for Q.
Yeah, I'll take that Chris So, we we didnt offer cash 'em at five of this quarter and and probably won't we offer that statistic and and the prior two quarters, having never talked about of before because we thought it would help illustrate the incredible momentum we had behind the business and well at.
Might have done that and also created a lot of confusion and misunderstanding and the analyst and investor communities.
And so we you know and stepping back after.
After the second quarter, we we thought we might have created a problem on we were trying to adjust illustrate the tremendous trends and art and our business. So.
We hesitate to offer and again, well certainly talk about of counting them at high which was up 11.
You know Weve talked about the total net member growth of 630000, we've.
We've talked about our hopes for for renewal rates as a member of <unk>.
You know the member data would look like these these folks will be sticky.
And and so I hesitate to give you the cash and F. a day.
And instead I'd I'd concentrate on the on the record identify the record membership college of the strong momentum, we've we've had and and the improving quality throughout the membership base as well.
Okay, and just as a follow up so if you know if if the membership base is sort of 12%.
A year on a year over year basis, and you've got transition on to higher tiers.
And and and a more expensive I'm sort of.
On fee there plus the fact that you know it seems like your debt level of discounted membership.
Is below what you had been running and last year, you sort of that the that 12% gross in membership sort of sets the base sets at.
Sort of at a minimum the baseline.
You know in terms of the at the growth rate I think you're thinking about the pieces of it correctly right. There's the total net member growth.
Which is which is up as you as you point out of there.
There is a bit of a but.
A favorable mix shift.
And in the premium membership says as.
We get people more up into the tears and into the co brand product as you point out that would build upon the of the.
On the member growth as we try and build on them at five there's also a slight offsetting mix shift as a as you just think about the math involved with.
With just having more new members versus more tenured members more renewal members.
Of those renewal numbers are generally paying full freight across the board and the the new members are.
Somewhat discounted and so.
You just have to think about those those two mix shifts that that's somewhat offset and.
And you kind of get back to the <unk>, that's something around the the net number gross.
Makes sense, thanks, a lot and very helpful.
Your next question comes from Kit Mcshane of Goldman Sachs. Your line is open.
<unk>.
Hi, good morning, Thanks for taking my question.
On this might be a lid.
At all to narrow, but I was just curious to hear a little bit more about the Michigan stores than the membership per store being I think you said, 20% higher than the company average is impressive just wondered if you could give some insight as to what do you think the combination of factors are that's helping drive this and do you think about introducing.
B.J.'s into new markets are there any learnings from Michigan.
Michigan.
And that it was and your market.
Yeah, well, one and I started and and Bob can jump jump and.
We're very excited about some of the results and and Michigan.
And with now on three clubs and to open for a longer period of of time and as we noted we are seeing membership accounts that are at 20% above what we would see across the chain on.
It's a combination of things that are driving that growth one is.
Just investing more and membership acquisition and Preopening and during the open and with more confidence about the potential for our our franchise and a greater ability to invest into the other buildings.
Hi, and at membership drive, we've been able to up to drive more excitement and the markets see higher aside EPS, both pre and post oak on which has been very exciting of two is we've really refined the offering and so a number of the changes that we aspire to make across the chain.
When it comes to assortment at the end club environment and signage and the integration of omni, we do from the very start and and and new clubs.
And so you put those kind of two pieces together more members at open.
And improved experience right at at the Gate, we are very hopeful about the potential for those of those clubs and it gives us confidence to invest into new geographies of the question about Michigan was we didn't have much.
Much in the way of of brand equity on like you would see on on the eastern Seaboard, but we quickly built a franchise. There that we're you know we're very excited about and it gives us confidence that we can grow into more of a new markets at and accelerated rate and so as we think about.
Operating income to six clubs next year, hopefully closer to 10 or more and the out years.
We do that quite bullish on it.
Thank you.
Thanks, Dan.
Your next question comes from a broad Kelly of Wells Fargo. Your line is open.
Hi, good morning, guys.
So Lee my questions for you and when you and when you guys went public you introduced and earning out earnings algorithm that at now you know kind of seems conservative.
And you talked about 1% to 2% unit growth one of the 2% comps could you just maybe take a step back for us and fundamentally talk about you know talk fundamentally about.
What's really changed with the business since then.
And how that potentially could impact the algorithm of the company over time.
Sure. Thanks, Thanks, and I think it's a really good question.
We certainly feel like Oh on the long term algorithm today is considerably ahead of what we would have described at the IPO you know Theres a few things playing out.
And one is.
I'd of investments and initiatives, we had talked about on the IPO are gaining traction and so it's our ability to invest into the membership with a greater data and science, it's our changes to other merchandising assortment of the marketing it's on.
Our building of of the omni system.
And then at our acceleration of of real estate and and those are the same basic themes that we talked about at IPO, but we just further developed our our ability and capability and then clearly you know the pandemic is it's just sent to you needs our unique circumstance where.
One of the things that we wanted members to experience or new members to to try and we're all accelerated by on just the incredible relevant that that we have right, where we operate very large buildings that I think afford and.
More of a sense of of safety because people are are more spread out or selling bulk groceries and people need to eat more at home and we are doing at at industry, leading prices as people.
And he to need to save money.
And then on the on the offerings and really really work and so the recent launch of curbside and and curbside fresh is just incredibly incredibly relevant and the advantage of economics. We have there. We think is a part of the equation that can give us a lot of long term ability to invest and those businesses are ahead of what other.
And might be might be comfortable doing.
And so it's kind of of a combination of on acceleration and the and the broad themes, we talked about it at IPO from on some of the initiatives getting more steam and non just and incredible shot of adrenaline tied to the pandemic at our increased relevance.
But we do feel really good about the long term state of the business.
And just from a from a store gross standpoint, you know as we think about where you're going over time and you talk about you know six next year and and I think you know the the hope to get to 10 or better.
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Why can't that number be higher than that you know if you're having success and these new markets and on the merchandising side is aligning and Michigan is going very well.
You know what what's the governor around that.
I think on the short answer is that it can be a the governor is finding a real estate and and developing at and so we ought to be quite aggressive push and internally to to find and develop sites and and properties and we'd love to move at a faster rate.
And as you think about the challenge of finding that many sites and moving at a faster rate.
Recover and you simply by our ability to.
And then progress at some of that so from a financial attractiveness standpoint.
Great. Thank you.
Your next question comes from Space, We think of Jefferies. Your line is open.
Thank you good morning, everyone. Most of our questions have been at but I wanted to just talk on a couple of threads and based on your response to the prior question.
So we're hearing your correctly it sounds like your one of your agenda. This you really on track that millennial.
Hold on fitness equipment, you've talked about furniture. Good fee you assume the health and beauty. So if you can talk a little bit about how you think about marketing digital activation customer acquisition through the lens of that next generation household and how you might be the Cios and club for that emerging household and then secondarily how of that.
Factors into your thoughts around real estate and co tenancy are there certain retailers as you think over the course of the next three to five years that are the more ideal co tenants maybe versus what would have been three to five years ago. Thank you.
Yeah, I think things happening at me on tick the the first part and then maybe Bob you can jump in on the on the real estate side of things you know.
For us the.
On the the relevance of our channel is really around homeownership and family formation.
And on you know as we think about growing the membership the ideal thing for us to do would be to.
Engage people are right at those two of life moments and the sooner weren't able to do that the better because you see an acceleration and spend and so as we look at the numbers that spend the most it'll tend to be.
The family of with three or four teenage at children and the house, who are just eating you out of out of house and home of but to get them earlier.
We need to market is on and make sure our assortment as it's relevant and frankly, we just.
And we we needed to to revolutionize the of the assortment of that and that's what you're seeing us doing its really understanding of what the growth rates look like across different food and non edible grocery categories. How do you invest and things that are relevant to a younger consumer of that will tend to skew towards on healthier.
And natural household cleaners and.
And the like at also on apply to.
On to more general merchandise assortment of were getting bigger and to connect at home and on investing more and and furniture and as you know and into fitness equipment are all categories that we know will appeal and worked at that a younger member and we have a right to play and so we are on you broadly transforming our assortment of if at that.
And demand and then you know as we said we think services can be a big part of that as well, where there's just a whole host of categories, where we can offer a phenomenal value of that are relevant to a new homeowner a new family and.
And so you'll see us continue to invest into those other elements and.
You Bobby you want talk with the co tenancy and real estate.
Yes, thanks stuff and I think that's a really smart extension of your question.
And really highlight something that we've been doing for the last couple of years, which.
And if you think back to some of the older.
Clubs, and and and our base and and our competitors our club competitors space.
You'd see you'd see clubs and and.
Distribution.
Parks, and and office parks and all of you know hidden behind berms.
Berms, and all sorts of things and and more recent years, they've they've been in places that have much more classic retail gravity and.
I think you will see us continue to do that.
Where you know the the retail gravity on the traffic and that brings outweighs what might be extra cost and those.
And those sites of you know versus something at an office park or the like.
And so as we look at at real estate sites going forward. We are we're very much looking for active great traffic sites.
And and the and the other retail names you would.
Not a piece of surprised by right. The TJX companies Dick's Sporting goods Capella as you know that that really.
Hi draw retailers are great for our business, what we are positioned to nearby or or or next door.
And the same shopping center. So it's a great question at certainly something we're looking at.
Thank you.
On your last question comes from Rupesh Parikh of Oppenheimer. Your line open.
Good morning, Thanks for taking my question. So I have a quick one just on cash flow. So we saw a pretty significant improvement and your ATP leverage. So just curious if you look at your your the improvement at what you view as more onetime in nature of versus more sustainable and also just in general and you look at your cash flow is was there anything that you guys more transitory and.
And the cash generation this year. Thank you.
Here at special I'll take that one.
So we were very pleased with our with our Q3 cash flows.
You know as we've talked about on them and their prepared remarks, we typically don't make make cash and Q3 of her buying inventory ahead of the holidays. We came out of a quarter with a with 20 odd million dollars and and free cash and to your to your point a good a p. leverage.
It is it.
It is really a tale of two cities right, we added a bunch of and inventory during the quarter, which we're happy about tilly's earlier comments, we are buying inventory with both hands.
Business.
Has ticked up and the last couple of weeks.
And HP decelerated a bit in the beginning of the quarter and now has has accelerated backup a little bit.
As the inventory spins of a bit faster and so there is going to be some variation from and on a p. leverage perspective going forward that is probably most closely.
Closely tied to comps.
But this at this quarter as we built inventories you had a had.
I had a little bit of and on offset to that too. So I think what we'll watch that we're not we're not worried about day <unk> leverage we do expect over the long term.
You know as of public health crisis beats that comps will.
You know will moderate a bit and as that happens a p. leverage will moderate a bit of but.
But in any case as with nearly everything we've we've talked about the post depend on mic bjs will be better than the pre pandemic VJ and.
Our IP leverage is no different than that.
Okay, Great and then maybe just one follow ups of the quarter to date strength that you guys saw.
What did you see from consumers I guess stocking up again on.
And also any sense of whether you're in November so far has benefited from maybe early promotions versus the prior year.
You every day.
And.
I think on we're.
We're sort of be starting to see the the signs of on another stock of way of as you look at things of things like and vegetables and.
And paper products and people are buying more aggressively.
On and so I suspect that's happening on yeah, there's no doubt, there's a little bit of benefit from the early of Black Friday of promotions, but if you think about the on the.
The breakdown and our our business and the scale of general merchandise vs food.
We're seeing really good momentum and.
The food and traditional grocery categories.
And that of the overriding thing that will at will make or break a kind.
End of the quarter, particularly the holiday season so.
So far in event and looks quite promising.
Great. Thank you best of luck on the balance of the year. Thank you. Thank you.
I'll now turn the call of <unk> to Mr. Li.
For closing remarks grade.
Great. Thank you everyone for for listens at the call for your engagement and for your interest and the company. We really appreciate on your your.
And your time and your interest you know until we talk again, please day, a safe and healthy we wish all of that's for the holidays I take care.
Ladies and gentlemen, and this concludes today's conference call. Thank you for pets and speaking human and I'll just call me.
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