Q2 2021 BJ's Wholesale Club Holdings Inc Earnings Call

August 19, 2021

Ladies and gentlemen, thank you for standing by and welcome to the Bj's Wholesale club Q2, 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need your price.

Star one on your telephone keypad. Please.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the company so to your speaker today frightened Frey Hal. Thank you. Please go ahead.

Morning, everyone. Thank you for joining E. J S wholesale club's second quarter fiscal 2021 earnings conference call.

Bob Eddy President and Chief Executive Officer, Laura Felipe <unk>, Chief Financial Officer, and Bill Werner Executive Vice President strategy and development 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 expectations described on this call.

Please see the risk factors section of our most recent Form 10-K and Form 10-Q filed with the SEC 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.

The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Please refer to today's press release posted on the investors section of our website for a reconciliation of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP with that I'll turn the call over to Bob.

Good morning, and thank you for joining us the second quarter was another impressive quarter for our company.

To take this opportunity to thank our team throughout the chain for their execution and dedication during a dynamic and challenging period.

Our stance on safety has not changed our highest priority continues to be the safety and wellbeing of our team members and members.

As a result, we have tightened our COVID-19 protocols around the chain in response to the resurgence of the virus, including the introduction of a vaccine mandated for our home office and field support teams.

We will continue to operate in an agile manner with a focus on doing the right thing for our team members and members.

When I reflect on our performance over the last year and a half.

It is clear that our progress against our strategic priorities has enabled our success.

We have invested into our team members the value of our membership our digital infrastructure and physical footprint.

All in the name of getting our flywheel going faster and it's clear to me that we are making progress.

In the first half of this year, we drove outstanding membership results and strong market share gains, particularly in our gasoline business.

Furthermore, we elevated the value proposition to our team members through meaningful investments in wages and bonuses.

Our team members are central to driving our strategy forward and these investments will help us attract retain and motivate the best talent and help ensure that they can thrive in our business.

During the second quarter, we delivered the following great results two year stacked comp sales up 21%.

Adjusted EBITA of $220 million.

Adjusted EPS of <unk> 82 cents.

Free cash flow of $240 million.

And as a result of those very strong cash flows we ended the quarter with a leverage ratio of <unk> eight times.

Our team delivered these terrific results in the face of three external factors influencing our business inflation.

Pes labor market and inventory availability challenges.

Let me talk a bit about how our team is managing each of those to continue to power. The strong momentum we are seeing in our business.

Let's start with inflation.

We experienced meaningful inflation this quarter and more is on the horizon. The increases are both deep and broad.

They've impacted many categories and some significantly.

Managed appropriately inflation could be good for our business historically inflationary pressures have widened price gaps relative to grocery leading to market share gains and top line growth.

It does come at the price of investing in value in the initial days of cost increases, which will pressure margins as the inflation works its way through the industry.

This is a trade off we were willing to make as value is paramount in our business.

Our team has worked diligently to mitigate impact on our margins, while investing in price where necessary to maintain outstanding results to our members.

Next labor challenges are impacting our industry like many others.

For a long time, we have chased the labor market recently, we've chosen a different path a path that calls for a significant investment in our team backed by our great financial performance to ensure that we get ahead of market forces and better serve our growing membership.

Specifically, we have made the largest increases in starting hourly wages in our history.

In addition, we rewarded our club and distribution center team members this quarter with a one time recognition bonus appreciation of their continued hard work and commitment to serving our members.

These investments are immaterial to Q2, and we expect these investments to get larger as we go through the year.

Our average hourly wage is now well about $15 per hour and we will continue to invest in our teams. So that we can recruit and retain top talent across our footprint.

Finally, there are widespread challenges in the global supply chain.

90 days ago, the pressure was limited to certain general merchandise categories.

Now many categories some entirely domestic like poultry pet food and juice.

We're having trouble meeting demand.

We expect supply chain and sourcing challenges to continue for the foreseeable future.

Our team's execution and ability to stay in stock at the height of the pandemic last year demonstrates the strength of our capabilities and our capacity to thrive in challenging environments.

We remain intently focused on executing our strategy validated by the strength of our performance and centered around four pillars.

Growing and retaining members.

Delivering value with an optimized assortment and.

Proving convenience with digital.

Strategically expanding our footprint, let me provide an update on each.

Membership is the foundation of our business and we continue to enhance the size and quality of our membership base.

In Q2, we grew our membership by 3% relative to the prior year and 14% compared to 2019.

Our growth this quarter was driven primarily by record renewals.

We continue to experience the highest rates of renewal on our largest class of members who have ever attracted.

Our first year renewal rate and on time renewals are at historic levels.

As we noted last quarter, we are intently focused on renewals. This year because these renewing members are generally more valuable than an average new member.

We're seeing both more timely renewal and incremental renewal and we continue to believe that we will finish the year with all time high first year renewal rates.

As a reminder, although these renewal results continued to be strong several factors could influence the renewal rates, we ultimately disclose that you're at such as timing and behavior differences.

Membership quality continues to improve in prior quarters, we have reported higher tier penetration and easy renewal participation rates as evidence of increases in quality.

Those same facts are present in this quarter.

Higher tier penetration for the second quarter or is that 33%, representing a 400 basis point improvement relative to the prior year.

This group consists of our most loyal members with the strongest renewal rates and highest lifetime value.

In addition, more than 74% of our members are now enrolled in easy renewal.

As incremental evidenced that the team continued to improve the value of our membership we are seeing a notable improvement in <unk> per member.

Our MFA growth has outpaced member growth for the last two quarters and that should continue in the back half.

The progress we're making in membership in terms of size and quality has elevated the lifetime value of our members across the chain and will help power our future results.

Assortment optimization remains key to continuing to deliver unbeatable value to our members.

We remain focused on curating, the best assortment of products and services to meet our members' evolving demands.

Our goal is to simplify and expand into new high demand categories.

Last year, we were able to accelerate certain simplification initiatives like expanding into better for you snacks as we sold through existing center store grocery inventory at a high rate.

This year the inflationary environment has provided an impetus to simplify to ensure we can limit the inflationary pressures, while also allowing for the benefits of simplification such as improved clarity of offering and the addition of new categories.

Our plan is to drive these changes through various CPI initiatives. Our supplier should note that we will be aggressive in this area in order to maintain great value for our members.

Private label remains a central to providing great value to our members to our assortment simplification initiatives and to our category profit improvement efforts.

We made great progress this quarter on brand penetration increased to 23% of merchandise sales compared to 21% in the prior year.

This increase was driven by strong growth in summer seasonal recreation and other home related categories as.

As well as frozen dairy and perishables.

We will continue to build on this progress and further expand our own brands portfolio over the long term.

Which will strengthen member loyalty increase value and improve our margins.

Our services business is one of the important areas, where we intend to grow our business along the lines of our club competitors.

We have a tremendous opportunity to elevate the value of our membership and deliver growth by scaling and enhancing our core portfolio of services.

This includes businesses such as optical travel home improvement and cellular phones, where we offer our members outstanding value in the market and the savings are easily comparable to the cost of a membership.

Our focus in the near term is to scale these existing businesses to drive stronger top line growth for.

For example, we've bolstered our optical services with telehealth capabilities, which are now live in 30 clubs.

I'll be a long term bill and we expect services to be a meaningful source of growth for the top line.

And from a margin rate perspective.

Let me touch briefly on our gasoline business, where we're seeing significant market share gains Gal.

Gallons in comp clubs were up 25% this quarter and are increasingly ahead of the market.

Since gasoline is likely the best example of a key value item price signs around every corner.

It's easy for us to show outstanding value.

And when we pair the gasoline business, where the club it drives tremendous loyalty members, who shop us for gas renew at much higher rates.

And their gasoline purchases keep bjs top of mind for additional shopping trips in the club.

We're very pleased with the performance of our gas business as we believe it drives robust member engagement.

Our digital platforms continue to resonate with our members and allow us to offer convenient access to the tremendous value we provide every day.

Our digitally enabled sales grew by 4% this quarter and over 300% on a stacked basis.

Digital sales growth relative to the prior year was driven by strong growth in our Boca curbside offering.

More than half of our bulk orders were delivered curbside this past quarter.

Engagement among our members is most evident through the increased use of our App, which has been downloaded over 5 million times and approximately a third of our members use it regularly.

In addition, our App continues to receive industry leading ratings.

Digitally engaged members have higher average baskets and make more trips per year than members who shop in club only.

Finally, our plan to enable members to use E V T payment when shopping on Bjs Dot com for ship to home same day delivery in club pickup and curbside pickup remains on track this.

This capability is now live in nine states and pending state approval, we expect digital EBT payments to become available and all additional eligible locations in the next few months.

Our efforts to expand our footprint continue to progress this quarter, we opened one new club and Seabrook New Hampshire.

While it's still very early we're delighted with the initial membership response and sales trends.

The remainder of our 2021 clubs are expected to open in the fourth quarter, including new locations in Port Charlotte, Florida, <unk>, New York, Lansing, Michigan, and two clubs in Pittsburgh, Pennsylvania, which is a new market for us.

We continue to expect to open as many as 10 or more new clubs in 2020 two.

In addition, we expect to open nine gas stations. This year, followed by a dozen or more gas stations in 'twenty 'twenty, two which means three quarters of our clubs will have gas stations by the end of 'twenty 'twenty two.

This is a great example of continued investment into getting the flywheel going even faster tying back to my comments earlier on gasoline driving membership.

We are very excited about our expansion and our confidence is underpinned by the strong performance, we're seeing in new clubs, particularly in new markets, where our brand is resonating and our Michigan clubs in Pensacola, Florida first year renewal rates are well above chain wide averages.

Overall, we are incredibly proud of our results we capitalized on the current environment and delivered record results.

Our performance exceeded our internal plans across all key metrics, increasing our confidence in the balance of this year.

While there continues to be a tremendous amount of uncertainty our ability to retain members and market share has been strong and we continue to execute at the highest levels.

The resurgence of the virus and resulting effects on plans to go back to work will likely keep food at home consumption high for longer.

We also expect tailwind from continued government assistance, such as the child tax credit.

Offsetting those tail winds are uncertainty around inflation and inventory availability and the expected decreases in unemployment funding.

When we mix all that together our current view of a back half sales trend has improved from what we thought it would be at the end of Q1.

These stronger outlook for sales.

Well be offset by increasing expenses, such as margin pressures from inflation and freight costs along with considerable investments we were proud to make in our team and their safety.

While the impact and benefit of all these factors are far from clear, we do know that our business is extremely well positioned and poised for further growth.

Our better than expected results for the first half of this year continue to validate our strategy and execution.

We remain confident that our membership trends assortment initiatives enhanced digital capabilities and robust real estate pipeline will power. Our long term algorithm that includes mid single digit top line growth.

Let me turn the call over to Laura to give a bit more color on our results and our view of the future Laura.

Thank you Bob and good morning, everyone.

Let me start by thanking our team members in our clubs distribution centers and home office for their continued hard work in the midst of a sustained challenging environment.

We are excited to report another great quarter anchored by a strong performance and significant progress against our strategic priority.

Let me now turn to our results for the second quarter.

Net sales for Q2 were $4.1 billion.

<unk> comp sales, which exclude sales of gasoline reflected a positive 21% two year stacked comp and outpaced our internal expectations.

Our performance exceeded our expectations for every month of the quarter and we are very pleased with the results, we're seeing across categories and geographies.

Membership trends were strong throughout the quarter and consumer spending habits as well as our market share gains exceeded our expectations.

Digitally enabled sales grew by approximately 4% and 304% on a two year stacked basis and drove about four percentage points.

One person that stacked merchandise comp.

On a stacked basis, we saw robust growth across all of our digital channels, particularly info pik and curbside pickup as well as same day delivery.

The nature of this growth is important because it is centered on the SEC settlement methods, where we have advantaged economics.

As you know we operate in a warehouse environment with a limited number of Skus and a higher average ticket, enabling us to be more efficient.

Okay, and curbside sales tend to skew towards bigger baskets and same day delivery sales have the same margin as traditional cell in our clubs.

As Bob noted digitally engaged members have higher average basket and make more trips per year, the members, who only shop in our clubs.

And as we've said before generally the more a member shops and span the more likely they are to renew.

Comps in our grocery division were 21%.

Reflecting a negative 4% comp for the current quarter and a 25% comp in the prior year.

On a two year stacked basis, we saw robust growth across all divisions, particularly in grocery and perishables, where stack comps were in the 23% to 24% range.

Despite the in stock challenges, we experienced in certain food and other household categories. The team delivered a strong performance, which demonstrates our continued relevance with our members.

Our general merchandise and services division comps were 20% stacked, reflecting a negative 2% comp for the current quarter and a 22% comp in the prior year.

Our growth on a stack basis was driven by strong sales in seasonal categories, such as patios that apparel and home related categories, such as furniture and consumer electronics.

It's important to note that our general merchandize sales this quarter were impacted by inventory availability in certain seasonal categories.

We saw strong growth across our services portfolio, where comp sales doubled relative to prior year.

Although services currently represent a small portion of our business. We will continue to invest in scaling our core offering and expect these investments to fuel future growth.

And our gasoline business, we continue to see strong gallon growth and gain share.

[noise] unsold at comp clubs in the second quarter grew by approximately 25% significantly outpacing overall market performance.

While margins certainly contracted in the gasoline business relative to prior year the performance of the business exceeded our internal plan.

Membership fee or MSI grew by 8% in the second quarter to $89 million.

Our MSI growth was driven primarily by strong member renewals and improved membership mix.

Our renewal rates for first year members and on time renewals remain acts Dor hi.

We are pleased with the progress, we're making in improving the quality of our membership base.

Higher tier members now represent 33% of members and more than 74% of our members are enrolled in easy renewal.

Let's now move to gross margins.

Excluding the gasoline business, our merchandise gross margin rate increased by 30 basis points, driven by improved private label penetration and mix of our general merchandise sales.

These tail winds were partially offset by investment in price as well as increases in freight and distribution costs.

SG&A expenses for the quarter were $598 million compared to $591 million in the prior year.

This quarter, we incurred approximately $8 million of expense related to the team member recognition bonus that Bob mentioned earlier.

As you may recall, we incurred approximately $48 million of COVID-19 costs in the prior year period.

We have seen some deleverage in our SG&A line this quarter as we elected to invest in our business and team members.

As Bob said, our team members are central to driving our strategy forward and it is important for us to attract and retain top talent across our footprint.

Our adjusted EBITDA grew by 2% to $220 million and reflects continued margin expansion and disciplined cost management.

Interest expense for the quarter was $16 million and included a $3 million noncash charge related to debt pay down.

Adjusted net income in the second quarter was $113 million or <unk> 82 cents per share and reflected a 7% year on year growth on a per share basis.

Our earnings growth highlights the strength of our business and reduced interest expense as we continue to enhance our balance sheet.

As a result of our solid performance, we generated $240 million of free cash flow during the quarter for a total of $431 million year to date.

In addition, we paid down approximately $360 million in debt and bought back $64 million worth of shares in the first half of this year.

We ended the quarter with a 0.8 time funded leverage with this reduced level of debt. We have further increased our flexibility to continue to invest in the future.

Let me now touch on our outlook for this year and provide some perspective on our long term algorithm.

As we've said in our press release, we will continue to refrain from providing formal guidance as 2021 remains difficult to forecast given the number of uncertainties, most notably the timing and size of the shift in consumer behavior away from food at home.

That being said I will share with you our best high level view as of today.

Looking at our top line and based on our current assumptions, we would expect comps for the remainder of the fiscal year to be in the negative low to mid single digits, implying a two year stacked comp in the mid to high teens for the full year.

Our assumptions are primarily based on strong membership results and the improving trend in food at home consumption when compared to our expectations at the end of the first quarter.

From a membership standpoint, we continue to expect total member count to be flat or better during 2020 one.

And for MSI growth to outpace member growth.

MSI growth for the year is slightly ahead of our prior expectations due to stronger than expected renewal and higher tier penetration.

We expect continued investments in price as well as significant increases in freight and distribution labor and safety and sanitation expenses.

Freight and distribution costs have been increasing throughout the year and we expect that they will be worth an incremental $10 million of margin pressure in the second half of the year.

We anticipate our investments in labor and incremental Covid related safety and sanitation cost will drive an incremental SG&A burden of approximately $30 million.

These costs could escalate if market conditions change.

Know that we will always do our best to keep our team members safe and we will continue to invest in our business and team, particularly in membership digital and geographic expansion.

While external factors are impacting our near term results. It's important to reinforce that our performance for 2021 continues to be ahead of any historical planned and that our confidence in the long term health of our business remains very strong.

The next few quarters will likely be noisy as the trajectory of the pandemic remains uncertain.

But we are confident that through our enhanced membership trends or improvements in digital and our large real estate pipeline and our assortment initiatives will lead to a much better comp algorithm that includes mid single digit top line growth in the future.

At this point I'll hand, it back to Bob to close.

Bob.

Thanks, Laura I'd like to leave you with a few key messages.

Our financial operational and strategic performance continues to be strong and our world class team is executing at the highest levels.

Membership trends, including growth quality of members and renewals are exceeding our elevated expectations.

Our growing relevant and robust digital business continues to be ahead of peers on a scale adjusted basis and is resonating with our members.

Our accelerated geographic expansion efforts remain on track and will fuel future comp growth. Our brand is resonating in new markets and we continue to see strong membership growth in renewals.

And we generated nearly $1 billion in free cash flow over the last five quarters.

We have transformed our balance sheet, and we'll use the resulting flexibility to invest in making our flywheel spin as fast as possible.

I'm incredibly proud of our team and thankful for the opportunity to lead them.

And now I'll turn the call back over to the operator to begin the Q&A session.

At this time, ladies and gentlemen that is star then the number one for any audio questions.

Our first question comes from the line of Edward Kelly with Wells Fargo.

Hi, good morning.

Taking the question.

Bob I wanted to just go back to.

Some of the comments around costs.

The food price inflation side, just curious what level of inflation Youre seeing now what the expectation is in the back half.

The market seems like from what we can tell from others.

Accommodative to.

Cost pass through so I'm, just kind of curious as to how you're thinking about managing the business for all that you have some control over where you know what youre going to pass through and how much a level of pressure.

Sort of like acceptable from a gross margin standpoint, as you think about.

As you think about pass through of inflation.

Yeah. Thanks, good morning.

Listen as I said in the prepared remarks, and inflation has been a big topic for us I'm sure. It's been a big topic for everybody in our business.

We've seen probably the most aggressive.

Inflation, we've seen in my career here at the company.

It's.

Our process, we're managing with an extensive team and tool kit.

To really make sure that we continue to provide outstanding value to our members all the time that the toolkit includes simply negotiating with our suppliers changing pack sizes.

Cutting items.

Buying in inventory and are ahead of cost increases all sorts of different things. We can do to both provide that outstanding value and manage some of the margin rates that are there.

We put on our financial statements.

I do think this is going to continue we certainly have quite a view into the future from our suppliers.

Cost increase environment.

And our team has done a really impressive job managing it is as we've gone through the first half of this year here in the second quarter. It was worth about a half a point of comp so it wasn't.

It wasn't.

Truly enormous but it was certainly.

Big and.

As we go forward, we'll continue to use that entire tool kit to manage it we'll continue to invest in price as a value is the thing that we care most about and.

Look our business is running very very well and we've got we've got all the freedom in the world to invest in.

And so the biggest class of members we've ever had and so keeping those members happy as my first my first objective and so we'll continue to manage it we'll continue to invest and hopefully continue to exceed our members' expectations.

Okay, and then just to follow up on on the labor side, and particularly in the $30 million in the back half.

At $8 million in Q2, which seems a bit more sort of like one time enormous I'm kind of curious as to how much of the $30 million is more one time ish versus what we should carry forward.

Into the future.

Yeah, It's a great question, but most of that 30 million is carried forward into the future. So as I said in the script.

We've chased the market for a while trying to manage what we pay our team in the context of our greater P&L and I get paid to run the business for the long term.

I believe youre not youre only as strong as your team and we need the best team on the field every day.

Wages are a big component of that and this.

This year, it's been an incredibly dynamic labor market forces.

Every.

Every industry really is suffering some sort of a labor shortage.

To one degree or another so maintaining the team we have continued to recruit great people and continuing to serve as our members is really what I'm. After here and we will continue to invest in our team going forward.

One of my competitors talked about yesterday.

I don't think this is going to change I think I think labor pressure will continue wage pressure will continue and will continue to invest to put the best the best team on the field that we can.

Great. Thank you.

Thanks, Ed.

Your next question will come from the line of Robbie <unk> with Bofa Securities.

Hey, good morning. Thanks.

Thanks, Bob.

Two questions one would be can you talk a little more about the.

The inventory availability.

In general merchandise and just how you guys are thinking about that as you set up for holiday. This year and is there anything we should think about that.

We.

Try and figure out our models and.

Second how are you.

How old are you seeing grocery market share play out for you right now and whats your thinking on grocery market share for the back half.

Yeah, Good morning Ravi.

So let me let me take them in reverse order grocery has been pretty strong for us. If you look at the business through our old four division lens grocery led our business with positive comp for the quarter.

And.

That's that's indicative of the strength of that business.

It's led by a great team member here.

And the team.

Put together a wonderful quarter.

I think that that strength continues.

We've been able to maintain if not grow market share in key categories and grocery and.

That's putting the right stuff on the on the shelf at the right price and.

Giving our members a great experience so that that business is running very very well.

Inventory availability has been it's been a challenge, but it's a daily battle. Some some categories are hand to mouth I mentioned a few of them.

Some of them are are continuing problems like consumer electronics and apparel are things coming out of China. Some of them are new.

We're doing our best and doing a great job keeping in stock for our members.

But it's uncertain right. We are like every one of our competitors on allocation in certain key categories like consumer electronics.

And so we're not receiving all the inventory that we're ordering and some of those categories.

We have reduced visibility, meaning the supplier doesn't commit to the shipping us.

On the time frame that.

We normally get notice of shipments.

So it's a bit of a daily battle from from that standpoint, but again our team throughout the last 18 months is done done yeoman's work really keeping in stock.

At the level or better than our key competitors.

See why that would that would change.

Heading into holiday so.

Sure. We're doing the same things that that are that our competitors are doing we're accelerating shipments, bringing holiday stuff and earlier, we set back to school earlier.

Trying to really think forward into next year, because the supply Crunch I think will will continue for the foreseeable future. So.

We'll just manage it as aggressively and as.

Forward leaning as we can and and keep everybody up to date as we go.

That's really helpful and just one last quick question any change in your customers behavior due to the variant that you've seen so far.

Yes, I would say slightly.

Certainly the growth throughout the year has been driven by the great performance in membership that we see in AR and the great performance, we've seen in digital and.

Brick and mortar.

You can see a more so the impact of stimulus dollars and are in the business. So that the child tax credit coming in for instance, and an EBT flows.

I would argue there's a there's a bit of a.

A bit of a change from our adult a variance perspective going on but I wouldn't say, it's the material thing driving the business I think it's great execution, great membership results and and the other.

The other factors that I mentioned.

Got you really helpful. Thanks, Bob.

Sure.

Your next question will come from the line of Christopher <unk> with Jpmorgan.

Okay.

Thanks, and good morning, so maybe starting at a.

A high level, if you look at the first half of this year.

Your operating margin was roughly flattish with a bunch of puts and takes on the gross in the SG&A side is the message that you're seeing going forward is look you know where you can think about operating margins being relatively flattish.

Plus or minus versus last year.

And this is really about driving that membership base driving the topline and flowing through those dollars to the bottom line.

Yeah. Good morning, Chris that's precisely what we're saying we're encouraged by the track of the business that the top line. Obviously is outperforming our plans actually every every metric we really care about and look at outperformed earnings during Q2.

We're pretty bullish on what we see versus where we were in Q Q1.

But the business is becoming a bit more expensive to run part of that is COVID-19 costs.

The big part of it is freight and labor.

The freight stuff will be around for as long as the supply crunches around and the labor cost is really us taking the opportunity to invest in putting the best team on the field.

And so that that will continue and as I said, probably get more expensive as we go.

So we think the sales trend.

Is improving and we think the bottom line trend.

Maybe improving a little bit less because we are choosing to make investments in our team and choosing to make investments in the long term health of the business through membership and in value.

It makes it makes total sense.

And the right thing for the long term as you think about I think the other the other part of their stories. If you look at your balance sheet. Obviously, you continue to grow EBITDA you continue to deleverage the balance sheet.

You stepped up the buyback a bit here in the second quarter. So can you just talk long term about capital allocation.

Obviously, you understand your excel are accelerating unit growth in Capex and reinvesting in the business as is <unk>.

First priority, but talk about the share repurchase outlook and also is there a point, where you start to compound to the balance sheet, maybe added a little bit of leverage you know did it do this sort of classic autozone strategy and in terms of.

No really leveraging that EBITDA dollar growth to be able to.

To enhance shareholder returns.

Sure maybe I'll make some comments on the American can chime in.

As you said our job is to grow the company. So that's our first.

Our first place to put cash so you'll see you heard us talk about in the script continuing to grow real estate.

And gas stations. That's that's an example of of allocating cash towards growth.

See us do some more remodels and things from from that standpoint, too. So we will use that cash to invest in the business, whether it be real estate, whether it's digital whether its membership whether it's in our team.

All of those things come before.

Buyback or anything else with that said.

I think Q2 provides a little bit of a hint as to what we what we plan to do from a cash flow perspective.

Significantly amped up the buyback during the quarter.

And this is an active topic with our with our team and with our board on.

How we allocate capital.

For the future.

Laura can tag onto anything there yet.

I think the only thing I'd add in there.

You got it right on the buyback you'll continue to see us lean.

Lean into that as we head into the future after we've invested meaningfully into the business.

Like Bob said that certainly the priority and will be the priority going forward.

Yeah, I would expect that in the back half will have it.

A clear plan on what we're doing long term.

And certainly when we have that we'll be able to share it broader.

And to put them put a fine point.

Through an obvious.

And obviously ramp.

Ramping the buyback company because we believe the stock is undervalued given our view of the strength of the company as a flywheel that we have going now and what we think.

It will happen in the future. We we very much believe that this is a different company than it was pre pandemic and we will come out much stronger and so that's.

That drives our desire to them to grow even further and to buy back shares along the way.

Thanks, very much best of luck thanks, Chris.

Our next question will come from the line of Chuck Grom with Gordon Haskett.

Hey, Good morning, guys. This is John Park on for Chuck.

It seems like you guys are very pleased with the renewal rates for the Covid cohort. If you will I guess can you talk about what youre seeing from the frequency and spend standpoint from this from these new members.

Sure.

We are absolutely pleased with what we're seeing in membership.

The strength that we saw in Q1 has continued into Q2 in terms of the size and quality of the membership as we talked about.

We plan to be.

A little bit negative in member accounts.

Then towards the end of the year to get back to flat or maybe even grow a little.

Tracking ahead of that at this point.

Total members were flat.

Here in Q2.

The way we can.

<unk> to grow them throughout the rest of the year, particularly as the new clubs come on in Q4.

The quality is going up as I said with premiums are up 400 basis points in easy renewal at 74% and M. S Y per member growing nicely.

We're really seeing good stuff from them from a membership perspective.

That causes us to be bullish.

When you take that leap into what the members are doing.

We see strong spending habits across the cohorts.

Including the Covid cohort. So we believe we're on track for all time high renewal rates in the first years.

We've seen strong membership results as I said in.

And all of the cohorts are acting I think very well, they're visiting us often they're spending a lot when they when they show up they are buying a whole lot more gasoline as we talked about a little bit in the script.

And they are interacting with our digital properties in a in a very strong way as well.

So we were encouraged by what we see.

And our members' behavior.

That's perfect and then just kind of switching gears a little bit I guess can you talk about the ramp in the drive up business or the curbside business I guess at this point like what percentage of your members do you think I've actually tried some of these new services.

Uh huh.

Look it's a it's very encouraging.

The adoption, we've seen here, 50% of our OPEC orders were delivered curbside this quarter.

Remember this is a service we launched in Q2 last year sort of on a shoestring.

Into the teeth of the pandemic, so really taking advantage of.

Ah perfecting that as we've gone through the last the last year and are really starting to advertise that a little bit to our members. So we're seeing.

A huge portion of our members.

Try it and reuse it once they've done it.

And we're seeing our teams execute very very well when when they do do it we've said pretty robust service levels for.

How fast we should get an order to somebody's cars somebody's car and our members of our team members are doing a wonderful job servicing our members in that in that respect.

You know you know how retail works every time, you give somebody a great experience and they come back and do it again. So so we're we're encouraged by what we see.

Those members that interact with us digitally and curbside is no different.

Are our best members right there the most engaged that come to see us more often their baskets are bigger.

And so we're very pleased with what we're seeing from from a digital perspective, and particularly in curbside.

Awesome best of luck guys.

Thank you John.

Yeah.

Your next question will come from the line of British Iraq with Oppenheimer.

Good morning, Thanks for taking my question, So I guess as Laura just starting out with some of your commentary just on I guess merchandize merchandize margins and SG&A is there any more clarity you can provide how to think about merchandise margins in the back half versus what you saw in Q2 and then on SG&A.

I think in the first few quarters your SG&A growth on a two year basis was 16, 17% is there a way to frame how to think about for that for that for the back half versus what we saw in the first half.

Yeah. Good morning, and thanks for your question. So from from Merch margin standpoint, I think we talked a little bit about that.

There's a lot of.

Uncertainty.

In the back half, but we will continue to do.

All the great things that the team has already done to manage it through.

Through the first half we expect that they'll continue to do that there will be some pressure on it.

<unk>, which we called out in the prepared remarks from a freight and distribution costs continuing to rise.

So that will be real, but we will continue to do our best to manage it accordingly.

From an from an SG&A standpoint, I think.

Frame that in the prepared remarks.

As well.

We expect a drag on SG&A from the investments that we've made in our team members. We think those are really important.

We quantified that as about 30 million Bucks in the back half and that will certainly continue in into next year. So we'll have a full run rate on that going going forward.

Again, I think Bob already talked to that we think that's really important for our business and meaningful.

And despite the drag will continue to.

Do everything we can to manage SG&A accordingly going forward.

Great and then maybe just one follow up question just on store growth just given the cost pressures that youre seeing in some of the I think labor availability challenges out there does that at all impact the pace of store growth that you guys are thinking about going forward.

The simple answer to that that no.

It's certainly something we all think about as a team on a daily basis.

It's core to our business, but we don't think it will have any impact on our store growth going forward. Since you brought it up refresh maybe I'll ask bill to give some comments, we're very pleased with what's going on from a real estate perspective, and that's something we'd like to highlight.

Hey refresh spill.

Listen we've had.

Great results as we've leaned into the new clubs.

The latest year with Seabrook and then the maturation of our new broker in long Island City clubs.

Had been.

They've been really great so far.

We've talked to analysts investors about this radar new club rollout is a 24 month window, where we're making decisions today for 2023 and beyond.

We'll continue to step on the gas in terms of both existing and new markets as we look to grow the footprint so any near term transitory.

Pressures don't really play into how we think about the long term we're bullish on the growth we're bullish on the store performance and we'll continue to lean in.

Great. Thank you.

Your next question will come from the line of Chuck.

Sir Cerankosky with Northcoast research.

Good morning, everyone nice quarter.

Thanks, Joe Bob.

Brad when Youre looking at these inflationary pressures.

I guess I'd put them in three buckets, one from the suppliers wage inflation and then some.

<unk> or logistics inflation.

How do you think about it in terms of passing it through and the timing thereof.

Yeah. So that's a good question Chuck I guess.

I guess I'll tell you what I tell the team and that's that we need to play to win.

So that means being as aggressive as we can with our suppliers and battling for inventory battling against inflation.

With our team members, it's a it's investing and providing them the great environment that we do every day to.

To survive and thrive so are.

We will do things.

That are perhaps detrimental in the short term to win in the long term and your question on <unk>.

And what we do with inflationary price increases is a good one.

Inflation isn't a bad thing for our company or for our industry.

Typically it has allowed us to widen our price gaps against grocery.

Uh huh.

But it does take some time for for that to sort its way out.

Our primary product that we sell.

Isn't it isn't a paper towels or perceval food its memberships and the key thing about selling memberships as you need to show great value. So we tried to do that every single day in an inflationary environment that means we probably lag pricing.

Particularly on key value items.

As we go.

That that was true 2008 last time, we had an inflationary environment and it's true today, we will we will always lag.

Key value items, just to make sure that our members see that great value every single day, that's that's probably tough.

From a margin rate perspective.

In the near term, it's great for us in the long term and so we'll continue to do that we can we can pick and choose to.

Core of your question right, we don't have to invest.

Invest at the same rate on every product or every category in our merchants did a great job this quarter balancing that as you saw merchandise margin rate growth lots of stuff in there inflation was probably.

A net drag to it.

But there is.

There is a thousand different stories in there from from product to product and category to category, we invest where we think it's really important to show great value and hero categories, and fast moving items and Super cute key value items.

And we we don't invest as much where we don't think it's as important.

So we'll continue to do the right thing for our members and our team members as we go forward.

Yes.

Thank you.

Sure. Thanks, John.

Your next question will come from the line of Paul.

With Citigroup.

Everyone. This Brandon Cheatham on for Paul Thanks for taking my question I just wanted to follow up on that you know as you look at you know investing in price is that really just to kind of smooths out any shock to your customer or do you look actively at price gaps in.

You know competitor pricing and trying to make sure that that is maintained at a certain level before you would you know.

Oh, okay.

Price increases.

Yeah. Thanks, Darren we we spend a ton of time and energy tracking what our competitors do so just like I would expect that they do we spend a lot of time and our competitor stores. We spent a lot of time with with data.

Looking at what the industry is doing as a whole. So we monitor our price gaps every day every week every month, we have something on the order of 50000 price checks a week.

<unk>.

Hum.

A pretty robust dataset that we spend a lot of time analyzing and figuring out what what to do.

In an inflationary environment that becomes more important we've got enhanced surveillance of what's going on out there right now to make sure that we're doing the right thing for our members and the right thing for our business.

And.

As I said in response to Jeff's question every product is not the same right, we would lag pricing longer on our key value item like bananas are bottled water.

And not like pricing as long on other things that aren't aren't is key. So every everything has its own its own story.

But it's all anchored in providing outstanding value every day. So the members are happy with us.

Got it and just.

One more for me, we've talked about product mix, just wondering about the puts and takes there.

Is private label, taking share and outpacing the store as a whole or is it driven by like new product launches and new categories and just wondering kind of where do you think you are in that progression.

Yeah.

I would say we're in the middle innings from from a private label perspective and it's.

It's one of the things I've talked to the team about about playing to win on as well you know we've been pretty judicious about how we've grown private label in the past because although it's probably the best thing for the business in terms of loyalty and margins. It does come with a bit of comp pressure when you trade somebody from a branded good to our private label goods. So in the past.

When we were we were comping.

And the low singles, we we're pretty judicious about that comp knock and trying to trying to grow penetration of private label, while not penalize on comps all that much.

I've challenged the team to rethink that a little bit given the strength of our business.

Because we are strong today and private label can help us be strong tomorrow.

So we saw both of the things that you referenced during this past quarter, meaning.

Improving penetrations in existing categories and products and launches of new products.

That will continue our our goal is to get private label penetration to 30% or better that will take a few years to do so but it's very important for us in terms of showing value to our members, which again is paramount and driving margins on loyalty growth going long term.

Got it.

A top notch overall improved profitability.

Absolutely right, that's what I made it a little bit of a comp pressure when you trade somebody from branded to private label, but but we get.

The order of a 1000 basis points more margin.

Yep. Thanks.

That's helpful. Good luck thank.

Thank you.

Your next question will come from the line of Simon.

Lin with Morgan Stanley.

Hey, guys. This is Michael Kessler on for Simeon Thanks for squeezing us in here.

My first question I wanted to ask about that.

The first year renewal rates you mentioned they are at historic levels can you give us a sense of I.

I guess, how much higher they are than historic levels and as we move now several months into that.

Covid cohort, how how that's trended as more and more of those.

First year members that have joined us since COVID-19.

Elected to renew or not to bring out.

Yeah, Hey, Michael.

It's a great question as I said earlier, we're very pleased with our membership metrics.

Including the first year renewal rates.

You know as we've talked about it in the first quarter. It was very early into the renewal of the Covid cohort.

We are.

Much farther through that today than we were at that point. So we've got a much better datasets to think about.

In Q1, we've seen the best renewal rates that we'd ever seen on any cohort nevermind of first year cohort.

But we were.

We were a first year cohort as large as it was when we were.

You know early on in trying to unbundle, whether it was truly incremental or just.

Q2 2021 BJ's Wholesale Club Holdings Inc Earnings Call

Request a DemoDemo

BJ's Wholesale Club

Earnings