Q4 2021 BJ's Wholesale Club Holdings Inc Earnings Call
At $3 3 million shares and issuing a new 500 million.
Dollar share repurchase authorization.
When looking at the company from an investment perspective, our collective efforts in building a more robust business have yielded shareholder returns that have been among the best in the industry over each of the past three years.
We now have had consecutive years of considerable transformation and membership merchandising digital and our real estate portfolio and there are still plenty of opportunity for us to capture as we look ahead to 2022 and beyond.
Taking membership first this part of our business has never been stronger.
The improvements in the size and quality of our membership base is evidence of the value we offer to our members.
Our member Count has grown by 2% sequentially, 3% versus last year and 15% over two years ago.
Along with the size of our membership base. The quality has also improved our higher tier members now comprise 35% of our member base, an increase of four points over last year.
Tying these improvements together we are proud to report the highest renewal rates in our company's history closing out the year at 89% a one point improvement over last year's renewal rates, which had also been a record.
The improvements in size and quality are not just the pandemic story in the past five years, our membership has grown each year and by a compound annual growth rate of over 5%.
As we've improved the size and quality of our membership base. We have also grown our membership fee income to new record highs.
Our membership fee income per member is up 5% over last year and over the last five years <unk> dollars per member have risen from just over $52 to just shy of $60.
As a result, we reported full year MSI a $361 million.
More than $100 million more than what we reported five years ago, and representing a compound annual growth rate of approximately 7%.
The gains we've made in our membership our last thing structural improvements in our business.
To put it in context, when I began my tenure with the company nearly 15 years ago.
Our renewal rate had never exceeded 84% and now 90% of insight.
Think of that progress another way in the last few years, we have grown the average member tenure by more than 50% over three years more life.
We are incredibly proud of all that we've accomplished across our membership initiatives.
We expect to eclipse $6 5 million members likely in Q2 of this year as I mentioned earlier, we are also targeting a 90% tenured renewal rate.
Which will be a very important marker of our success in becoming a different and better company.
We will also continue to increase the quality of our membership base our co branded Mastercard offering is an important part of this initiative.
When we created this product several years ago, we set out to have our members directly benefit from the value created knowing that they would reward us with more lifetime value.
Our value prop, which continues to be among the best in the industry has allowed us to grow to about $1 4 million cardholders.
We've chosen capital wanted to help US take this program to the next level we.
We will spend the next year designing a program that will pass even more value to our members again, knowing that they will reward us.
We believe that this will be very powerful over time, and we look forward to moving ahead with our new partner in the early days of next fiscal year.
We've continued to make progress in improving our merchandising such as the continuing simplification and our sundries categories.
The effected categories have seen SKU reductions of over 40% and now feature a much better presentation and shop ability.
We're seeing strong results in our efforts and sundries. The simplified categories are currently exceeding their pre simplification comp performance, despite having less skus.
This effort has also allowed us to expand margin rate.
We continue to see significant opportunities to improve our merchandising beginning with internal capability building and the additions of external talent.
After announcing Rachel Vegas, as our Chief merchandising officer last quarter, we added new senior Vice presidents of owned brands and <unk> sales.
With increased focused on own brands, we will look to accelerate the steady improvements we've been making and we think we have good run rate here.
Our penetration this quarter was 23% up 200 basis points year over year.
Driven by strength in our perishable and sundries divisions.
Our members are reacting well to our brands and we find that members that shop owned brands are among our most valuable.
The number of baskets, including at least one owned brands item was up this year and repeat purchase rates improved by approximately 400 basis points during the year.
In addition to completing the sundries simplification and increasing own brand penetration. We will also begin the reinvention of our fresh offering to ensure that we're providing a higher quality and better value version of our products. Our members want most.
Fresh is already the anchor of our business, we see considerable opportunity here too.
And we will update you more as we make progress.
And finally, we will place a renewed focus on increasing the share of general merchandise and our business, we need to have a better more relevant assortment to take GM, where we think it can go.
Turning to our objective of improving convenience for our members the performance of our digital business. This year shows our success.
For the first time, we generated over $1 billion in digitally enabled sales in 2021.
And these sales now comprise almost 8% of our total business, having grown 22% year over year and over 250% on a stacked basis.
Approximately 80% of our digitally enabled sales are fulfilled by our clubs with services like Bo pick curbside and same day delivery.
This has increased from about 45% over the last year.
We are finding that our members are engaging with all of our digital offerings and this is exciting because we also know.
That members, who increasingly engaged digitally our younger visit us more often and purchase more when they visit.
We also continue to launch new products like express pay the ability to skip the checkout lines using your phone.
That went live across our chain in Q4.
We know that leveraging technology to deliver a more convenient experience for our members is a long term game changer for our business.
The club channel has never been thought of as the most convenient place to shop, our digital assets are changing that paradigm and we believe our members will increasingly reward us for that.
To that end, we now have our door dash marketplace live in the chain and just the last few days.
And we're excited about the convenience and value this will bring to our members.
We're continuing to work on the new model is same day delivery driven by BJ Dot com and expect this to be live in April .
Under this model our team members will pick orders and our delivery partners will make deliveries to our members. This model will allow for a better experience and better value for our members and better economics for us.
We will also launch an unlimited deliveries package, which will allow members to get unlimited same day deliveries for a fixed price for one year.
And our testing we've seen an encouraging response and results from our members and we'll share more as our program specifics crystallize.
Moving to real estate I am proud to report that we continue to accelerate our efforts we opened five new clubs and seven new gas stations in 2021.
Our confidence here continues to increase as new clubs opened in the last few years have performed better than expectations with stronger sales and operating performance leading to faster paybacks and had initially been contemplated.
We expect to open 11 clubs in 2022, and new and existing markets.
The new markets are expected to include Columbus, Indianapolis and Nashville.
With existing markets being Atlanta, Miami, Richmond, Orlando, Detroit, and New York Metro.
We will also significantly increase our gas station footprint with a total of 12, new gas station is expected in the year.
This would bring our percentage of clubs with gas stations to nearly 75% at the end of 2022.
Fuel is an important value driver in its own right, but becomes an even more important when paired with our co branded Mastercard, which offers those members of <unk> 10 per gallon discount on our already great prices.
As we look ahead at the various ways. We can grow new units. We will also open a small box pilot this year.
While this could become a new expansion vector for us. It will initially function as an innovation lab for us to test out new assortments displays product demonstrations and convenience initiatives.
Our financial performance and strategic progress is also evident in how we use our cash flow.
In Q4, we made two key investments underpinning our business both in the logistics area.
First we opened our fourth perishable distribution center and independence, Kentucky.
This facility currently operated by virus logistics will serve our new markets in the Midwest, but also take some of our core market volume to allow us to better balance our facilities.
Second and most importantly, we announced the acquisition of all of our perishable distribution centers from <unk> logistics.
The <unk> family and team members have been phenomenal partners to us for over 20 years.
We're excited to welcome the over 800 bars team members to our family.
One thing we've learned over the past two years is that the food supply chain is not as resilient as once thought.
This purchase allows us direct control over the most important and complex part of our supply chain.
And once complete derisked the business considerably.
While risk reduction is important this deal also has strategic merit.
Our perishable foods are critical reason why our members shop, our clubs and we can do much better in terms of the assortment quality and freshness of these items.
I mentioned earlier, a new effort to improve our fresh offerings controlling our distribution will allow us to more aggressively optimize our network for freshness and to be more flexible and assortment in areas in which we lag like prepared foods.
This deal should provide a great foundation on which to build our future business.
And with that I'll turn it over to Laura to discuss our financial results in more detail. Thank.
Thank you Bob and good morning, everyone. We delivered another year of very strong results and is enabled by the fantastic work of our team members.
The fourth quarter was an incredibly challenging operating environment omicron infections drove significant disruptions in our facilities as well as our suppliers' facilities and resulted in shortages of team members and product.
As well as changing member purchase habits that were hard to keep at Bay.
For the contributions and hard work of our team members this year and I'm proud of the business. We are building together IMAX.
I am excited to share the results of their hard work with you today.
As Bob mentioned earlier this year has been the best and most transformational year in our company's history.
We have record membership and renewal rate, a relevant and growing digital business.
Revamped balance sheet and robust real estate pipeline.
Of our membership base is poised to deliver our long term future growth.
Bj's is a company that is stronger today than it has ever been and we will look to extend and grow that position.
Now, let's turn to the results of our fourth quarter.
Net sales for the quarter were $3 6 billion.
Merchandise comp sales, which exclude sales of gasoline increased by 9% and were driven by ticket.
On a two year stack comp sales grew by 16, 8%.
Our food business continued to be very strong in the quarter, while sales of sundries and general merchandize lagged our plans.
Comps in our grocery perishables and sundry division grew by 2% and 19% on a stacked basis.
<unk> deeper into the topline results, we saw perishable and dry grocery items, continuing to perform well generating a 5% comp and a two year stack of 23% in the quarter.
But this strength was offset by weaker sales and sundries.
In the rearview mirror it is clear that our sundries business was impacted by a pull forward of purchasing into the third quarter.
Members made outside purchases in September and October that impacted in November and December sales.
We are confident that our Q4 results and sundries were not caused by the recent assortment work.
Combining the third and fourth quarters and sundries shows an acceleration in the two year stack in the second half.
60 basis points.
Our general merchandise and services Division declined 3% on a comp basis and generated a 7% two year stacked comp.
This performance was due to supply chain driven headwinds in inventory availability product assortment and promotional cadence.
We suffered from product shortages in key holiday categories, such as televisions and electronics and seasonal items.
Our digitally enabled sales grew by approximately 20% in the quarter and nearly 190% on a two year stack, we continue to invest behind digital platforms, particularly in <unk>.
So I picked up and same day delivery, which together drove more than two thirds of our digital growth during the fourth quarter.
And our gasoline business, we continued to gain significant market share as retail prices increased more than 50% on average versus a year ago.
Comp gas gallons in the fourth quarter grew by approximately 17% outpacing overall market performance.
Over the course of the year and this past quarter.
<unk> industry, leading results that demonstrated strong market share gains in our gasoline business.
Membership fee income or MSI grew by 10% during the fourth quarter to $94 million and underscores the progress we have made in improving.
Healthy growth in new members with renewals trending strongly and favorable membership mix during the quarter.
We delivered a new all time high renewal rate of 89% for our tenured members along with increasing our first year member retention by over 400 basis points relative to prior year.
Our penetration of higher tier memberships increased to an all time high of 35% and easy renewal enrollment is over 75%.
Now, let's move to gross margins excluding.
Excluding the gasoline business, our merchandise gross margin rate increased by 10 basis points much better than our expectation of down 50 basis points that we shared with you last quarter.
Merchandise team did a great job managing margins in the face of inflation and we also saw a benefit from mix.
SG&A expenses for the quarter were $631 million.
The year over year increase was primarily attributable to the increased labor costs associated with the wage investment we made earlier this year as well as higher occupancy expenses and costs associated with our pending <unk> acquisition.
Our adjusted EBITDA grew by 12% to $229 million.
Reflecting sales growth and margin expansion.
This quarter, we incurred $3 $5 million of one time deal costs related to our pending acquisition of the burst facilities.
These costs were adjusted for in our adjusted EBITDA metric.
Adjusted net income for the fourth quarter was $110 million or <unk> 80 per share and reflected a 14% year over year growth on a per share basis.
Tax rate within the quarter was about 26% higher than it was in the prior quarter due to a relative lack of tax windfall from equity awards.
Our earnings growth highlights our ability to manage costs throughout our P&L prudently in a highly inflationary environment as well as the benefits of a lower leverage and share count.
With the most formidable prior year in our history as the comparable and considering how we initially planned for the year. We are very pleased with how this year shook out from both a topline and bottom line perspective.
During 2021.
We had merchandise comp sales growth of 21% on a two year stack and we generated more than $16 billion in net sales.
Membership fee income was $361 million, an increase of more than 8%.
Margin rate grew by 20 basis points, despite price investments and elevated distribution costs.
Adjusted EBITDA of $880 million growing, 3% and 50% on a stacked basis.
And we grew adjusted EPS by 5%, which was 117% on a stacked basis.
We also generated $527 million of free cash flow this year.
This cash flow has allowed us to transform our balance sheet with eight eight times funded leverage versus one two times last year by repaying more than $350 million in debt.
More importantly, this reduced level of debt will allow us greater flexibility to invest in the future with the <unk> deal being a good example.
As we allocate capital going forward are first and foremost priority is to grow our business.
Investments to support membership Digi.
Digital and our real estate growth plan will be funded by these cash flows and enabled by our newfound flexibility.
We also plan to Opportunistically buyback shares with the remaining free cash flow.
At the end of 2021, we had $471 million remaining under our $500 million buyback authorization.
While we can all likely agree that things are starting to return to normal.
There continues to be several unknowns that make for a significant variability as we look to frame guidance for the coming year.
Among the most significant are headwinds that could materialize as we anniversary unprecedented levels of government aid and stimulus efforts.
We are also experiencing some of the highest levels of inflation that we've seen in several decades.
Given these uncertainties we offer the following full year guidance details.
We expect 2022 merchandise comp sales to increase in the low single digit range and total revenue to increase in the mid single digit range.
From a membership standpoint, we expect MSI to grow in the mid single digit range.
We expect merchandise margins to remain flat.
2021 market conditions provided approximately $40 million of gasoline profit greater than a typical year.
We have planned for this to unwind in 2022.
But we will retain the market share gains that we have captured.
We expect EPS will be flat year over year, after giving effect for the pending Paris acquisition.
The deal is currently anticipated to close in Q2 and will yield seven of EPS for the full year.
We also anticipate capital expenditures of approximately $350 million.
We currently expect our quarterly comp cadence to be weighted towards the first and fourth quarters.
We continue to remain confident that we will be able to generate a much better growth profile than we had done prior to the pandemic, resulting in a long term algorithm of mid single digit revenue growth.
Now I'll turn it back to Bob to conclude our prepared remarks.
Thanks, Laura the last two years, where the best years in the company's history back to back and I'm confident that the outlook is bright for this company.
The transformation, we began years ago enables us to deliver that performance and also put us in a position to take advantage of opportunities to continue to transform this company.
We are providing more value and convenience than ever to our members and our price gaps are better than they have been in a while.
As a result of our flywheel is spinning faster.
Growing membership size and quality.
We're improving our merchandising we are delivering value conveniently.
We are broadening our reach into new markets.
We are also taking chances that this company has never taken and doing things we've never done.
Wiring businesses with key capabilities pursuing critical partnerships innovating around membership structures like co brand and offering new ones like unlimited delivery.
Our business is better today than ever and we have tremendous confidence in our future.
Demonstrated an ability to grow shareholder value over a long period of time by playing the long game.
We will keep our eyes on any one quarter and more on the many long term opportunities that we see.
Those opportunities are underpinned by several strategic advantages.
We offer tremendous value, even more so than inflationary times.
That value becomes more important when wallets are stretched.
And we've made that value easier than ever to access with our digital capabilities.
We also have a lower labor model than many of our competitors.
As labor costs rise, we are less affected than those competitors.
We are confident that the structural advantages of our club business are right for these times and I've never been stronger.
Finally, I would like to thank our team members for their service to our company and to our members I'm incredibly proud of their efforts and the results that they provided and I look forward to all that we will accomplish together in the new fiscal year.
Now I will turn the call back over to the operator to begin the Q&A session.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad if for any reason you'd like to remove your question. Please press star followed by two again to ask a question. It just stopped followed by Bob <unk>.
A reminder, if you are using a speaker phone please remember to pik.
Jim.
So our first question comes from the line of Peter benefit of.
Your line is now open. Please go ahead.
Oh, Hey, guys. Thanks, good morning.
So maybe two questions one just kind of on the comp cadence for this coming year.
First quarter fourth quarter weighted should we be assuming merch comps or are you assuming at this point merch comps would be down in the second quarter and third quarter on a year over year basis.
Then my second question is as you transition to capital one just curious maybe.
Maybe what the benefits are you think going to be.
That will accrue to Bj's from P&L perspective, and then how do you manage that transition.
To limit the friction or potential friction with your with your members. Thank you.
Yes, good morning, Peter Thanks for the question.
As we think about the coming year, we're pretty bullish on the company overall.
The quarterly cadence as you point out will be a little bit weird to figure out. So we gave that guidance.
<unk>.
Comp should be weighted towards Q1 and Q4.
We don't really necessarily believe Q2 will be negative Q3 may be negative.
It is.
It's the highest hill to climb from a lapping perspective.
Given how we see the sales shaking out I think thats certainly possible.
It's how we've how we plan the business.
We're incredibly bullish about our partnership with with capital one going forward.
I think this program has been.
Probably the Best example of.
How we'd like to run the business going forward and that is.
The more the more value, we can transmit and show to our members the more they reward us and purchasing habits and membership gains in lifetime value.
Our current co brand program is still seven years after we announced that still among the best in the industry from a value prop perspective, but we know we can do better.
And.
We've been able to grow it from pretty nascent program through a million foreign cards at this point.
Really looking forward to taking that to the next level with our with our new partner.
Uh huh.
We're still in the early days of of ironing out what the.
New value prop might be so not a whole lot of news to share there but.
Think about it loosely that as we did the old program any any gains we might make in the.
And the economics of our new deal, we will look to pass those on to our members knowing that they'll reward us over time. So we're not building in additional profit directly from from the new.
New deal.
And you're right to point out.
The fact that this process needs to be managed we're trying to take a deliberate approach to or trying not to do it quickly we want to make sure that we do it correctly and really over manage the process. So that we deliver a seamless transition for our members and for our shareholders.
Got it okay, great. Thanks, so much Bob.
Yes, Thanks, Steve.
Thank you.
Our next question.
It comes from the line of Robbie <unk> of Bank of America. Your line is now open. Please go ahead.
Oh, Hey, good morning.
Thanks for taking my question actually a couple of quick questions. The first just.
In terms of.
Hi.
How are you thinking about the sort of comparisons against stimulus since it sounds like the comps would be strongest in the first quarter I think thats one peak stimulus hit do you.
Thank you. Thank you have a lot of exposure to that more lower income.
Closure than some of the other warehouses competitors and then the other question was just.
Any comment on how traffic comp was in the fourth quarter versus previous trends.
Didn't change or was it fairly similar.
Yes, Thanks, good morning, Robert.
As I said in the <unk>.
Repaired remarks were pretty pretty bullish about our long term.
Prospects, we've made incredible strategic progress.
Over the past couple of years.
And.
And we're excited about taking advantage of that as we go forward. Your question on stimulus and EBT as a good one.
Certainly as we've gone through the last couple of years, our penetration of EBT members has has increased.
They were given the outsized dollars through the stimulus programs over the past couple of years. So we do anticipate a lapping effect.
Of that.
However, these members are good members in any environment.
Even even without the extra stimulus.
Pandemic, they visit us often shop, a lot they renew their memberships and so it's important that we try and.
Focus on retaining these members focus on getting them into our buildings.
Many of the the.
These members, although they use EBT as a tender they also use other other tenders and so.
We are.
Understanding of the fact that they will not have as many dollars next year as they did last year.
But theres still great members that we intend to try and keeping our franchise and keep them motivated and shopping and renewing their memberships going forward.
Yes.
Do you think about your traffic question.
I assume you mean in Q4.
It was slightly negative during the.
During the fourth quarter on that.
<unk>.
Hangs together with the pressure on our <unk> business.
And our general merchandise business.
That we noted in our prepared remarks.
Got it thanks, so much Bob.
Sure.
Thank you.
Our next question comes from Chuck Guam of Gordon Haskett. Your line is now open. Please go ahead.
Okay. Thank you very much.
But I'm just curious.
General merchandise.
Where you are on fixing that business, how you're feeling about the supply chain and I guess, the cadence of Jim over the next few quarters.
Yeah. Good morning, Chuck Thanks for the question, it's a good one.
Q4 was a little rocky for general merchandise business, we suffered from some supply chain challenges in key categories like televisions in electronics and and and.
Some seasonal categories.
I don't I don't think those are.
Anything but.
Fly chain challenges in those categories, we do we do face a big opportunity in general merchandise and that is.
Really to increase the penetration of that business and within our overall overall business I'd love to get it.
To be a quarter of our merchandize sales over overtime.
What it was when I started with the business and we need to get it back there to me that is about.
Presenting irrelevant.
And timely assortment to our members every day.
And that that is not something we do.
And the best way, we can do it.
We've started that process.
We've added.
Through our through our team with our new Chief Merchandising Officer, Rachel Vegas, Rachel spending an incredible amount of time directly with the general merchandise team and we've made some other changes on the team.
As well that will help us do this over time.
The reality is there are lots of categories within general merchandise that have longer lead times and so it will be.
As you are to fix categories like televisions that were mainly just supply chain issues it will be harder to fix categories like seasonal.
Which we buy out.
Months to 12 months ahead of time so.
I would look for this to improve over over time over a number of years.
<unk>.
For the hopefully the second half of this new year to be better than the first half.
Got it. Thank you and then just in the near term sundries sounds like it was an issue in the fourth quarter I guess is it rectified itself in.
First quarter I'm, just trying to connect the dots on your comment that <unk> is expected to be.
Towards the towards the upper end of the range for the quarter.
It implies a nice uptick on the three year stack relative to.
For the fourth quarter, you just reported.
Yes.
It's a great point you make on the three year stacks.
You should really look at the three year stacks and the two year stacks as youre thinking about how to play on the quarters given how many strange things have happened over the past couple of years.
Sundries is nicely positive at this point in the first quarter. So.
It has recovered.
The preponderance of the softness in Q4.
It was really.
Three categories paper and cleaning and personal protective equipment.
Most of that is really because we had spectacular in stocks in Q3 relative to some of our competition and our members took advantage of that in.
And made made outsized buys Laura.
Noted that the.
Combined Q3, and Q4, we actually accelerated in the second half.
And I think that that sort of proofs proves the case together with the fact that.
Back to positive comps here in February so.
It was it was just a Q4 blip and we can continue to build that business as it is an incredibly important part of our overall value proposition to our members.
Great. Thank you.
Sure.
Thank you.
Our next question comes from Mike Baker of D. A Davidson. Your line is now open. Please go ahead.
Thanks, a couple questions on the all important membership issues. So can you just talk about bigger picture, what you're seeing from the members that joined.
In 2020 early in 2020 with the pandemic now we're about two years out from that how are they renewing specifically how is their spending going I know that they start off spending more than a typical new member.
There was some concern that that might fall or be flat or maybe not grow as much as it has for past new members is can you talk about that curve as they are now relatively tenured members.
Yes.
Yes, sure good morning, Mike.
As I talked about in my prepared remarks, our membership.
Has never been stronger in terms of size and quality will continue to grow it over the past five years.
Let me quickly recap some of the key points of their membership count up two points sequentially up three points over last year and up 15 points over the two year.
And growing at a 5% CAGR.
Remember growing nicely up five from last year of almost $8 over the past five years.
MFA overall growing at a 7% CAGR, which is which is incredible.
And.
And another all time high from a renewal rate perspective.
And our tenured base and in our first year base for that matter.
89% is incredible would love to get to 90 in this next new year that will be.
Personally a great marker for us is a better business, we've always looked at that number and admired our largest competitors number that starts with the mylan. So.
Personally that will be a big achievement when we get there.
As we look under the covers all the cohorts of members are doing well they are all visiting nicely renewing nicely.
We're doing more on time than ever which is an important thing.
That includes the Covid Gora members that you're referencing so.
We continue to see great things within the membership that's what really gives us that bullish feeling.
Coming into this new year, and then and then building for the long term as well.
Well then let me follow up on that if I could your guidance for mid single digit MSI growth can you break that down into first.
First of all I think your average club count is going to be up three 5%. So I presume some of it from there, but how much from.
Just adding new members versus <unk> per member you can you sort of break down that mid <unk>.
Does it increase.
You would.
Yes, you've got the right things and we go back to.
So the fact that we've been growing bodies in.
Yes.
Dollars per member going forward.
That's basically what we're thinking of.
With a tinge of.
In terms of conservatism on top of it so trying to.
Under promise and over deliver there I think we can.
Continue to run that we've been on where we've been growing <unk> in the mid single digits and that's that's the guidance that we've issued.
Yes, Okay makes perfect sense. Thank you.
Yes.
Yes.
Thank you.
Our next question comes from Doug.
With think of Jefferies. Your line is now open. Please go ahead.
Thank you good morning, everyone. We had two areas. We wanted to unpack. The first is your new innovation lab store in Rhode Island, If you could talk a little bit about just the strategy.
Behind that is is it a true prototype test or are you testing things for your larger format stores.
Yes, good morning stuff.
Let me talk a little bit about it in.
Maybe I'll ask bill wanted to fill in any gaps that I have.
We're first and foremost looking at it really as an innovation lab. So one of the things we're trying to do here in this company is install a culture of growth and that means we need to up the innovation quotient in the business and one of the ways to do that is to give people the freedom to do it.
And having a place to do it that's the safe place to where we can tinker and try new things is really what we're after and so it will be.
A different assortment initially then particularly.
Any particular club that we have today it will be presented differently.
We will have a different way to do product demonstrations.
Different labor model different front end model with.
Our focus on getting people out of the building.
More quickly than they might get out of the building today in a traditional club all sorts of different things that we'd like to.
Try out see what works and then take what works and poured it back to the mothership.
If it becomes a new growth vector for us if it really works in its own right that would be wonderful it would be a real.
Asymmetric growth chance, where.
If this thing doesn't work.
We lose a few million dollars and trying new things if it does work. We can we can open a whole lot more new boxes, that's not really what we're thinking of at this point, but it could end up that way.
We will think.
A stellar success, if we can learn a few things about.
How does show our members new Assortments, how to do product demos of the right way how to be more efficient at the front and how does it deliver value in a truly convenient fashion if.
If we can learn things about that to bring back to the chain. We will think it's very very successful.
Do you want to add anything so yes I.
I would just add stuff its all around convenience right and as I step back and think about our digital business. We talked about 1 billion digital sales with 80% being fulfilled either bulk curbside or same day.
This becomes a little bit of a test around how what are the other ways that we can bring convenience to our members and if we can do with the smaller formats. So think about.
The ability for a member to quickly get into how to get everything they need the lunchbox, while you'll still be able to access all the value that we offer through our full size boxes.
There could be something there. So we're excited to get it open we're excited as Bob mentioned too.
To get some testing and learning done.
And we will see how it goes here.
Great. That's helpful and one for Lora is just on the relativity between sales guidance and earnings guidance I'm wondering if you can help us a little bit in the middle of the P&L, how youre thinking about labor cost pressures any sort of supply chain carryover pressures into the year and I think you mentioned omicron in your remarks, just thought it was.
Relative to both customer flow and some of your labor.
Absenteeism, just talk a little bit about what youre seeing as we kind of emerge on the backside of armour com. Thank you.
Yeah, Thanks, Jeff So.
The way you should think about it is.
Just as we guided at if you break that apart there is certainly a a bit of deleverage in the business.
Part of that is our wage investments that we've talked to you in prior quarters and part of that is really a growth story and the ramp up of our new clubs.
So we're at a cadence that we haven't been at in the recent years.
So as you think about adding 10 new clubs.
Or 11 with the one that carried over from this year.
Compared to.
Where we performed this year with adding five.
That's a relative increase and you would you would know that our stores.
Don't scale.
Until future years, so <unk> got a little bit of a drag from just our investment in the growth going forward.
Maybe I'll put a finer point on that stuff. So you've got a 14 or $15 million headwind just in preopening costs going from five new clubs to <unk> 11 and <unk>.
Then you have what Laura is referencing which is which is actually a.
A very good story right will open 11 boxes, so those boxes open width.
Full occupancy costs for labor.
Full utility is all those types of things, but not full sales of the sales scale over a couple of years and so what youre seeing there is that labor investment, partially but also partially this growth story, which is going to unfold over the next few years.
Thank you that's very helpful.
Thanks for the question.
Thank you.
Our next question comes from the line of Edward Kelly from Wells Fargo. Your line is now open. Please go ahead.
Yes, good morning, everyone.
I wanted to just go back to the Q4 comp just quickly I don't want to beat a dead horse here, but.
Just any more color on the supply chain issues and how that evolved and then how.
It got fixed so quickly so that.
It doesn't seem to be impacting.
Q1, you mentioned confidence in.
The weakness is not assortment driven maybe just kind of elaborate.
On that and then in food the underlying comp also decelerated there despite sort of behind the crime and inflation. So just just thoughts on that side as well.
Yeah. Thanks for the question good morning.
Our food business did incredibly well during Q4.
<unk>.
It was up five and it had a 23 stack on it. So we're very very happy with the way that business is continuing to run.
It's been the core of the business for a long time.
And.
Q4 was another another great quarter for it.
As we talked about the <unk>.
The softness in sundries and GM.
We are really two different stories sundries was really a pull forward for the most part and MGM was with supply chain and assortment and a little bit of promotional cadence. So let.
Let me pull that apart for you so.
Key Q4 categories, like Tvs, and electronics and seasonal suffered from some supply chain challenges when we talked to you. All in Q3, we we pointed out we had more inventory.
Going into Q4 than we did the prior year, but we werent sure. If we had the right inventory I think what we found out is we didn't have the right inventory. So take Tvs as an example of that we had plenty of.
Big expensive Tvs and not enough of.
Smaller value Tvs and not that seem to be what the consumer wanted from us in Q4, So we were a little bit running behind trying to.
Squeezed some of those Tvs out of our suppliers and were not as successful as we would've liked to have been.
We can we can fix that I think the market will fix that overtime, just just a supply chain challenges start to resolve.
Tvs.
Comes up.
Yeah.
Lesser important category in Q1 for instance than it is in Q4.
Seasonal will will be a continuing.
I think a continuing issue as we try to.
Make sure that we have the right assortment.
The right levels of Assortments.
And then the rest of GM I think is a long term build as we.
Install new talent and new processes and get get the assortment to where we want to be so.
As I said earlier I think I think that's a little bit of a long term story.
And we will continue to work to get it from where it has to be about a quarter of our business.
Sundries.
As we talked about a couple of other questions.
And it was really that pull forward and has.
<unk> gotten back to positive comps here.
In the first quarter so.
I think thats just.
A one quarter blip in that in that business and we can.
Look forward to having a good a good first quarter here.
Great and just one follow up for you so on berries and fresh I guess right I mean fresh for a long time has been.
The big opportunity for you can you just talk about how.
So it changes things for you and.
How quickly can you progress down the road sort of leveraging leveraging that into the fresh category.
Yes.
But this is another long term build for us so our first priority with <unk> is to make the acquisition happened without any disruption in our business. That's the direction that I've given the team that's what they're working on.
We're really trying to make it invisible to the member to our team members to our entire business.
We're incredibly excited.
To bring.
To bring the borrowers facilities and their team members into our family they've been wonderful partners they've really been.
Partner that highlights.
Our culture of service.
As their client into our members they really try and look through us to our members. So they are very much aligned from a culture perspective with with our company and we're thrilled to bring them in and allow us some some some flexibility and some.
Lesser risk profile as we go forward.
Here's how we're thinking about the upside for it there are certainly some.
Some financial reasons to do the deal certainly some synergies that are out there, but that's not why we did it we did it to derisk the business and we did it to help ourselves grow.
<unk> is the core of the business. It is the reason why people come to our buildings Thats. The reason why we get them into by general merchandise and every other thing we sell them.
But we have tremendous opportunities to make our assortment our selection our pack sizes or freshness.
All all better Theyre all good today, but they can be better.
And.
Having control of the supply chain.
As far back in the supply chain as we can get it will help us to do everything we want to do in those businesses.
Here's an example, our clubs currently order on a two day basis. So they order today and they get it two days from now we can trigger the supply chain to go to a one day order in which we've already started to do.
We can.
Take categories that are particularly sensitive to freshness issues like berries and.
<unk> optimize the supply chain so that our members are getting the best strawberries that we can possibly give them.
It also has some opportunities to go even further back in the supply chain. So think about prepared foods I mentioned that quickly in my prepared remarks.
As a small business for us it is a big business for some of our competitors.
We've had trouble in doing it.
In the past and not losing a tremendous amount of money from a salvage perspective, if we can do it.
At facilities close by to two borrowers in our commentary format and run it through our existing supply chain and we can do it in a way that is cost effective and also gets the product to our members much sooner than the way that we do it.
In the past and so we.
We will look for those opportunities to do that over time, none of them are are easy or quick.
So don't think that we will make tremendous changes in this fiscal year, but over time. This will really give us a foundation on which to build.
Alright, thank you.
You bet.
Thank you.
Our next question comes from the line of Paul <unk> of Citi.
Your line is now open. Please go ahead.
Hey, everyone. This Brandon Cheatham on for Paul Thanks for taking our question I wanted to get into the sundries.
And I was just wondering what do you see that gives you the confidence to say the adjustment in the assortment did drive some at least temporary decline.
And maybe if you could talk about how does that work do you test some clubs in.
<unk> been rollout to others.
You saw kind of similar results there.
I have a follow up.
Yes sure. Thanks for the question so so as we talked.
<unk> talked about we did have some.
Some significant simplification and several sundries categories during the quarter.
Let me, let me back up and tell you what we're trying to do there.
We are trying to set our assortment in a way that makes it easy for our members to shop. It makes it easy for them to see our selection makes it easy to see the value that we offer the reality is in many of our sundries categories. The assortment is too cluttered, we don't get credit for the assortment that we have and we don't get credit for the value that we have.
Almost every piece of math that I've ever seen on this on this subject because the closer we get our assortment to our club competitors Assortments better our category closure rate gets meaning the more the more members participate in the category and the more sales that we get.
That's what we're after we're trying to get more more credit for the Assortments that we have.
We have done extensive testing.
What we need to do in many categories. These first categories that we've done we certainly tested in a number of clubs.
<unk> saw a benefit after.
And after we made these changes and that's effectively what's happened.
Here in the.
In the wake of those simplification efforts that we put forward at the end of Q3 and now into Q4.
So that that does come with a touch of softness as we make the initial changes and we did see some of that in the fourth quarter.
It wasn't the primary driver of Q4 comps, but.
But certainly was there.
But.
The longer we go out from those initial simplification efforts the better the sales are getting there.
Certainly these categories are outperforming their pre simplification comp and they are outperforming.
On simplified.
Comparable categories and so we're confident that this is the right thing to do.
To get our assortments to be in the right place Theres, one great byproduct to do it too which is our margin rate is much stronger in these categories that have been simplified so over time, if we can get more sales and more margin.
That's a winning proposition and that's that's really that's really what we're after.
Got it could you break out some of that margin unlocked potential.
And then we have some inflation headwinds that may be modeling that story and then what is considered in.
And that SKU reduction margin on block in.
In 2020 guidance 2022 guidance sorry.
So I don't want to get too far in the weeds.
On the margin point that certainly we did see some some uptick on margin rate that did help us.
In the fourth quarter.
Not a primary driver of our outperformance in margin in the fourth quarter, and we don't expect it to be that way going forward.
What we're trying to do is get the assortment in the right shape. So that we can show the right value to our members we're not.
Really trying to do.
Mix up.
Our primary objective of this effort is really about getting the assortment to be the right place.
So that we get the credit for the selection and the value that we provide.
Got it.
Thank you and good luck.
You bet. Thank you so much.
Thank you.
Our next question comes from the line of Repass Paris.
<unk>. Your line is now open. Please go ahead.
Good morning, Thanks for taking my question. So I wanted to go back to your full year comp outlook low single digit growth.
You guys are building in for inflation, and then how youre thinking about potentially some food away from home normalization as well for the year and then Brian just from a category perspective would you expect growth on both the grocery and GM side for the year.
Yes, good morning, <unk>. Thanks for the question so.
Let me tell you in big Big building blocks, how we're thinking about the comp.
We've got one.
One significant headwind, which is the reduction of stimulus.
And we've got one huge tailwind which is inflation.
Those two things we plan to do more or less offset during the year.
So that's a point of clarity we should we should make our guidance does include the effect of inflation, we have not.
We've not done that.
In the past and so as you think about think about that please don't layer on some giant.
Inflation assumption on top of the low single digits, we've already built that in.
We have a number of things underneath those two headwinds and tailwind.
<unk>.
You brought up food at home normalization, we do have something built in for that we're not seeing that as a tremendous headwind at this point, we do think we've gone through.
Enough of the pandemic that people's purchasing habits are largely going to be sticky.
Do have.
A low single digit headwind associated with that but not.
Not anything dramatic.
We do see a great tailwind from the continuing growth and strength of our membership base.
That will more than offset the food at home.
Normalization that we see.
And then the continuing improvement in our merchandising.
Efforts that we've talked about.
Along with.
Along with new.
New efforts like co brand and unlimited deliveries.
And all of the things we've talked about in our prepared remarks, so all of that mixes out too to low single digits to us.
And it's probably.
More weighted towards the food and sundries business less so towards the general merchandize business for this year.
Okay, great. Thank you.
You bet.
Thank you that's all the questions. We have time for today, So I'll pass the conference over to the management team for closing remarks.
Great. Thank you everybody for your attention for your support and for your questions today.
If I were to leave you with one thought is that this company is better than it ever has been we've.
We've made great strategic progress in our membership and our merchandising.
<unk> our value conveniently through digital we've got the best real estate.
Portfolio, we've ever had.
Moreover, we didn't talk about it at all today, but I believe we have one of the best management teams in retail our talent level at the top of this company is incredible and I would like to thank that team for all the things they have done so far.
Together and all the things they will do in the future so with that I wish you. Good luck. Thank you so much.
Sure.
Thank you. This concludes today's conference call you may now disconnect your lines.
Okay.
Sure.