Q1 2022 BJ's Wholesale Club Holdings Inc Earnings Call
This year.
Our recent acquisition of our perishable distribution network from virus logistics will support our future growth efforts.
And with this environment of high inflation and waning government stimulus stretching consumer wallets value is becoming a necessity and purchasing decisions being made today.
As a result, the club channel remains more relevant than ever.
And we are delivering more value to our members while executing on our key initiatives to drive membership lifetime value.
Our performance in the first quarter was strong as we navigated what is already shaping up to be another dynamic year here in 2022.
Our first quarter comp sales were up over 4%.
Adjusted EBITDA grew 9% to $221 million and.
And adjusted EPS grew 21% to 87.
Our comps were driven by significant gains in traffic and market share and.
Our sales were led by our grocery and perishable categories.
The current consumer environment in the gasoline business drove continued increases in comp gallons up 23% versus last year and up 51% on a two year stack basis.
This dramatic increase in market share in the rapidly increasing price of gasoline during the first quarter.
Drove traffic into our clubs as members continue to recognize the value of their bj's membership.
We made further progress in the first quarter on our strategic priorities, which are growing and retaining members.
Delivering value improve.
Improving convenience with digital.
And expanding our footprint, let me briefly touch on each.
Our membership stats are as strong as I've seen in my history with the company.
In the first quarter, our member count grew 5% year over year, reaching $6 5 million members.
We achieved this milestone earlier than expected.
Driven by a combination of strong renewals as well as membership acquisition related to new club growth.
In terms of membership quality, we made great progress here as well.
Easy renewal enrollment was just shy of 76% compared to roughly 72% in the prior year quarter.
Higher tier membership penetration grew to 36% in the first quarter, representing a four point improvement from the first quarter of last year.
Higher tier members are more valuable to bj's, given higher spending and loyalty.
Therefore, as the penetration of these members increases the quality of our membership improves meaningfully.
Not only are we driving growth in membership count in quality, but an MSI per member as well.
In fact in the first quarter, our average MSI dollars per member across the $60 Mark for the first time in the company's history up 5% from last year.
We're also taking meaningful strides toward achieving our targeted 90% tenured renewal rate, having hit a record 89% last year.
Within the membership cohorts that we track, we see encouraging shopping behavior trips.
Scripts are increasing and while we see some pressure on the lower end of the economic spectrum that is more than offset by gains at the higher end as those members increasingly search for value.
We will invest to continue delivering value in order to foster long term growth.
The games and membership count quality in rates over the past quarters and years will power us into the future.
One of the many benefits of our membership model is that it allows us to truly focus on delivering unbeatable value to our members.
Earlier this month, we closed on our acquisition of our perishables supply chain from virus logistics.
I mentioned last quarter that our fresh foods are a major reason why our members shop our clubs.
I think full control over our perishable food supply chain will allow us to provide more value through network efficiencies and also opens the door to long term growth of the business.
There's a lot we can do here to elevate our fresh offering over the long run but in the meantime, we are thrilled to welcome over 800, new team members to our Vijay Stanley.
Improving our merchandising is a crucial element to providing great member experience and the key is having the right talent.
Over the past year, we have been very deliberate and focused on building a best in class merchandising team by promoting our star merchants from within.
As well as recruiting the best talent externally.
And in addition to Rachel Vegas, our Chief merchant, we now have two incredibly talented individuals heading up our own brands and <unk> initiatives.
We also hired a fantastic new head of general merchandise.
Growth in our general merchandise business is at the top of our list of merchandising improvements to come.
The transformation of this company over the last handful of years can be directly linked to attracting and retaining the best talent.
<unk> those improvements is my first priority.
With respect to our Assortments improvement initiatives, we continue to make progress on our sundries simplification work in the first quarter.
Our clubs typically carry more skus in our warehouse appears.
Compete and fewer categories, thus eroding our members' ability to efficiently shop our clubs.
We're looking to change that by reducing Skus and categories, where we feel there is unnecessary choice and introducing new categories or increase in skus and categories, where we feel there is too little choice.
A simplified categories performed well in the first quarter and are much easier to shop and service.
As you know one of our ongoing initiatives is increasing the penetration of our own brands Wellesley Farms' in Berkley Jensen.
We continued to gain traction in the first quarter with own brand penetration up 200 basis points to an all time high of 24%.
I can't think of a better time than these economic circumstances to lean into our own brands showcasing value deepening member loyalty.
A recent example of success here is our new Wellesley Farms' single Cup coffee pods.
Which we introduced in March.
Based on an understanding of our members' needs an extensive benchmarking of competitive offerings, we invested in a better quality product.
And deliver savings for our members, bringing our price per cup down by 20% and.
And giving our members more than 40% savings per cup against branded competitors.
Eight weeks and we're already seeing strong sales and repeat rate. This is just one example of our efforts to broaden our own brands reach.
On the digital front, we are driving robust growth across all of our digital channels, particularly in brokerage and curbside.
We also continue to expand the ways in which our members conveniently shop with us.
We know that digitally engaged members tend to have higher average baskets and shop with us more frequently.
And members, who make more trips have a higher likelihood of renewing.
Our growth in digitally enabled sales continues as we develop new offerings like our partnership with door dash and strive towards frictionless shopping.
We believe that adding convenience shopping offerings to the significant value offered by the club channel as a long term winner.
We also launched same day select in the first quarter, which offers bj's members the ability to pay a onetime fee for either unlimited or 12 same day grocery deliveries over a one year period.
While it's still in the early days, we are encouraged with the adoption rates and are thrilled to see our efforts resonating with our members.
Finally, we remain on track with our real estate plans and our confidence in our expansion strategy continues to grow with each new club opening.
Year to date, we have opened three new clubs in two new gas stations. This includes our small box pilot Vijay market in Warwick, Rhode Island.
Bj's market is about half the size of a typical club.
It will serve as a place where we can test assortments displays product demonstrations and convenience initiatives and then apply those lessons across the broader portfolio to strengthen our operations over time.
We continue to expect to open a total of 11 new clubs this year.
And see a path to opening another 10 next year.
I am proud of the significant transformation. We've made at this company. We are a much stronger company with a clear path for sustainable long term growth and value creation.
It is evident in our membership base of digital business and footprint expansion and our conviction is further validated by our share repurchases executed in the first quarter.
These are turbulent economic times.
<unk> is continuing gasoline prices are high in last year's stimulus benefits are winding down.
In light of all of this we've continued to invest in our value proposition.
In fact, our internal competitive pricing benchmark show, our pricing positions have improved over the past few quarters.
A good example is our signature rotisserie chicken, which at 499.
Maintained industry, leading pricing despite robust inflation impacting this item.
We've made similar investments in select categories, such as paper and water, which we know are key member value items.
These are the times that our business and the club industry overall was made for.
When a consumer wallets are pressured they search for value when they search for value they come to us.
We believe we are well positioned for the future.
Our results remain a testament to the strength of our team members and their continued dedication to the company in serving our members.
To our team members who are listening in today. Thank you again for all of your hard work.
With that I will turn it over to Laura to provide more details on our results and outlook for the rest of the year.
Laura.
Okay.
Thank you Bob.
First I'd like to quickly share Bob's gratitude for our team members across our clubs distribution centers and home office. This is.
Success of our company as a result of their hard work now lets dig in to our results.
Net sales for the first quarter or $4 4 billion.
A 16% increase over the prior year quarter.
Merchandise comp sales, which exclude sales of gasoline increased by over 4% and were driven by traffic growth.
Our two year stack.
Negative, 1%, reflecting a three year stack of over 26%.
As our business continues to settle into a higher normal base than pre pandemic levels.
Comps in our grocery parish of all and Sundry division grew by 7% in the first quarter, which equates to down approximately 3% on a two year stack and up nearly 30% on a three year stack.
This division was led by continued strength in our food business and particularly in grocery where comps were approximately 15% in the first quarter and up 3% and nearly 36% on a two year and three year stack respectively.
Our general merchandise and services Division comps were down 10% for the first quarter and up 22% and up 19% on a two year and three year stack respectively.
As discretionary spend normalizes towards a new higher base from the past two years.
Weather also played a role in our first quarter comp.
Our core northeast markets experienced cold and rainy weather.
General merchandise comps and our south eastern clubs were three points better than the rest of the clubs across the chain.
As we discussed last quarter and Bob reiterated in his remarks today, we are experiencing the highest levels of inflation in several decades and.
In fact cost inflation accelerated sequentially in each month as we progressed through the first quarter.
We also saw significant increases in freight costs that corresponded to the increase in the price of diesel fuel.
Despite these pressures, we manage margin rate well, while making investments in key items to maintain outstanding value for our members.
Digitally enabled sales for the first quarter grew 26% year over year and over 400% on a three year stack.
80% of our digitally enabled sales are fulfilled by our clubs with services like buy online pickup in club curbside and same day delivery.
And our gasoline business, we continued to gain significant market share as retail prices increase.
Gas gallons sold at comp clubs grew by approximately 23% in the first quarter outpacing the overall market by a wide margin.
This growth combined with higher than normal gas margin resulted in gas profit that significantly outperformed our internal plan.
Membership fee income or MSI grew by 12% during the first quarter to $97 million and underscores the progress we have made improving the core of our business we.
We saw strong growth in new members renewals trending well and we are thrilled with the continued success we are seeing in our membership kpis.
As Bob noted our penetration of higher tier memberships increased to an all time high of 36% as we continue to improve the quality of our membership base.
Moving onto gross margin, excluding the gasoline business, our merchandise gross margin rate decreased by 30 basis points.
While we passed on a majority of inflationary cost increases we did make tactical investments in some key items right.
Great was also pressured by increasing supply chain costs during the quarter.
SG&A expenses for the quarter were $635 million a.
The year over year increase was primarily attributable to increased labor costs associated with the wage investments we made last year.
Higher occupancy expenses and other costs incurred to drive our strategic priorities.
Our first quarter adjusted EBITDA grew by 9% to $221 million, reflecting sales growth and outsized gas profits.
This quarter, we incurred nearly $8 million of one time costs related to our birth acquisition, which we closed on may 2nd these.
These costs were adjusted for in our adjusted EBITDA metric.
Adjusted net income for the first quarter was $118 million or <unk> 87 per share and reflected a 21% year over year growth on a per share basis.
Our 21% tax rate within the quarter included a benefit of $8 four.
Tax windfall compared to $3 $1 million in the first quarter last year.
We anticipate the tax rate for the remainder of the year.
Normalized at approximately 26%.
Our earnings growth continues to highlight our ability to prudently manage costs throughout our P&L in a highly inflationary environment as well as the benefits of a low lower share count.
Our balance sheet remains strong as we ended the quarter with less than one turn of net leverage as measured by our net debt to adjusted EBITDA.
With respect to our inventory levels. Our teams have proactively worked to stay ahead of supply chain challenges that have hampered our business last year.
We have also opportunistically made the decision to buy and inventory earlier than usual.
Partially to combat inflation heading into the second quarter.
These actions combined with the impact of cost inflation have resulted in a year over year increase in our balance sheet merchandize inventory net of accounts payable of $98 million.
As we allocate capital going forward, our first priority remains growing our business.
Investments to support membership digital and our real estate growth plan will be funded by these cash flows and enabled by our strong balance sheet.
We also believe that share repurchases remain a good use of excess capital and expect to continue buying back shares opportunistically.
At the end of the first quarter, we had $435 million remaining under our $500 million buyback authorization.
Let me now touch on the current out look for the year.
Our first quarter results were generally in line with our expectations with the exception of a stronger than expected gas business.
While our gasoline business has significantly exceeded our plans for the first quarter as we sit here today, we are back to levels of profitability that are in line with long term historical averages.
Given the lack of predictability in the drivers of gas we continue to carry the same Phil the soft call approach of modeling our gas business through the rest of the year.
That is assuming normal profit per gallon with a slight year over year volume increase over the next three quarters.
As Bob mentioned in his remarks, we are navigating a dynamic macro environment that can create considerable variability variability in our operations, including record levels of inflation and waiting stimulus.
That being said these circumstances have also resulted in a stronger propensity for customers to gravitate towards value and we believe our business is favorably positioned to continue to strengthen membership gain market share and grow member traffic.
Taking all of these factors into consideration our fiscal year 2022, EPS outlook of flat year over year remains unchanged as we believe our first quarter excess gas profits will be largely offset by heightened margin pressures driven by growing supply.
RIN costs.
Finally subsequent to the first quarter end on May 2nd we closed on the acquisition of our perishable distribution centers from birth.
From a individual P&L line item view, we expect minimal impact for each quarter and remain confident that the acquisition will deliver approximately $20 million of EBITDA and seven of EPS for the year.
As a reminder, this expectation is already embedded in our flat EPS guide for the year.
Before turning it back to Bob I'd like to reiterate our confidence in the strength of our business and the transformation we've made at the company.
As a result of the fundamental improvements in our membership our footprint expansion strategy and the structural advantages of a warehouse club model. We believe we are positioned to deliver a better growth profile than prior to the pandemic.
This should result in a long term algorithm of mid single digit revenue growth.
With that I will turn it back to Bob for closing remarks.
Thanks, Laura I'd like to conclude with some final thoughts.
I remain excited about the future of this company anchored by the continued progress we are making in our core strategic priorities.
Growing membership size and quality, we're providing great value and convenience to our members further accelerated by our digital efforts.
We are relentlessly working to improve our merchandising.
And we are broadening our reach into new markets and solidifying our brand and existing ones.
Our efforts to fundamentally strengthen our business served us well through the pandemic and I believe our business model will continue to resonate with members in the current environment.
We remain focused on what we do best.
Delivering great value.
This was evident in our growth in traffic across our clubs during the first quarter and we believe we will remain favorably positioned to help our members stretch their purchasing dollars when times are tough.
I'm incredibly proud of our team.
I'm honored to be working alongside them as we continue to serve our members provide unbeatable value and grow our business.
I'll now turn the call back over to the operator to begin the Q&A session.
Perfect. Thank you.
We'll now start our Q&A session.
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And our first question comes from Robert <unk> at Bank of America. Please go ahead. Your line is open.
Good morning.
Great quarter.
Two questions one was.
Bob I think you mentioned that the.
You are seeing some lower end customer pressures can you talk more about the behavior changes that you're seeing in and how thats different versus the higher end customers and then the <unk>.
Second question is just maybe could we get a little more color on the buying inventory early and costs going up.
More help on how to think about.
Timing of that impacting or not impacting margins.
As we move through the rest of the year.
Thanks.
Hey, Robyn thanks for your questions.
Look we had a we had a fantastic quarter.
From a topline perspective, we thought an incredibly demanding environment.
Membership was off the charts good right the membership count up five against last year up to against Q4.
The quality of the membership.
Incredibly.
In terms of higher higher tier penetration easy renewal all of the things that we track have you sort of Peel back and get to your core question.
In terms of what are these what are these members doing all of the the income cohorts that we track.
We're a little bit better than we thought they would be.
The core hypothesis that we had going into the quarter was given the roll off in stimulus we would see some.
Some headwinds from our lower income perspective.
But we would we would also see some some tailwind at the top of the house with higher income folks and that's exactly what we saw.
Every one of the income cohorts that we track is spending well.
Versus our expectations. So we're very pleased to see that.
We certainly saw more.
More traffic in the higher income cohorts as they search for value in these.
Tough times, we also saw a gas driving a tremendous amount of traffic.
Certainly it drives traffic and a normal a normal world that drives renewal rates as well.
But as you get to levels of the price of gasoline that we've seen in the past couple of weeks.
Weeks or months, certainly people care more about saving money and gas and we saw that in our golf clubs.
As well so all in all a pretty pretty strong quarter from a traffic perspective from a spend perspective.
From a membership perspective.
Your second question on inventory.
Maybe I'll I'll take quickly and then work and so on.
Our inventory was up about 30% year over year.
A large portion of that is just the cost of inventory going up.
We made some strategic choices to bring in extra supplies from a food business perspective about the last thing I'm worried about it.
More inventory in our food business given.
How strong that is and then certainly from a merchandise perspective, we've got more inventory last year was a little bit light. This year is probably a little bit heavy but we don't see tremendous markdowns coming.
Through our general merchandise business, and maybe I'll ask Florida comment as well.
Yeah, I think you got that right Bob the only thing I might add a little context on that.
The general merchandise comment you made so.
That inventory I think Bob said.
Feel okay about.
No.
Emphasize that.
We don't think that there's markdown risk on it as of right now.
We feel well positioned our general merchandise inventory is not heavily.
<unk>.
Fashion based or or something that we think about <unk>.
Risky as we look forward to the remainder of the year.
Got it that's really helpful. Thanks, so much.
Perfect. Thank you very much for your question Robert.
Our next question comes from Peter Benedict at Bat piece. Please go ahead. Your line is open.
Sure.
Hey, good morning, guys. Thanks, Thanks for taking the question.
I guess first one would just be around inflation.
You talked about record levels I'm not sure if you'd be able to quantify maybe what the inflation impact was on your merch comps and then and then on MSI on the fee income obviously, great growth there.
Any reason why those numbers wouldn't continue to build sequentially.
Sequentially in dollars and just how youre thinking about the growth in <unk>. This year. Thank you.
Hey, Pete Thanks for the questions.
So certainly inflation was a big impact on the quarter I think we had talked about about four points of inflation in Q4. It is.
It's meaningfully higher than that at this point, so think about maybe seven points of inflation.
As Laura talked about it did increase in every month of the year I think it's probably going to continue to increase from here.
Uh huh.
That's that that drives.
Tough operating environment, it drives a tough consumer environment, but.
Frankly, I think our merchants and our team overall has done a fantastic job managing the inflation, we've been able to pass through most of it.
But you know the higher it goes the more we more time, we have to spend with our suppliers managing.
Managing the cost of managing what we pass through.
We need to.
You need to do what we can to help our members navigate this path.
Consumer environment.
Certainly from a membership perspective as I said earlier, we're very proud of the results that we had.
Renewal rates are higher we were able to get.
A ton of new members for the three new clubs that we opened during the year and we.
We exceeded our own expectations and pretty much in all things MSR related.
Including the $1 per member as you mentioned I do think I don't want to jump in front of Lora guidance, but I do think we should see a little bit.
Better MSI performance than we initially thought and that should carry through the remainder of the year as well, maybe I'll, let laura pile onto that comment.
Yes, I think I think that's right Bob.
The thing I might add is.
To think about.
The timing of MSI and how it rolls into the P&L. So some of that is coming from.
The record levels, we had in the fourth quarter of last year, and we're getting the benefit from all of those members that we added in the fourth quarter of last year.
Rolling through so.
I think all of.
Everything that Bob said it is a fair point from a full year and how to think about it.
It should continue.
We're really happy with all of the membership stats that we talked about including.
I think the one thing is <unk>.
<unk> renewal and all of our members that are included.
In that program and that certainly helps.
No.
That's super helpful. If I could just one quick follow up just on the pricing and deflation comments Bob.
You talked about some strategic price investment that was going on I am just curious maybe where.
Where do you feel like that's most useful and how the gaps are.
Right now in grocery and gas relative to maybe where they have been thank you.
Yes, no doubt, but thanks for asking that.
Simply put our price gaps are better than they've been in a while rather than just from last quarter better than last year.
Uh huh.
We've spent a lot of time figuring that out.
Very detailed analysis every every day every week every quarter at this point given the.
Pace of inflation.
Our team has done a wonderful job managing it I feel great about where we are from a pricing perspective.
And obviously, that's that's driving revenue.
Our traffic.
And you bring up gas that's important as well.
So lots.
Lots of gasoline.
Not something we look to make a tremendous amount of money on but certainly something we look to provide a tremendous amount of value on to our members.
And we.
We did a nice job.
With that during the quarter.
Pricing of our gasoline as low as we can.
We can do it and using that to drive traffic into our buildings. We also.
<unk> built our co brand credit card portfolio.
Almost a million and a half cardholders at this point.
Those folks get 10 cents off per gallon.
Every day at the pumps on a number of different promotions to try and get people.
Who are visiting our gas stations to get inside the club during the during the same trip.
And I think our gallons gallons.
Gallons really show that right up over 20% during this quarter up over 50% on a two year stock basis.
A tremendous effort to merge those two businesses and really take that value that we show every day at the pumps and convert that into traffic at our registers inside the store.
No that's great Alright, I'll pass it on thanks, so much guys.
Thank you so much for your question.
Next question comes from Mark Mike Baker at D. A Davidson. Please go ahead your line is open.
Great. Thanks, guys.
A couple of I suppose follow ups, one on the general merchandise and your lack of <unk>.
Mark down risk.
Maybe this is too short term question, but how much of that is seasonal and a lot of other retailers have said that the weather has been better in may and thats allowed them to work through some of the seasonal product and see a rebound there is that one reason why.
You don't see markdown risk and how concerned are you that target Walmart their inventories were up massively and theyre going to start marketing stuff down there.
That impact you at all from a competitive standpoint, even though you don't think you'll markdown staff if they do.
Have to follow.
Yeah, Hey, Mike.
Go ahead go ahead.
Laura.
Okay.
I'll jump in Mike and.
And then maybe let but Bob Bob jump in after.
Mike My comment earlier on the general merchandise.
As was pointed at it not being fashion. So so no markdown risk you got that right I would say it is.
Heavy from a seasonal perspective, so think about.
Everything kind of spring summer.
Yes.
Your comments on target and Walmart and their markdown cadence I think thats something we deal with on a regular normal operating basis.
We will continue to watch the markets figure out what's going on make sure that we're delivering the right price and value to our members.
But as of right now we feel okay about where we are in and we'll see kind of where the.
Quarter goes.
Okay, and if I could ask one more.
Ill follow up just on the.
The lower income customer can you give a little bit more detail on what you're seeing there in terms of is there any trade down.
Maybe that's harder to senior limited assortment, but is there is it a trade down as your lower units per transaction is it fewer trips than you.
Than others, what exactly you're seeing too.
That lower income customer thanks.
Sure.
Yeah. Thanks, Mike as I said earlier, we're seeing great shopping habits across the income cohorts.
We're seeing more trips, where youre seeing a little bit of trade down.
Take a look at our our own brand penetration up 200 basis points. So that's certainly part of that is us driving that business, but part of it is undoubtedly people searching for value.
The.
That doesn't necessarily surprise us and then as I said, the higher income cohorts are shopping meaningfully more.
And that's making up for for any pressure, we see a bottom of the house.
<unk> characterized the.
The pressure on the lower income cohorts of as expected, it's not tremendous that's not something that worries us right in line with what we thought would happen.
Uh huh.
The benefit of that.
Income cohorts.
Frankly, a little better than what we expected in that.
It gets to the traffic gains that we saw during the quarter.
Makes sense I appreciate the color. Thank you.
Thank you for your question.
Our next question comes from Edward Kelly with Wells Fargo. Please go ahead.
Hi, good morning, guys nice quarter.
Can we just start with.
My first question is on merchandise margin and can you talk about how youre thinking about.
Second quarter and the rest of the year.
As part of this how harvest pass through expectation of inflation change is accelerating.
And then you didn't mention incremental pressure on supply chain could you quantify that as well as part of all that.
Maybe maybe good morning, maybe I'll sort of set the tone and let Laura fill in.
With any specifics so certainly pretty proud of where we landed from a membership sorry on a margin perspective during the quarter.
We were able to commit inflation very effectively.
As I said pass.
Assets are in a pretty rational basis, we did make a bunch of <unk>.
Tactical investments we talked about.
Registry chicken is probably the headline example, where we haven't moved off the price give them.
Given double digit inflation on that particular item.
Because it's such a meaningful thing to our members similar categories.
Paper and bottled water and things we have been.
Making investments all along in those things and we'll continue to do that but for the most part we've been able to figure out ways to pass through the inflation that we're seeing so far.
Yeah.
<unk>.
I do think we are seeing more supply chain costs, you can take diesel fuel from four bucks for six Bucks.
Without seeing that.
We certainly saw it in the first quarter, we anticipate seeing more of it.
Second quarter and beyond if those.
Those prices continue.
We will obviously work to cover that but I think the risk is there.
Particularly the longer the longer that goes.
And then we've talked a lot about potential for markdown risk, which we think is pretty limited based on what we what we see today.
<unk>.
So.
That is our starting point, let me, let me kick it over to Laura she can sort.
Sort of fill in.
Shifting to the second quarter might land.
We can go from there.
Yes so.
I think as I think about the second quarter.
I certainly think.
As you compare it to last year. There is some pressure primarily from what what Bob just said as diesel prices rise.
There is not much we can do about those so certainly some pressure on merch margins in the near term.
Two other things I would add in there.
As you think about we've talked about our import business. We are relatively insulated from an import perspective just because.
From a mix, we don't have a lot of product that we import on an annual basis.
So think about all of the supply chain.
Issues that continue there and we feel pretty good about that as we look across our peers.
And then the other thing I had.
I'd say is that.
While there are supply chain pressures on on merch margin.
Yeah.
The flip side of that is actually that.
Consumers will feel that as well.
Probably gas prices will continue to rise or at least stay where they are now.
And that will continue to drive traffic and we think.
The value that we can provide to our members they will continue to see that.
We saw in Q1 with traffic patterns, and we think that will continue in Q2. So.
Yes.
I think you've got the story on merch margin there I think the only other thing is on your point about pass through and how much of the inflation. We continue we can continue to pass through.
That's something we'll watch.
We watch it every day, we watch it.
Weeks months.
And we'll continue to react where we can.
If we have to make investments in certain categories. We will continue to do that as we did in the first quarter.
Okay, maybe I'll follow up.
And maybe I'll just jump back into the ones that can put a put a little bit of a finer point on what Laura So we're expecting.
A little bit more margin rate pressure than we saw in the first quarter in the second quarter. So we were down 30 bps in the first quarter or so.
So we're forecasting down a little bit more than that in the second quarter, but.
But a chunk of the traffic that we saw in the first quarter was driven by gas to the degree that gas prices stay high.
I would think that benefits to our sales line again in the second quarter. So as we look at.
Q2, probably a little bit more sales than we than we initially thought a little bit less margin rate.
And more or less the same the same bottom line.
Okay, Great and then just a quick one for you on new clubs, you've opened up seven clubs in the last six months or so just kind of thoughts on what your what youre seeing there.
Yeah, Hey, maybe I'll start off with.
Maybe I'll start it off and let the fulfill them.
Credibly proud of the progress of the real estate team and our team overall has made.
And in expanding our footprint.
As you said, we've done a great job in the last six months great job this quarter three clubs alone on this quarter.
We last talked in and each of them is doing spectacularly well, we look forward to.
Getting about 11 clubs in this year and see if Roger 10 more next year.
<unk>.
And just.
Just very proud of.
<unk> been able to accomplish so Phil wants to take it from there.
Yes sure Ed.
Listen the results have been really good and capped off I would say over the last.
A couple of weeks with probably what was our best membership campaign ever in our opening last week and Lady Lake, Florida.
So both the membership as well as the sales levels in the clubs.
I've been I've been really really promising so far so as Bob mentioned really really happy with the result really proud of the work the team has put in.
Excited for the clubs are going get opened here in the in the rest of the year.
Yes.
Great. Thanks, guys.
Perfect. Thank you so much for that question.
Next question comes from Kate Mcshane with Goldman Sachs. Please go ahead. Your line is open.
Hi, Thanks for taking our question.
I was curious if you could talk a little bit about your thoughts around the cadence of comps.
Throughout the year I know.
Last time, when we spoke with you I think Q3 was one of the.
Quarters, where you maybe had expected.
A tougher compare.
Tougher quarter.
I know, we kept the guidance for the year today, but just how youre thinking about each quarter. When it comes to top line if anything has changed there.
Yes, okay.
I think the general Gist of it is about the same and I'll kick it over to learn a second.
And we thought that Q1, and Q4 will be our strongest and then followed by Q2 and then.
Q3 would be would be likely negative comp I think that that still holds.
Albeit.
Given the level of inflation.
The traffic that we saw in Q1 were a little bit more bullish on.
On the general comp trend of the business. So maybe let me kick it over to Laura she can sort of fill in the expectations for Q2.
Yeah.
That's right so.
I think the.
Framing of it that Bob just gave is is right from a cadence perspective.
I think there is a big piece that will.
Come from from rising prices or inflation so.
I would think about it from a from a cadence.
On and off of Q1.
Q2 kind of hanging around where Q1 was.
And then Q4 certainly.
Will be higher Q3, we continue to think we'll have pressure.
From a <unk> perspective.
As we lap kind of what we talked about last year that that sends.
Sundries pull forward so.
Lowest in Q3, as we view it now.
Thank you.
Perfect. Thank you so much for your question. Our next question comes from Chuck Grom.
Gordon Haskett Research advisors. Please go ahead.
Okay. Thanks, a lot good morning, great quarter can you just provide some comment on the cadence of that.
Comp throughout the period.
And then if it sees.
<unk> started to lift now in the month of May now that the weather started to improve and you talked about traffic driving the comp I was wondering if you could unpack the comp between traffic and ticket.
So hey, Chuck.
So you think the Q1 comp it was it was fairly ratable across the quarter although.
The first month February in the last month April where we're <unk>.
Better than March.
I wouldn't say, it's a meaningful difference, but that's certainly.
March was a touch lower.
As we sit here in.
In may.
The comps the comps look good.
But it is.
It's very early and made the service those Q2 service strange quarter. We've got two holidays Memorial day in the fourth of July on there.
It comes in sales come in chunks, you have to hit both of those holidays in the.
A quarter really well so.
I'm not sure I would read anything into where we are at this point although.
As I said they are they are looking fine.
Uh huh.
And remind me what's your what's your second question was.
Just the traffic versus ticket composition of Macquarie.
That's right that's right so the.
We accomplished was denominated almost entirely in traffic growth.
Basket was about flat.
The rest of it is all traffic we were really pleased with that obviously driven by our membership gains driven by the higher income cohorts that membership spending more making more trips and denominated in.
The gas benefit that we saw as well.
Okay, great and it does seem like you guys are amplifying the gas conversion more than maybe you have in the past of immuno Costco has talked about how you know roughly 50% of the people who buy gas shop, the club and like like for like hours I guess.
Is that the case for you guys. When it gets why do you think youre gaining share now in gas versus more maybe than you've seen in the past.
Yes.
It starts with valued truck right when we have the best gas prices around you layer.
They are on the co brand credit card benefit Youll layer on some of the things we're doing promotional tie the club together with the gas station.
Those are all.
Really what's driving it certainly.
We didn't really have.
The gas business flag in the beginning of a trend on that like like the entire industry. We have been growing at for a couple of years undoubtedly at the beginning of that was people consolidating trips from a from a safety perspective.
But I do think that allowed people to give.
Give us a try understand our value proposition from a gas perspective understand that we're a one stop shop.
Gotcha, Gotcha and get everything you need inside the box.
And.
We're very pleased with the.
20% gallon growth during the quarter actually it was totally unexpected we didn't model that at all.
50% more than 50% two year stack gallon growth so.
I'm very pleased to see that and it all ties back to value. These these times are tough for our consumers and Mrs.
This is the type of environment to the club business and our business specifically was let's make sure we give great value every day and do it on a one stop shop basis.
Okay, Great and then just one quick follow up for me would be just you are not underwriting improvement continued improvement in gas gallons gained correct for the for the balance of the year.
That's.
We're not we're not we're sort of modeling gas, where we always model from a profitability perspective, we do think.
Some increasing gallons is warranted to model, but we havent continued to model 20% gains in gallons.
And as.
As Laura said in our prepared remarks, we're sort of back to normal from a.
Per gallon profitability perspective, as we sit here today so.
Modeling a huge windfall.
Gas prices.
That usually as you know, we don't tend to make a lot of money when.
When gas prices rise in attacks.
And parts of the first quarter as it rose we were losing money every day.
If gas prices were to fall they typically yield higher margins when we fall so.
Uh huh.
So we'll see what opportunities we're not modeling.
Anything greater than our normal.
Our normal historical stance at this point.
Great great. Thanks, a lot.
Thank you so much for your question. Our next question comes from Paul <unk> with Citi. Please go ahead. Your line is open.
Sorry, Paul will now getting any audio from your line.
Unfortunately, I will now proceed with any audio from your line. So we will move onto next question Kaufman from Stephanie Wissink of Jefferies.
Please go ahead.
Hi, guys, it's Blake on for Steph, Thanks for taking our question.
Wanted to ask first on on the ticket versus traffic just to follow up on that was wondering how the flattish ticket growth was versus your expectations.
And just how we should think about that in terms of.
Overall inflation.
Didn't know if there is a tough compare or any mix impacts that might have affected that number as well.
Yeah.
Hey, Blake so.
You know when you when you look underneath the covers certainly certainly traffic growth was very strong.
We exceeded our our estimate for the quarter.
Yeah.
And I would I would expect that to continue given.
Given the environment that we're all facing together.
Certainly what the ticket flat.
Traffic is up that means units are down a bit.
As you unpack that.
Your point on unfavorable lapse comes comes are considered before where you see categories Mike.
PPD and.
And cleaning.
Driving pretty significant unit declines as folks aren't wearing masks any longer than not.
<unk>.
Sanitizing products all over the place.
And certainly our general merchandise units were down a bit.
Given the given the comp there outside of that.
You know what Theyre doing fine and.
More or less in line with our plan. So I think the business is pretty healthy I'd love to see the traffic gains continue and given the membership growth that we've seen and I think that's probably a good bet.
That's super helpful. Appreciate it.
A follow up on that and then I have one more.
On the general Merch didn't know if you could talk any more about you just mentioned some of the PPE categories.
Didn't know if you could talk any more about some of the other categories within general merch and maybe how those trended throughout the quarter, maybe anything along the lines of electronics or bigger ticket or maybe anything that you are trying to.
<unk> really increase the penetration of as you build out that business.
Yeah.
Yeah.
Look I think.
Jim.
<unk>.
<unk> was up against a tough comp with with all the free money that was floating around last year. So.
Uh huh.
Certainly the negative comp was as expected.
Kim across the business, particularly in the home categories that you would you would expect given.
It won't happen last year.
What do you think about seasonal or home or furniture or electronics.
Those categories had a tougher go than some of the other ones.
They were not a meaningful below our expectations.
Given given.
Given the membership on the traffic that we've talked about I think.
I think they are.
Perfectly fine for the future.
And we look forward to showing our members the best value in those categories. So as we go through the rest of the year.
Got it and then last one was on gas I know you've mentioned profit has kind of normalized here into the second quarter I don't know if you talked about.
Are you still seeing a traffic benefit from gas in May and if you could talk about that.
Yes.
Gas benefit on traffic tends to correlate to the absolute price of gas amount to the profitability of gas so.
Certainly.
Gas prices remain high and in fact, they've been going up for the past week or so.
So certainly we're still seeing.
We're still seeing folks in our gas stations.
Improving gallons and improving mix.
Cross shop, where people come in to get gas and that would come into our buildings. We continue to see that happening here in may so far.
Got it thank you very much.
Thank you for your question. Our next question comes from Cristina Goodbye at Deutsche Bank. Please go ahead.
Hey, guys and congrats on a good quarter.
I do have a follow up on gas we did see you running several promotions on the fuel side. So I was curious if there's any way to quantify gasses contribution to traffic in the quarter and and what kind of a customer it is bringing in if it's any different versus your average customer signing up right now and then secondly.
You're building inventory and accelerating receipts.
You did say limited markdown risk based on what Youre seeing today, but I was just wondering how much have you factored in a potential further weakening of the consumer both at the lower end, but also potentially at the mid to higher end consumers.
Yes, thanks for stealing let me, let me take a look.
Take the gas question first so.
We've.
We've seen tremendous gains.
Gains in gallons and traffic is you'll see that we.
<unk> that to continue going forward.
And.
It's about as I said earlier, it's about showing members the best value. We can every every day I don't particularly care, if we make a ton of money in the gas business.
A week or they are a quarter or a year.
<unk> that we use that as a as an avenue to get people into our buildings and it is it is the most understood commodity in the world because theres a price on every street corner.
So people understand what a good gas prices and what a bad one is we try and put good ones up there every single day.
The big thing for us over the past periods of time is how do you.
Joe even more value are there ways to tie the box together with the gas station in a more meaningful way.
Bill is great idea several years ago.
People at 10 cents per gallon gas discounting with the co brand credit card has been a stalwart in that effort.
When we get people into our co brand credit card, we effectively get all of their gas purchases.
They really are.
They really love that benefit.
As you said we've done several promotions.
For a couple of years now actually are trying.
Trying to further that tie between the box in the clubs so.
Promotions, where you perhaps you by.
<unk>.
Particular items inside the box and you can get 10 cents per item.
At the pumps those are funded by our suppliers.
We don't do other ones, where you have a certain basket size, you've got a certain discount on gas.
Again, some some of those are funded by our suppliers.
It's really all about showing the best value knowing that people sometimes make.
Economic decisions.
How about gas, it's a very emotional purchase and we're trying to take advantage of that.
By showing great value every day, and then even better value.
Get into the store. So we'll continue to do that we'll continue to balance.
The traffic of membership gains that we get from that with the overall profitability of the business but.
Again, we're always going to bet on membership on traffic not gas.
Gas profit.
As you think about think about inventory.
Again, we've talked about being a little bit a little bit higher than we would've liked.
Again, some of that inflation some of that the food business, which is totally intentional.
<unk> business is a touch high at this point, but.
Not dramatically so and we don't see tremendous markdown liability at this point in time.
We have taken our best our best look at that given what we see for our membership cohorts at this point in time.
And that continues to be our best guess, where we are.
Our model in Q2 to look a little bit like you won from a spending perspective so.
A little bit of weakness.
And the bottom part of the house and then some strength on the top part of the house. So that's how we thought the year would play out it's certainly how it is going now.
<unk>.
And I don't think that's different in the in Q2 than what we saw in Q1.
Great. Thank you so much.
Perfect. Thank you. Please ask your question.
I will now terminate our Q&A session and this concludes today's call I would like to thank everybody for joining you may now disconnect.
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