Q3 2022 BJ's Wholesale Club Holdings Inc Earnings Call
Hello, everyone and welcome to the Bj's Wholesale Club Holdings, Inc. Third quarter 2022 earnings Conference call. My name is Adam and I'll be coordinating your pud today. After the Speakers' remarks, there will be a question and answer session. If you wish to ask a question at that time. Please press star followed by one on your telephone keypad.
Ill pass the call over to your highest gains.
Please go ahead when you're ready.
Good morning, and thank you for joining Bj's wholesale club third quarter fiscal 2022 earnings conference call on the call today are Bob Eddy President and Chief Executive Officer, Laura Police, Chief Financial Officer, and Bill Werner Executive Vice President strategy and development. Please remember that during this.
Call, we may make forward looking statements within the meaning of the federal Securities laws. These statements are based on our current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectations described on this call. Please see the risk factors sections of our most recent Form 10-K and Form 10-Q.
Filed with the SEC for a description of those risks and uncertainties. Finally, please note that on today's call. We will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance.
With GAAP. Please refer to today's press release posted on our Investor Relations website for a reconciliation of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP with that I'll turn the call over to Bob.
Good morning, Thank you for joining us today.
This morning, we reported another quarter of strong results demonstrating the power of our business model. This.
This was the most profitable third quarter in our history.
Our consistent focus on delivering value to our members, especially when they need it most.
Put us in a position of strength.
Our member base is growing in both size and quality.
We're improving our merchandising to deliver unbeatable value.
We're offering more convenience for our members through a great digital experience.
We are expanding our footprint into new and existing markets and doing it successfully.
We have a great team and a competitive strategy and the investments we continue to make position us well for long term growth and sustainable value creation.
In the third quarter, our comp sales were up nine 7% overall and up five 3% excluding gas.
Our food categories continue to anchor our strength with comps increasing double digits over last year's performance.
When we entered the year, we expected Q3 to be our most challenging quarter from a comp sales perspective, given the difficult compare.
Our business has exceeded our expectations given the continued strong membership and shopping behaviors.
As we've seen all year traffic growth has been a positive driver of our comp and.
And sales per member had been greater than last year in each of our income cohorts.
I'd like to put Q3 in perspective relative to 2019, our third quarter merchandise comp sales or nearly 30% on a three year stack, which is a sequential acceleration from last quarter's results the.
The combination of membership growth higher quality of membership and our club growth continue to highlight our company as a structural long term growth story.
Adjusted EBITDA grew 19% to $272 million and adjusted EPS grew 9% to 99 per share.
Finally, another strong gas quarter contributed nicely to our profits.
Gas is an emotional purchase for many of our members. So we set our prices to showcase value and drive member loyalty.
This led to a comp gallon growth of 11% in the third quarter, despite the broader market decline in gas consumption.
Our 30% two year stack in gas gallons highlights a tremendous gain in market share.
In addition to the growth in gallons our business has been more profitable.
Absolutely in a structurally more profitable than it was a few years ago in the last several years and this year in particular.
<unk> seen increased levels of volatility.
The resulting higher than normal profit per gallon has served as a significant tailwind to our business this quarter and this year.
We are executing on our strategic priorities, which are growing and retaining members, bringing more value to our members through better merchandising improve.
Improving convenience with digital and expanding our footprint. These priorities are key to driving long term sustainable growth in our business.
Let me briefly touch on each.
The long term success of our business is grounded in the strength of our membership in the third quarter. Our membership fee income grew 9% year over year to nearly $100 million.
I'm proud of the progress we've made in growing and retaining our members over the past several years we've.
We've evolved our membership acquisition campaigns to optimize our marketing.
We're utilizing digital capabilities to expand our reach.
Got and smarter about how we leverage data to remain relevant with new and existing members yielding better renewal rates.
And as we enter new markets, we're working to strategically build membership well ahead of our grand openings.
Our member count stands at over $6 5 million members up 6% year over year in the third quarter.
Effective acquisition efforts across new and existing clubs as well as growing digital acquisition have contributed to the increase.
In addition to overall member growth, we are improving the quality of our membership are.
Our higher tier membership penetration in the third quarter was 38% up roughly four points year over year.
Our co branded credit card program has meaningfully contributed to our higher tier membership base and this quarter, we formally announced our transition to capital one.
As we look back the decision we made to invest in lifetime value by creating the best card value proposition in the club space is paying dividends with our cardholder base growing over 10 times since we launched the program in 2014.
As we look to the next leg of growth I'm excited about our new partnership capital one's market, leading customer service and digital experience are widely recognized in the card space and we are especially thrilled to offer an enhanced value proposition to our members as part of this new program.
Our data shows that members with our co branded card have profoundly better lifetime values, driven by renewal rates well above the chain average.
As the penetration of these members increases so does the quality of our membership.
Ensuring a successful transition with capital one will be one of our highest priorities over the next handful of quarters now.
We are confident that this is the right next step for the company as we continue to grow with the best partner in the business.
A final point on membership strength, our first year and tenured renewal rates are improving over last year's levels.
And I believe we will achieve another all time high at year end.
Persistently high levels of inflation are diminishing consumer purchasing power.
In the U S food at home CPI has grown in the double digit territory year over year for most of this year and households, with Wayne and government aid have been further constrained.
Overall energy costs, including gas have come down a touch since summer, but are still running higher than last year's levels.
Our sustained cost pressures continue to weigh on consumers' pockets. We have remained focused on delivering great value to our members.
Specifically, we have continued to invest in price, resulting in significant savings for our members.
In fact, our internal analysis shows that our pricing positions remained stronger against our competitors in the third quarter compared to the same time last year.
Having the right value is especially important to us during the holidays.
This year, our members, who spent $150 or more at our clubs. During the first 10 days of November are offered Turkey for free.
Consider the savings from this one transaction alone our members can save about 25% or more when they shop with us when compared to our supermarket competitors.
That 25% savings from our members $150 basket combined with the free Turkey basically covers a one year bj's membership fee.
This offer and the examples highlighted on our last two earnings calls rotisserie chicken and our deli offering are meant to highlight our outstanding value.
We aim to offer our members as many ways as possible to get a return on their membership fee.
We are leveraging our competitive advantages to drive market share gains in the near term while investing in initiatives to further optimize assortment and deliver more value to our members in the long run.
Our fresh business. For example is a major reason why our members shop, our clubs and we aim to offer the freshest assortment at a compelling price.
Bringing our perishable supply chain capabilities in house with the natural first step in this process. We are now in the early stages of working through everything from sourcing to packaging to supply chain lead times.
All the way to marketing and in club presentation.
In addition to our work in fresh we are leaning into our own brand strategy as our members look to maximize their savings with quality products.
In the third quarter, our own brands penetration grew to 24% despite a difficult compare.
Our third strategic pillar is driving convenience through digital and we are generating robust growth in this area led by <unk> and curbside and.
In fact, our digitally enabled sales are trending towards 9% of our overall net sales this year up from 8% last year.
Digitally engaged members typically have higher average baskets and shop with us more frequently which increases the likelihood of membership renewal.
With the expansion of these offerings are member experiences more convenient than ever and we will continue to invest in enhancing our digital efforts.
Finally, as you know we have dramatically accelerated our real estate plans.
We've opened seven new clubs this year, including our entry into Indiana in September .
Last month, we opened in Greenburgh, New York and we also opened in new Albany, Ohio, a couple of weeks ago, expanding our presence in the state to the Columbus market.
We're almost set to open our doors in Wayne New Jersey. This weekend and we have a few more clubs slated to open over the next few months.
At clubs that we've opened in the past several years continued to perform better than our initial plans, giving us the confidence to sustain 4% to 5% unit growth in the foreseeable future.
Our commitment and ability to bring value to our members remains a powerful advantage in times like these.
As a result, we have grown our top line and market share throughout the year, while navigating a pressured margin environment.
Gas has driven considerable upside to our results granting us the ability to further invest in our members and our team members.
Our grocery business is strong and we feel good about how we're managing our inventory through the holiday season.
There is no doubt that inflation is impacting consumer decisions and it's looking like likely that inflation will continue into next year, albeit at a moderating pace.
No matter, how the macro ends up playing out.
We will remain true to being there for our members and delivering unbeatable value, which I believe will deepen loyalty reinforce our brand and drive long term growth.
Before I wrap up I'd like to acknowledge and thank our team members for their dedication in serving our members and the communities in which we operate.
I am, especially heartened by the incredible support our team members have provided to those impacted by Hurricane Ian.
Our emergency response teams work in the days, leading up to <unk> landfall and short inventory preparedness asset security and the safety of our team members and members.
Our clubs were up and running so long as we deem that safety was not compromised.
Teams worked with our partners to provide essentials, such as water snacks baby formula and cleaning supplies to local shelters.
As they always do our team members showed up for our members and communities through this crisis.
So our team members who are listening in today. Thank you for your hard work.
<unk> make a real difference in our company and in our communities.
I'll now turn it over to Laura to provide more details on our results and outlook for the rest of the year.
Thank you Bob before I begin I'd like to reiterate.
Gratitude for our team members across our clubs clubs support center and distribution centers.
We are navigating a challenging operating environment and our continued strength as a result of our team members' hard work.
Now, let's dig into our results.
Net sales in the third quarter were $4 7 billion.
A 12% increase over the prior year.
Third quarter comp sales were nine 7%.
Merchandise comp sales, which exclude sales of gasoline increased by five 3%.
It was driven by about equal parts traffic and basket growth.
Our two year stack was up 11%, reflecting a three year stack of up 29, 5%.
The Q3 effect of inflation was slightly more than last quarter as we pass on a portion of growing and costs, while maintaining our strong pricing position by strategically investing in our key value items.
Comps in our grocery perishables and Sundries Division grew by approximately 6% in the third quarter up 12% on a two year stack and up 31% on a three year stack.
We grew market share during the quarter and our overall market share remains well above the <unk>.
Covid levels.
Our general merchandise and services Division comps grew by 3% in the third quarter.
The growth was led by optical home improvement and tires, where we've made tweaks to our offering to provide greater value.
Comps in this division were up 7% and up 21% on a two year and three year stack, respectively. As discretionary spending continues to normalize towards a new higher base from the past few years.
Our digital offerings have made the member shopping experience more convenient.
Digitally enabled sales for the third quarter grew 43% year over year and over 280% on a three year stack.
Over 80% of our digitally enabled sales are fulfilled by our clubs with services like OPEC and same day delivery.
Our curbside delivery offering continues to resonate with our members, making up approximately 60% of our co pack business.
In our gas business, our comp gallons grew by 11% in the third quarter, which performed in line with our expectations of continued market share gains our gas margins on the other hand trended higher than our expectations and resulted in gas profits that outperformed.
Our internal plans.
Membership fee income or MSI grew 9% to $99 5 million.
In the third quarter and continues to underscore the progress we have made improving our business.
We are pleased with our membership trends, including higher tier penetration.
Renewal and first year and tenured renewal rates.
Moving on to gross margins, excluding the gasoline business, our merchandise gross margin rate decreased by 30 basis points, primarily due to a higher supply chain costs and inflation.
That has remained consistent with prior quarters this year.
Let me touch briefly on inventory, where our teams have made significant progress.
We ended the third quarter with $249 million more inventory on our balance sheet than last year.
Excluding the impact of inventory on our books as part of the acquisition of our perishable distribution centers, our inventory increased by $152 million.
Or 12% year over year, and the growth made up of inflation and new club growth.
SG&A expenses for the quarter were $674 million.
Year over year increase was primarily attributable to increase labor and occupancy costs as a result of new club and gas station openings as well as $6 million in costs associated with the transition to our new club support center.
Our third quarter, adjusted EBITDA grew by 19% to $272 million.
<unk>, our sales growth and outside gas profits.
Finally, adjusted net income for the third quarter was $136 million or <unk> 99 per share and reflected a 9% increase year over year growth on a per share basis.
Turning to our capital structure. The current rate environment has slightly altered our near term thinking around our debt, which is entirely floating rate today.
In efforts to partially mitigate our interest expense risk, we paid down $154 million of debt during the quarter, including a $100 million of our first lien term loan.
We ended the third quarter with less than one turn of net leverage and May further reduce our debt if rates continue to rise.
We are generating robust free cash flow was $79 million in the third quarter and $333 million year to date.
As we allocate our capital going forward, we will continue to be flexible in our approach.
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 balance sheet, which remains strong.
We continue to return excess cash to shareholders through share repurchases and in the third quarter.
Bought back nearly 685000 shares for approximately $50 million.
Let me now touch on our current outlook for the year.
As we noted various times in our prepared remarks today, our grocery business remains strong and we believe we can continue gaining market share because of our intense focus on value.
Inflation is still impacting many aspects of our business. Although recently, we have seen some relief in commodities, such as chicken milk and cheese.
And as we head into the winter holidays, we will remain nimble and maintaining our competitive advantages to drive traffic into our clubs and online channels.
Starting at the top of the P&L, we now expect our fiscal 2022 comparable club sales excluding gas to increase in the five to five 5% range, which continues to imply about 4% to 5% of comp for the fourth quarter.
In October we officially announced our new co brand partnership with capital, one, which we believe will bring an enhanced value proposition to our members and serve as another catalyst to grow and strengthen our membership base there.
Ultimate benefits of these changes are crystal clear to us.
At the same time, we also acknowledge that it will take us multiple quarters to complete the transition, which may temporarily impact our membership kpis, including higher tier penetration we.
We will aim to be transparent as possible through this period.
For our gas business in the fourth quarter, we continue to assume gas gallon comp growth in the low teen range with slightly higher than normal profit per gallon.
Call that our gas profitability was the strongest in the fourth quarter last year.
Moving down the P&L our outlook on margin also remains unchanged and that we still see ongoing but slightly easing merchandise margin pressure driven by investments in price and elevated supply chain costs.
As such we expect the year over year change in merchandise margin rate to remain negative in the fourth quarter, but better than the 30 basis point decrease we delivered in the third quarter.
As it relates to interest expense, we expect continued pressure in the fourth quarter and we will continue to monitor.
<unk> in the rate environment.
Taking all of this into consideration, we now expect our full year EPS to be in the $3 70.
To $3 80 range.
Before turning it back to Bob I'd like to reiterate our confidence in the strength of our business and the transformation we have made.
As a result of the improvements we've made in membership.
Footprint expansion and digital further amplified by our advantages inherent in the warehouse club model. We believe we are positioned to deliver a solid long term growth profile.
With that I'll turn it back over to Bob for closing remarks.
Thanks, Laura.
We've made significant progress in strengthening our business and I believe we are well positioned today to drive long term growth by executing on our strategic initiatives and prioritizing value in everything we do.
We will continue to allocate our capital towards investments to maximize shareholder value.
Our warehouse club model remains a structural advantage with a growing annuity in the form of membership.
Lower operational costs, and our foundational focus on great value.
When the consumer outlook is uncertain, our members find comfort in being able to stretch their dollars with us I believe that the reliability and loyalty that we have worked hard to build with our members over the years will remain key to our success no matter their circumstances.
With that I will now turn it back over to the operator to take your questions.
Thank you.
If you'd like to ask a question today. Please press star followed by one on your telephone keypad now.
So I'll ask you a question. Please proceed with your headsets fully plugged in.
Let's turn to ask a question.
Our first question today comes from Mike Baker from D. A Davidson. Please go ahead your line is open.
Thanks, guys great quarter I just wanted to ask you about your overall view on the consumer heading into the holidays, I guess, you've given us guidance that helps us but.
Maybe maybe one way to flesh it out as the pace of sales throughout the third quarter a lot of retailers saw a big drop off in October .
Did you see anything like that or maybe another way to think about it is are you seeing consumers just really focus on promotional activity or trade down or anything like that that would give.
Another sort of opinion on what's going on with the consumer as we head into the holidays.
Yes.
Hey, Mike Good morning. Thanks for your thanks for your question I think it's a good one overall I think our consumers with very healthy shape as we've seen.
Through through the entire year as we've talked about in the prepared remarks, our membership statistics are doing great. We're gaining market share through the year. The thing I'm. Most excited about as we continue to gain trips as well.
As we show our members incredible value.
The the refrain that we've been talking about all year is really throughout the income cohorts that we look at we've seen more sales and more trips per member as well so.
I think our consumer is very healthy at this point.
As you think about the pace through <unk>, certainly October was lower for us than.
Then the preceding two months.
I think though is really.
But the compare what we had last year, we had an incredibly strong October last year and so if you look at it on a two year stack the months were very equal for us. So.
I don't I don't see that.
October performance this year.
Sort of running into November or <unk>. So.
We're very pleased with where our consumers are really reacting to to the value that we put out there and hopefully that continues.
Yeah.
Great. Thanks, one more quick follow up just wondering how that wondering how about Turkey offer what did it actually drive new membership growth.
So it's certainly.
I haven't had a good reaction we're still in the period, where people are redeeming. The offers so you didn't get the free Turkey on the.
The data that you spent the $150 you have to come back at sort of a bounce back free Turkey offer and so we're still in the redemption period, we've got a little ways to go to see how it actually works out, but so the number of people that took advantage of.
Of the offer.
I think is looking higher than our expectations and it certainly drove some traffic into our buildings too.
Yes, Thanks, it's a great idea and great offer a great offer for consumers.
At the time.
Thanks.
The next question comes from Edward Kelly from Wells Fargo.
Go ahead your line is open.
Hi, good morning, everyone.
This quarter once again.
Bob you've been.
Think very optimistic around the new co branded credit card and what that could mean.
For you over time could you, maybe just give us a little bit more color on.
How we should think about that both sort of like the upfront benefit that you could see which I would imagine there are some better economics here, but also what it does to the member and then Laura mentioned.
Potential impact of member Kpis could you just maybe give a little bit more color. There in terms of how you are mitigating that risk.
Sure. Good morning. Thanks for your question, maybe I'll kick it off and Bill and Laura can fill in.
I look at our current co brand program and see it as a tremendous success as we've talked about it's grown over tenfold in the year since we launched it as a great source of member value. We think it's the best.
Best value prop in.
The wholesale club space at this point and it will only get better as we go forward.
We talk about it as a team we think it will be tremendously valuable to our members given we will improve the value prop and.
The question becomes one of lifetime value, we are in the value business.
We can use this as a vehicle to provide more value to our members that has has shown too.
Come back to us and better purchasing habits and higher renewal rates. So that's the game that we're playing will continue to play it.
I think it could be one of the more valuable things we do in the next the next set of years.
And looking forward to the transition to our new partner and maybe I'll hand, it over to Bill. He is he is the architect of this program and running the transition. So he can give you a few comments as well.
Thanks, Bob.
Good to speak with you.
I'll just echo what Bob said, we made.
As we think about the co brand program, we've talked about this with the street a little bit we made the strategic decision back when we launched the current version of the program to invest all the economics back into the members with the goal of driving lifetime value I'm really pleased with.
How that's performed over the last several years as we think about the transition to cap one we're not going to come away from that.
From that point of view in strategy in terms of investment, it's an unbelievable way for us to give value back to our members.
And we'll take some of the enhanced economics enroll them back through the value props that we could deliver back to the members. So.
We're really excited about cap one the team across the board at cap one is incredible.
And everything that they do and.
And as we think how that plays through to the growth of the next program.
We think that there is a substantial leg higher from here in terms of the growth with the membership base. So there'll be a little bit in terms of the kpis will be.
A little bit of a slowdown here not sold out with a pause as we.
As we shut off acquisition.
In the coming days on the current program as we work through the transition so you'll likely see a pause in the higher tier membership penetration as we report Q4, and then as we get the program launched in the first half of next year, you'll see then reaccelerate from them as we as we started acquisition the new program.
Okay, Great and just a quick follow up if I may.
Bob as we think about 2023 and I know, it's still early in the backdrops I'm sorry.
The consensus to me looks a little high.
Actually given that you have the fuel margin compare could you just maybe.
Can you help us with some puts and takes that we should be thinking about for the out year.
Yes, sure certainly when we think about next year.
The long term positioning of our company, we're very excited as we talk about a lot.
Our membership is growing.
Performance in the quality of our membership is much better than it has been and continues to improve and what we just talked about with co brand is just one more lever.
Improving the content quality.
We're looking for continued market share gains.
The flow through from those increased trips that were seeing here into renewal rates and we won't take our eye off the ball from a value perspective, either so as we go through whatever happens next year from a macro environment I feel like we're well positioned.
You pointed out that we've had an incredible tailwind from a from a gasoline income perspective that is absolutely true.
We've also had headwinds all over the business most notably in margins this year as supply chain cost and general merchandise markdowns really impacted our margins.
Throughout the year and so.
I do think it will be tough to lap the gas income that we've seen this year.
By far the most profitable gasoline year, we've ever seen.
We're continuing to see an incredible volatility in gas, which could provide more opportunities to get more income next year.
But.
Long ago stopped trying to predict what would happen in the gasoline market. So we've got some work to do to figure out whether we can lap.
The gas profit.
I do think it will be tough I do I do think some of the margin headwinds that we've seen this year may fall away as well and so hopefully we've got some avenue to get to get back towards flat from an EPS perspective, I don't know that I would project to get flat with this year at this point.
Alright, thank you.
You bet.
The next question comes from Robby <unk> from Bank of America. Early your line is open. Please go ahead.
Oh, Hey, good morning, Thanks for taking my question actually two questions. One was just on the membership fee income decelerated sequentially can.
Can you remind us what would be driving this sequential growth deceleration and how we should be thinking about that for the fourth quarter.
Thanks for your question certainly.
You're right it did decelerate a little bit I guess I would tell you we're not worried about it when we started the year, we were thinking about a mid single digit increase.
<unk> were up over 10% for the year. So as we as we think about that.
We look at it I think we're doing well.
A lot of it has to do with the timing from quarter to quarter, when the new clubs come into play.
Just general membership flows as well so again nothing to be concerned about there I think it's I think it's been a great performance all year and kind of right, where we want them.
And then the other question I was just general merchandise I think you guys said that the comps were up 7% is that right.
John Merchandizing services Division as Jeff Yes.
Yes, so the.
That's a really good.
Number against it.
Wasn't an easy comparison last year.
Can you talk a little more about the discretionary side of the business I know, it's relatively small for you guys, but it sounds like you might be outperforming what other retailers are seeing in discretionary maybe.
What are you seeing in apparel and some of those areas.
Yes, I think.
Largely we've seen what others have seen Ravi so.
We saw very strong performance in our services Division, if you think about optical and home improvement and tires and some of those businesses.
Which which shows a healthy consumer right those are not small dollar amount purchases, but.
But we have seen our members be a little bit more choosy about what they are spending on.
Some of the themes that our competitors have talked about with lower apparel sales in the more discretionary items.
We definitely saw that in the third quarter.
I think some of that is weather related I always hate to talk about that but.
It's never 75 in Boston in November and it was pretty much the entire front part of the month so.
Certainly that's had some some part of it as well and you.
Youre seeing some meaningful deflation in some key general merchandise categories like televisions.
And finally, the last thing I would say is the holiday season. It seems like it's going to run a little bit late to us.
Last year consumers, we're hearing by buy it in September and October because it won't be there in November and December and then it seemed like they are back on a normal purchasing pattern this year at.
At least in our business in a couple of our competitors have noted it that way too so.
Jim did okay in the quarter were looking forward to a good performance in the fourth quarter book.
We've got a lot of room to go in the last part of the quarter here too willing to bring it home.
Laura just clean up one point on that is that.
The 7% that I mentioned in the prepared remarks was the two year stack on GM and services. So on the quarter it was 3%, but still positive.
Got it that's all Super helpful. Thanks, So much.
Thanks Rami.
The next question comes from Peter Benedict from Baird. Peter Your line is open. Please go ahead.
Oh, Hey, good morning, guys. Thanks for taking the question maybe.
To talk a little bit about the club growth opportunity.
That you guys see I know youre, a 4% to 5% unit growth maybe talk a little more about kind of a new club economics, how they look today, maybe compared to where they were historically.
Curious on your mix of kind of new versus existing market openings, and then longer term where is the distribution infrastructure.
How much can the current how many stores can the current infrastructure support at what point would you guys have to start to invest more in that that's my first question.
Yeah, Hey, good morning, Thanks for the question I'll, just kick it off and bill can fill in.
We've had a great year this year from from a new club perspective got seven and the bank already.
We opened hopefully tomorrow.
And Wayne New Jersey, we've talked about that on the prepared section of the call.
And we've got a few more before the end of the year to meet our target.
Our pipeline is very healthy at this point, we feel like we're going in the right direction and all the clubs. We have opened in the last few years have outperformed what we thought they would do so that gives us a ton of confidence to continue to keep our foot on the gas from a real estate perspective.
We've invested behind the capability to move.
A move this quickly as you know we didn't do that in the past.
That is born.
Great openings of late and building a team that is dedicated to making sure those new buildings open on time in great condition and looking forward to continuing.
Unit growth and I'll, let bill talk about economics, and somebody wrote the other points that you asked about.
Hey, Peter it's Phil.
In terms of the new versus existing markets right. As you look at our growth. This year <unk> seen continued expansion in the Midwest with the build out of Pittsburgh of.
Detroit.
Down in Ohio into Columbus.
The entry into Indiana for the first time with our club in Noblesville, which is off to an amazing start.
So the balance this year is about 50 50 as we look at next year it'll be similar in terms of new and existing markets in terms of the performance in the existing markets has been extremely strong as we look back on the openings in clubs like pullback on long Island City, and Newburgh, New York, where we've added density where we <unk>.
Have a strong membership base to begin with we see really great member.
Behavior in those clubs, where not only are they shopping the new clubs, but the legacy members that were in those trade areas. They are also shopping at the legacy clubs as well as the new clubs.
So we've seen.
Really strong incrementals in that performance in the existing markets at levels that we haven't seen in the past and that's really positive as we think about building out our existing networks into the future.
In terms of the investments is certainly something that we're looking at we expanded our perishable distribution facilities.
Facilities last year with an opening a facility in Kentucky.
We're looking forward at the Buildout of the dry network.
As we go forward.
If you remember when we went public we had talked about the ability for the our distribution network to support about 100 incremental clubs and Lo and Behold as we've done 30 stock comp over the last three years, we've used a lot of that capacity pretty quickly.
Which is a which is a great problem to have so but dry size.
Certainly something that we're looking about going forward.
Yes, I'd be reluctant not to mention the insourcing of our various <unk>.
Acquisition this year.
<unk> facilities, bringing them in house gives us great capabilities as we continue to grow our network.
Your forward. So we feel good about the pipeline for next year. We're working now actively on calendar years, $24 25, and we feel good about the results and what we're seeing.
No. That's super helpful. Thanks, and then just a quick follow up just on the general merchandise.
Is this.
You had made some investments in there.
Personnel, just maybe a quick update on what the plan is in terms of trying to drive improved execution in that area over the next couple of years. Thank you.
Yes, so maybe I'll take that one as you know.
Improving our general merchandise business is one of our key priorities.
To me the entire game no matter, what you talk about but most notably here.
With talent and we've made tremendous upgrades and our merchandising.
Team.
Both with new talent and improving the capabilities of our of our outstanding talent that was already here.
To allow us to over time improve our general merchandise business, so whether it's hiring a new chief merchant Rachel Vegas, not so new anymore.
A year at this point, our new head of general merchandise Dion Evans.
Their teams.
<unk> just done outstanding work.
Two really.
Start that process of improving.
Our general merchandise business as you know a lot of these categories are long lead time categories, and so you really wont see the fruits of their efforts until next year, probably in the second quarter Youll see some.
Some benefit in Q3, and Q4, you really start to see some of the benefits of their decision making.
I can tell you.
We would as one example, we would not have worked through the general merchandise inventory, we had over the summer this year without their help the quality of the conversations and the execution that we're seeing from the team.
As well as the new planning and allocation folks that we've brought in.
<unk> has really just changed the game for us So I'm very bullish on our GM prospects over the long term.
With our team and looking forward to getting into next year. So we can we can see how the members react to what we're doing.
The next question comes from Chuck Grom from Gordon Haskett, Chuck Your line is open. Please go ahead.
So much good morning.
But can you talk about the balance between flowing through the excess gas profits. So you've generated year to date to the bottom line.
It's just taking some of that money and investing in price to showcase value to your customer.
Yes. Thanks, Thanks, Chuck it's a great question. So as you know we price our gasoline every day to be the best in the market.
Generally that is on par with our club competitors better than everybody else, we have a pretty sophisticated pricing model, where we will look at data on who is in the market every single day, sometimes multiple times, a day and make sure that our prices.
The best.
We do that because it.
Changes member behavior right gas stations.
With the gas station performed better than those without they have more trips more renewal rate.
And that the definition of more changes with the price of gas over the summer.
It was even more traffic and more membership benefit.
So we will sort of add gas stations wherever we can as that point.
But this year, it's been an interesting one to the core of your question right, where we've made so much money in gasoline. We've we've used that to spend into the beat if you will.
So we have.
<unk>.
Made our gas prices, a little bit even lower than normal to showcase even more value and then we've taken that that gas profit and invested it in other places in the business So think about.
Helping our members through these inflationary times inside the business, we've used gas profits to fund.
And investments in price inside the building, we've done a tremendous amount of incremental marketing this year that we've never done before both.
Trying to incent purchasing behavior, but also acquiring new members as we go.
It's allowed us a tremendous amount of freedom to test things that we've never done before without sort of economic consequences. If you will.
And thats been the aim.
For years, you've heard both of my predecessors talked about spending into the beat and something we'll continue to do.
Whether we're beating.
Inside the box or in gas or anywhere we do it's sort of a core part of our strategy.
And dovetails nicely with when you're trying to show value to members every day.
Yes, they are smart.
My follow up question is just on the comp and I was wondering if you could maybe unpack the acceleration on a three year basis from the second quarter to the third quarter, which it looks like it's about 300 basis points and then looking ahead. If you do say a four 5% comp in the fourth quarter that implies.
A real big drop.
Sequentially relative to the third quarter close to about 1000 basis points. So just curious like the decision factors behind that that comp assumption for <unk>.
Yes, it's a good it's a good question, maybe I'll start and Laura can pile on.
We had a tremendous quarter in our view in the third quarter far exceeding what we what we thought.
I was a little bit of inflation, so inflation definitely ticked up <unk> over <unk> on a tremendous amount.
But certainly was there and it was continued acceleration in our members' purchasing behaviors.
When we started this year.
We thought <unk> would be negative comp given what happened last year.
And.
And I mean that in sort of the EBT funding sense.
The government stimulus center.
The behavior change we saw in <unk> last year was a dramatic pull forward of.
Primarily our sundries business, but some some of our the rest of our grocery business as well.
As we've gone through the year one of the one of the best things that we've seen is the increases in shopping behavior in all of our income cohorts as I talked about earlier, but most notably at the bottom of the house.
And our past data, we've seen a great linkage between increases and decreases in federal EBT budgets and what those folks actually did.
So in times, where budgets contracted their shopping behaviors contract that we have not seen that this year.
And.
As I said earlier the sales per member.
Remember in each of our cohorts has gone up.
I think thats, a tremendous story about value I think we have convinced that lower end consumer.
Our proposition.
And they are using different dollars today than than what they get from the government because they believe our value story. They believe that we are saving them money and we are.
So that I think is really the real story behind the third quarter performance was over our expectations for sure.
I don't know that that slows down in <unk>, but as our competitors have noted and I talked about earlier, our GM performance was a little bit soft in the third quarter.
And you've got a tough a tough market out there.
And Jim becomes a bigger piece of our business in the fourth quarter. So.
Youre absolutely correct the guidance that we've got out there comps from the $4 to $5 range for <unk>.
It would imply a decent b cell.
I hope that doesn't happen.
See we will see what we end up with we're certainly working hard too.
To do what we can from our general merchandise business and we will capitalize on the great health of our grocery business.
That business, we have no.
No issues and it's it's comping quite nicely.
And.
Our performance has been has been good here in the.
The opening weeks of <unk> as well.
A lot of that is market share we've been gaining market share all year, along both in gas and in our grocery business and I don't I.
I don't see that.
That that's slowing down at all the other the other point I might throw out there, which factored into our thinking was where you're going to start lapping some of the inflation. We saw last year, so you're going to have a little bit of a base effect come.
Coming on in <unk>, but.
But we are very bullish on our prospects in <unk> I think we'll do well.
And hopefully do well in the next year as well.
Great. Thanks, a lot thanks, Kevin.
You too.
The next question comes from Mark Carden from UBS.
Please go ahead.
Good morning, Thanks, a lot for taking my question. So to start just given the current inflationary environment and what your two largest warehouse competitors have done to date has there been any changes to how you're thinking about the pacing for your next membership fee increase thanks.
Hi, Mark Thanks for thanks for being on the call today and thanks for the question.
We haven't we haven't given a tremendous amount of thought to.
Two a fee increase at this point for two reasons one.
Larger competitor hasn't hasn't done it yet.
We would not do it unless they do it.
Two we talked about the co brand transition that is the most important thing we will do next year is get that right.
And I don't want to mess that up with what the fee increase and so I think at a minimum we're waiting until both of those two things happen.
Once they do and the sort of the smoke clears, we'll figure out what we will do.
The one thing we haven't talked about so far as the dollars per member were seeing already over the past few years, we've already seen the effect of a fee increase rate. The average dollars per members well over 60 Bucks at this point, it's up about $5 in the last few years. So.
We've mixed our business up to.
Really look like it has had a fee increase when we haven't changed the sticker price to our members. So it's sort of an unappreciated thing that we've been able to do over the past few years and our membership team has done a fantastic job doing that.
That makes sense and maybe a bit of a follow up to that how are you thinking about premium penetration in the current environment. Today. It seems like you have a lot of momentum there, but would you expect shoppers to upgrade less frequently.
Current economic pressures continue with just getting sticker shock.
Market upgrades any more aggressively just how are you thinking about that.
Look I think that comes back to value and we look to provide outstanding value every day. It also comes to one of the core reasons, we're doing the co brand transition right.
That has been the fastest growing part of our premium tier memberships over the years.
And with the new value prop that we'll announce in January we only expect that to get better.
So as Bill mentioned, we will we'll probably pause on the growth in Q4, given the federal laws around what we have to do around our card transition we have to stop requiring.
Sort of have to put down our pencils for a little bit, but once we get the conversion done IX.
<unk> that the excitement around this program will really help us grow premium tier memberships quite nicely in the future.
Great. Thanks, so much and good luck.
Thanks Mark.
The next question comes from refresh Creek from Oppenheimer refresh. Your line is open. Please go ahead.
Good morning, Thanks for taking my question and also congrats on a nice quarter. So just just on the food inflation front as you guys look out for the balance of the year and into next year. It sounds like you expect moderation any sense, whether it moderate I guess low single digit type levels or just any thoughts in terms of how you see it playing out at this point.
Yes. Thanks for your question. It's a good question I'm not sure I have a perfect answer.
<unk> certainly seen a ton of inflation this year as everybody knows.
And we have seen a little bit of moderation in the third quarter as Laura talked about in the prepared remarks.
It's really coming in pockets, but I would tell you on a general basis, we're seeing less inflation today than we were seeing three months ago for sure.
I don't know what happens from here.
To our supplier partners they continue to indicate.
Their desire to raise prices, particularly those with with very strong brand names our market shares.
And some of the commodities are still above where they are last year and I don't know that folks are pass through all of that.
Increase.
So I think we.
Got to wait and see approach on it we are.
Working proactively with our supplier partners to avoid any further price increases I think it's as you know it's bad for.
That for everybody.
So we'd like to forestall that but I'm not sure we're going to be successful and that we will we will continue to do what we've done.
All year and invest in price to make sure we have the right value and we won't let anything stand in the way of that.
And I'd be remiss, if I didn't thank our merchandising team for what they've done this year I think they've done an outstanding job managing double digit inflation.
In an environment that many of US haven't really lived through in the business since in the past. So our team has done done well, we'll continue to do those things well going forward.
Whether we see.
10 points more inflation or two points more inflation I think the companies companies really well set up to grow.
Great and then maybe just one follow up question.
In regards to next year I know you guys have the big had been related to fuel what is your commentary earlier that you hope with some of the margin headwinds that you'll be lapping next year that maybe between the headwinds and <unk> that may become tailwind that could help to make.
If you're neutral from an EPS perspective is that is that where you were trying to convey earlier.
I don't think we will be able to get back to flat right. We've got a tremendous gas tailwind this year.
Other headwinds this year that we've talked about.
Some of them are almost the same thing or do you think about the cost of diesel fuel running through.
Our supply chain.
We've got both headwinds and <unk> in this year, but the gas income headwind has been bigger than any of the tailwind right. So as we think about next year.
It looks hard to create that same level of gasoline income next year.
That doesn't mean, we won't have some of these headwinds flipped to tailwind alright, if diesel goes down we will have a tremendous tailwind next year from a margin perspective, there are other things under the covers as well that should should help.
But at this point as we're modeling next year, we do not see us.
Getting back to our full year EPS, though that we'll put up this year I don't think it will be too far away from it either.
But I don't I don't see us getting flat at this point.
Okay, great. Thank you for all the color.
You bet.
The next question comes from Paul <unk> from Citi. Your line is open. Please go ahead.
Hi, everyone. This spring and shoot him on for Paul.
I'd like to go back to the commentary about the.
Income cohort courts, it sounds like your low income consumer was particularly.
Strong in <unk>.
That's a change from the second quarter.
You all said the higher income consumer was really the bright spot.
I'm just wondering did you see kind of an inflection in the lower income consumer.
Cohort behavior.
Gaining more share of wallet, that's kind of what it sounds like but any category or anything that you. All are doing are communicating that kind of really drove that inflection.
Yes, good morning, Brian Thanks for the question.
Seeing growth in all of our.
This year as we've talked about.
At the beginning of the year.
We were seeing a ton of higher income folks come into the business or buy more we are still seeing that.
We're also seeing good purchasing behavior out of our lower income cohorts.
That's been the.
The real story for Us and every other down market, we've seen the higher income cohorts come in and try and search for value and as I talked about earlier.
We've seen lower income cohorts.
Laid out our trade down.
As <unk>.
<unk> budgets dried up that certainly has not happened this year. They they have performed very very well.
And continue to.
I think they will continue to do so.
We're very happy with how we see our purchasing behaviors going both both higher and lower income cohorts are.
<unk> is very healthy behaviors.
And we're looking forward to that continuing I think the reason why that youre.
Youre scratching after his value right, we are showing the best pricing that we've ever shown to folks.
We're showing better prices in some of our competitors and.
And people are believing that we have got some credibility with our members.
As we continue to prioritize value in everything we do so we will we'll continue to do that and hopefully they continue to reward us.
Got it and then one follow up if I may on digital sales it seems like a meaningful driver comp these days.
Different about how the consumer engages with you.
What percentage of your members are shopping with you digitally and Bernie anything to call out on the margin side from the digital sales business.
Yeah, Thanks for bringing that up we haven't talked about digital all day.
It's been a growing part of our business over the years as you remember the longer term story.
Four years ago, or so we didn't really have a digital business to speak of.
We've spent a bunch of time building the infrastructure and Lo and Behold now are well over $1 billion.
And sort of 90% of our business.
Our members are really reacting to that.
Most particularly in the <unk> and curbside parts of our business.
Where were really saving them time right that our aim is to save people so to say.
People with money.
We keep going back to value.
But it's also to save our members time, if I can.
Sure.
Have them not spend time walking around our clubs throwing things in their basket for their routine shops. That's that's great. We still want to get from the clubs for their opportunistic shops.
But we've not seen.
That behavior fall off either.
We have done things like our express pay products, where you can skip the lines. If you R&R clubs you check out on your phone that saves you 10 minutes.
<unk> been pretty popular.
Also changed the way that we.
Market and promote from a digital perspective so.
Huge amount of our member acquisition is now coming digital where three or four years ago. I would tell you that was zero or close to it.
<unk>.
Five years ago, we were worried about the fact that our primary promotional products was paper coupons.
Nobody loves paper coupons so.
Now well over two thirds I think maybe three quarters of our.
Our promotion is done digitally you click your coupons on our app or online versus clipping the paper.
So we've made tremendous strides both in product promotion.
And.
And convenience as we've invested in digital and we will continue to do that the members that engage with US digitally are our best members they shop with us most often.
They buy more when they do so.
And.
They really are starting to prove the case to us on the combination of saving people time and money.
<unk>.
Both of those are important parts of of the value equation for our members. So we will continue to make investments in our digital properties and.
And I believe that our members will reward us for doing that as well.
I appreciate it good luck with holiday.
Thanks, Brian .
This concludes today's Q&A session and this does conclude today's call. Thank you very much for your attendance and you may now disconnect your lines.