Q3 2024 BJ's Wholesale Club Holdings Inc Earnings Call
Carly: Welcome all and thank you for joining us for the BEJ's Wholesale Club Q3 2024 earnings conference call. My name is Carly and I'll be coordinating your call today. If you'd like to register a question during the call you can do so by pressing star followed by one on your telephone keypad and to remove yourself from the line of questioning will be star followed by two. I'd now like to hand over to your host Cathy Park to begin.
and Catherine Park. Thank you. Thank you.
Cathy Park: Good morning and welcome to BJ's third quarter fiscal 2024 earnings call.
with me today.
Cathy Park: Chief Financial Officer, and Bill Werner, Executive Vice President, Strategy and Development.
Cathy Park: 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.
Cathy Park: Please see the risk factor sections of our most recent Form 10-K and Form 10-Q filed with the SEC for a description of those risks and uncertainties.
Cathy Park: 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.
Cathy Park: 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.
Speaker Change: Please refer to today's press release and latest investor presentation 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. And now I'll turn the call over to Bob.
Bob: Good morning. Thank you for joining us. Today we reported impressive third quarter results that demonstrate the power of our model and the impact of great value and fantastic execution.
Bob: We drove quarterly comps and profits that were higher than anticipated.
Bob: Our business was once again fueled by robust traffic, unit volumes, and market share growth inside our clubs and at the gas pumps.
Bob: We continue to invest in our long-term initiatives while growing merchandise margins in the quarter as our efforts continue to take shape.
Bob: We are most pleased with the consistent strength we've driven in membership, leading to over eight percent growth in membership fee income and hitting a milestone of 7.5 million members in the third quarter.
Bob: Since fiscal 2018, we've grown our member base by 40% while achieving the highest renewal rates in the company's history. We've more than doubled the number of members in our premium tiers and higher tier membership penetration continues to grow.
Bob: We also announced our first membership fee increase in seven years. Effective January 1st, our base annual membership will increase by $5 to $60.
Bob: For the plus tier, we're increasing the annual membership fee by $10 to $120 and bolstering the premium value prop to include a new added benefit of two free same-day deliveries a year.
Bob: This new benefit alone is worth about three times the fee increase for our PLUS members.
Bob: Since our last fee increase in 2018, we have invested heavily in the value of OBJ's membership. We've raised average hourly wages by nearly 40% across our clubs and DCs.
Bob: We provide better rewards and gas benefits and launched a new Co-brand credit card to deliver more value to our members. In fact, rewards to our members have gone from about $130 million in fiscal 2018 to more than $350 million in the last year.
Bob: Seven years ago our members had only one way to shop us. Today they can access a range of digitally enabled conveniences to save time and money.
Bob: We've improved our assortment in fresh and gentle merchandise and leaned into our own brands which are now over a quarter of our merchandise sales.
Bob: Our efforts have paid off in the form of a much stronger business that's delivering significantly more value to our members today.
Bob: We plan to reinvest the proceeds from the fee increase announced today in labor and better value, not to mention the two free deliveries, in order to keep our momentum up.
Bob: Comparable club sales, excluding gas sales, grew by 3.8% in the third quarter.
Bob: The East Coast port strike last month created temporary shifts in member behavior reminiscent of the pandemic.
Bob: This, along with the two hurricanes in the quarter, positively impacted our comp sales by a bit less than one point. Said differently, excluding the port strike and hurricane shifts, our results slightly beat expectations, demonstrating the progress we continue to make on our long-term priorities.
Bob: Traffic accelerated once again, contributing over four percentage points to our comp, and we gained grocery market share in both units and dollars in the quarter.
Bob: Our perishables, grocery, and sundries division delivered over 4% of comp growth in the third quarter with broad-based strength across all three divisions. Perishables led the growth, boosted by our strong showing in dairy, meat, and of course, produce.
Bob: Our General Merchandise and Services Division delivered approximately flat comps in the third quarter.
Bob: We're pleased with the underlying progress our teams are making to sustainably grow this part of our business.
Bob: Our assortment and presentation on our home and apparel categories are improving each quarter. Notably, our seasonal GM categories delivered positive comps in the third quarter for the first time in nine quarters.
Bob: Members have increasingly taken notice of our elevated assortment in areas like toys and books.
Bob: Our nimble teams also adapted our localization strategies to take advantage of an unseasonably warmer fall season.
Bob: and capture opportunistic sales and grilling producing low double-digit comps in the category.
Bob: Finally, in consumer electronics, members continue to find phenomenal value in our enhanced offering, with meaningful comp growth in categories like audio and video games.
Bob: We are still seeing members being thoughtful in their purchasing behavior, especially around larger ticket discretionary categories, which we're accommodating with high-quality items at compelling price points.
Bob: Thanks to our well-curated assortment, we are an attractive TV destination for our members, delivering comp unit growth once again in the quarter.
Bob: As we approach the holidays, we've built on last year's success in gifting, providing more great options for everybody on our members' lists.
Bob: Our toy assortment has all the top brands our members are looking for, including Barbie, Hot Wheels, Lego, Bluey, and many more.
Bob: We're also delivering an assortment that includes the latest tech, including video games, audio, TVs, and more.
Bob: True to our DNA we will also be offering exceptional value on all of the holiday essentials including seasonal decor, updated home furnishings, and items for hosting holiday gatherings.
Bob: And of course, the convenience of a one-stop holiday shop alongside our grocery offering makes the treasure hunt even more valuable.
Bob: Our four strategic priorities are critical to our future success. As a reminder, these priorities are improving member loyalty, giving our members an unbeatable shopping experience, delivering value conveniently, and growing our footprint. We have a lot to be proud of in each of these areas.
Bob: Our membership momentum is incredibly strong. Our success in growing both the size and quality of membership resulted in another robust fee income quarter and our member count surpassing 7.5 million.
Bob: We continue to drive strong renewals and effective member acquisition across new and existing markets. We're also on track to deliver another strong 90% renewal rate this year, supported by our 39% higher tier membership penetration.
Bob: We're especially pleased with our continued strength in our 1-plus credit card tier, our highest tier, which is outpacing the growth of the rest of our member base.
Bob: Our One Plus members are our most loyal and highest spending members, exhibiting the greatest lifetime value.
Bob: In addition to our strong value proposition, we've made strategic investments to motivate this growth in higher tier memberships.
Bob: Our successful conversion of our credit card portfolio to Capital One early last year was a milestone on our membership growth journey.
Bob: Since the conversion, we've added over 750,000 new accounts to the program, driving substantial incremental rewards for our members and incremental lifetime value for BJs.
Bob: The team is proud of the growth and hungry to drive our higher-tier penetration north of 40% and beyond.
Bob: We continually work to deliver an unbeatable shopping experience and great value to our members, which comes in multiple ways across merchandising, pricing, and convenience.
Bob: We're going after repeat trips and greater wallet share ultimately in pursuit of our first strategic priority, deepening member loyalty.
Bob: As with most, if not all, of our strategic work, our merchandising initiatives begin with a fundamental understanding of how our best and most loyal members engage with us, and how they want to maximize their value with BJs.
Bob: These insights have served as the foundation for our recent initiatives in General Merchandise, Category Management Process, or CMP, and also in FRESH 2.0.
Bob: Fresh Tupina was devised from our own data informing us that members who shop BJ's as their primary fresh destination visit us at least once a week and on average have nearly 30% greater baskets per trip compared to members who don't engage with us in fresh.
Bob: As a result, these members spend about eight times more per year than non-fresh shopping members.
They're also more likely to be higher tier members.
Bob: Our fresh initiatives are designed to encourage these behaviors across our broader member base.
Bob: We've worked hard over the past year to bring excitement and even more freshness to our produce assortment. We improved supply chain velocity where it mattered. We expanded vendor relationships to increase in-stocks and put new seasonally relevant produce on rotation.
We implemented essential fresh training across our clubs.
Bob: We upgraded our marketing and presentation. Finally, in the second quarter, we completed the rollout of our stand-alone coolers stationed at our front entrances to highlight incredible quality and value, drawing members into the category.
Bob: Our third quarter results continue to showcase our mounting credibility and success in FRESH.
Bob: Our produce category has delivered low double-digit comp growth in the third quarter, almost entirely driven by unit volumes, and our NPS performance in fresh has also dramatically improved in the last two quarters.
Bob: We're thrilled with the early results and are excited about the long-term benefits of more loyal members driving sustainable growth in our business.
Bob: Our own brands provide members with high quality products at spectacular value. We are elevating our offering where we see opportunity. Our Snack Nuts program, which we recently relaunched, is a great example as one of our best performing own brand categories in the third quarter.
Bob: We spent months refreshing our assortment, elevating the quality, especially in our almonds and cashews, and improving the packaging for better aesthetics and functionality, all while continuing to offer our strong club value.
Bob: We're just about one full quarter in and we're already happy with the level of member engagement. Our third quarter own grants penetration in the category rose over a thousand basis points.
Bob: We're growing our own brand sales penetration each quarter and remain confident in our goal of reaching 30% over time.
Bob: Our digital business is growing rapidly. Today, members can save hours on their shopping through digital conveniences such as Bopec, curbside pickup, and same-day delivery. When in our clubs, they can also leverage our digital coupon gallery and skip the lines with Express Pay Checkout.
Bob: Adoption rates in these conveniences continue to grow, driving our 30% growth in digitally enabled comp sales in the third quarter.
Bob: While our digital offerings have been available to our members for several years now, we've been constantly refining and tailoring the experience to how our members want to shop, making it even more seamless.
Bob: For example, our order process has evolved to include the ability to substitute items and allow members to add items to their order after checkout.
Bob: We've also enhanced how our team members are fulfilling digital orders through optimized batch orders, AI-enabled pickpassing, and temperature control safeguarding.
Bob: Our efforts have delivered gains in both team member efficiency and member experience, including an estimated 20% reduction in item cancellation rates and meaningful improvements in our member satisfaction scores.
Bob: During the holidays, we typically see increased search activity across our digital platforms. We know how important it is for our members to quickly find the products they want and need during this busy time.
Bob: In preparation, we recently launched a new AI-powered search engine to improve search relevancy, and we're already seeing better member engagement and conversion. We will continue to adapt and enhance our digital conveniences to deliver greater value to our members.
Bob: Finally, we're making great progress on our real estate strategy, opening three new clubs and four gas stations in the third quarter.
Bob: We recently opened our membership center in Louisville, Kentucky, as we prepare for entry into our 21st state in a couple of months.
Bob: During the fourth quarter, we will bring our total club count to over 250 clubs, a year ahead of our original goal.
Bob: While the recent hurricanes have caused some minimal delays in our timeline, we are on pace to open eight more clubs by the time of our next earnings call.
Bob: Based on the engagement we've seen with membership sign-ups our future communities can't wait for us to open.
Bob: We're excited about our growing pipeline, which will enable further acceleration of new club openings in the coming years.
Thank you for watching!
Bob: Complementing our in-club experience is our fuel business. Gas is yet another great way in which we deliver significant savings to our members, particularly our co-brand credit card holders.
Bob: Because of a strong member loyalty tied to this amenity, we have strategically revisited older standalone club locations across the chain to add gas.
Bob: This is why our gas station openings have outpaced new club growth over the past several years.
Bob: In fact, one of the four gas sites we opened in the third quarter was in Medford, Massachusetts.
Bob: BJ's very first club now has a gas station 40 years later.
Bob: We're pleased that the continued share gains we're delivering with nearly 3% growth in comp gallons in the third quarter. This compares to the single digit declines currently being reported by the broader industry.
Bob: As we assess the health of the consumer today, members remain focused on value and they are increasingly relying on BJ's to attain that value.
Bob: We have an advantaged business model that gathers share not just in the good times, but also in times of uncertainty.
Bob: Our performance in the third quarter validates this very notion where amid some choppy events we produce year-over-year growth in trips and spend across all high, medium, and low-income levels.
Bob: Our strong value prop is resonating with our entire member base, regardless of their financial standing.
Bob: Our third quarter results also underscore our team members' dedication to our purpose of taking care of the families who depend on us.
Bob: I'm incredibly proud to see them go the extra mile, showing up for our members every day, especially in times of need.
Bob: In advance of a storm, BJ's is often the last retailer to close, and in its wake, often the first to open.
Making us a reliable destination for our communities.
Bob: I'd like to thank our team members who navigated the hurricanes and port strike led spikes in demand with tremendous grace Working around the clock to support our communities and each other
Bob: Looking ahead, we are confident in our ability to sustainably grow the business reinforced by strong membership, traffic, and unit volumes. These remain key markers of the underlying strength of our company.
Bob: Furthermore, we believe our operating model, investments in our strategic priorities, and unwavering dedication to delivering value keep us well positioned for the future.
Laura: I'll now turn it over to Laura to provide more details on our results and outlook for the year.
Laura: Thanks Bob. I'd also like to thank our team members across our clubs, club support center, and distribution centers.
Laura: Their outstanding dedication to our company and communities contributed to another strong quarter.
Let's now review the third quarter results.
Laura: Net sales in the quarter were close to $5 billion, increasing 3.4% over the prior year.
Laura: Our accelerating traffic and comp unit growth in the quarter serve as a strong testament to members finding significant value in their BJ's membership.
I'm sorry. I'm sorry. I'm sorry. I'm sorry.
Laura: Total comparable club sales in the third quarter, including gas sales, grew 1.5% year-over-year. An approximate 13% year-over-year decline in retail gas price per gallon was partially offset by market share gains, with comp gallons growing nearly 3% year-over-year.
Laura: Digitally enabled comp sales in the third quarter grew 30% year-over-year and 47% on a two-year stack.
Laura: Over 90% of our digital sales are fulfilled by our clubs with services like BOPIC and Same Day Delivery, which remain meaningful drivers of our digital growth.
BOPIC alone comprises about half of our digital sales today.
Laura: Our digital offerings is intended to deliver value by maximizing convenience, thereby improving member loyalty.
Laura: We will continue leaning into these mutually beneficial enhancements in the future.
Laura: Membership Fee Income, or MFI, grew 8.4% to approximately $115 million dollars in the third quarter, driven by strong membership acquisition and retention across the chain.
Laura: We're incredibly pleased with surpassing 7.5 million members this quarter and the strong momentum we are building in membership.
The
Moving on to gross margins.
Laura: Excluding the gasoline business, our merchandise gross margin rate increased by approximately 20 basis points year-over-year.
Laura: led by our continued execution of our long-term initiatives and disciplined cost management.
Laura: Last quarter we highlighted several areas of investment we are making to strengthen our business longer term.
Laura: First, our perishables business continues to drive strong comp sales as we advance our fresh initiatives.
Laura: While a growing fresh mix is naturally margin rate dilutive, we are committed to growing our fresh business due to its favorable influence on long-term member behavior.
Second, we have made considerable progress on executing CMP.
Laura: which, as a reminder, is our end-to-end assortment planning approach to deliver a member-relevant assortment that drives profitable sales and market share growth.
Laura: At this point, we have rolled out CMP across all of our key grocery and sundries categories, and the initiative is yielding our intended results of better member engagement and share gains.
Laura: As a result, we're driving structurally better margins too, contributing to our merchandise margin performance in the third quarter.
Laura: SG&A expenses for the quarter were approximately $733.6 million, primarily driven by our new unit growth and other investments to drive our strategic priorities, as well as an expected increase in accrued incentive compensation.
Laura: We also benefited from the net impact of legal settlements of approximately 20 million dollars in the quarter, partially offsetting the SG&AD leverage as a percent of net sales.
Laura: Our third quarter adjusted EBITDA grew 13.5% year-over-year to $308.3 million.
Laura: As a reminder, our calculation no longer includes pre-opening and non-cash rent expense add-backs.
Laura: All in, our third quarter adjusted earnings per share of $1.18 increased by approximately 18% year-over-year, reflecting the underlying growth in our business.
Laura: Strong gas profitability also contributed to overall profits that exceeded our expectations in the quarter.
Laura: Excluding the effects of the port strike, hurricane, and net impact of legal settlements, our third quarter results were slightly better than expected.
Thank you for watching!
Let's move on to our balance sheet.
Laura: We ended the third quarter with absolute inventory levels up 3% year over year and flat on a per club basis with nine more clubs in our chain today compared to a year ago.
Laura: I'm especially proud of the team's work in the third quarter in allocating the right amount of product to the right clubs at the right time.
Laura: Despite the inventory challenges caused by the port strike-led demand, we improved our in-stock levels by approximately 70 basis points over the same period last year.
Our capital allocation strategy is consistent with our historical framework.
Laura: We believe that the best use of our cash is applying it towards profitably growing the business.
Laura: As such, investments to support membership, merchandising, digital, and real estate initiatives will continue to be funded by our cash flows and enabled by our strong balance sheets.
Laura: We ended the third quarter with half a turn of net leverage.
Laura: Returning excess cash to shareholders remains an important part of our capital allocation strategy as well. In the third quarter, we repurchased nearly 680,000 shares for approximately $58.2 million.
Laura: With our existing share repurchase program expiring in January, we announce today that the Board has approved a new $1 billion share repurchase program effective February 1, 2025.
We will continue to take a disciplined approach.
Laura: Turning to our outlook, we are raising full year fiscal 2024 guidance to reflect the third quarter results.
Laura: This remains consistent with our original expectations of getting closer to our long-term ALGO comps by year-end.
Laura: We continue to navigate an uncertain economic backdrop but expect our strong value proposition to drive traffic and market share especially through the holidays.
Laura: In the fourth quarter, we have also embedded a little bit of online import strike-led sales from the third quarter.
Laura: We are proud of our achievements in membership, which has performed better than our expectations and our long-term algo this year.
Laura: We expect to end the year strong despite continued moderation in the year-over-year growth rate and minimal impacts from the fee increase in the fourth quarter.
Laura: We anticipate that any fee increase related MFI will be invested back into our value prop consistent with our philosophy.
Thank you very much.
Laura: Our fiscal 2024 merchandise gross margin expectations remain unchanged at approximately flat year-over-year as we execute on our long-term initiatives while investing in the business.
Laura: Consistent with the first three quarters of the year, we are planning SG&AD leverage for the fourth quarter of fiscal 2024 as we invest in growth initiatives, particularly in unit growth and new club sales ramp over a multi-year period.
Laura: While these investments have tempered our earnings power in the near term, we have high conviction that this is the right thing to do for the long term.
Laura: A reminder that we are also lapping variable compensation tailwinds from the fourth quarter of last year.
Laura: Subsequent to quarter end, we opportunistically repriced our $400 million term loan to provide for a 25 basis point reduction in our spread, the equivalent of approximately $1 million in annual interest savings.
Thank you for watching!
Laura: We are planning for an effective tax rate of approximately 20% in the fourth quarter.
Thank you very much. Thank you.
Laura: Please also recall that we are lapping a 53rd week from the 4th quarter of last year that contributed approximately $350 million of net sales and $0.10 of earnings per share.
Thank you.
I'm here.
Laura: Longer term, we remain confident in the underlying strength of our business and believe we are well positioned to deliver sustainable growth to maximize shareholder value.
Bob, back over to you.
Thank you very much.
Bob: Thanks Laura. We continue to transform our business, investing in great talent and executing on a prudent strategy focused on delivering great value and driving long-term growth.
Bob: We are unified by our purpose of taking care of the families who depend on us.
Bob: We will grow the size and quality of our membership. We will offer an unbeatable member experience through our merchandising improvements.
Bob: We will provide more digital conveniences to save our members money and time.
and we will profitably grow our footprint.
Bob: Thanks again for joining us today and for your support of BJ's Wholesale Club. We will now take your questions.
Thank you for watching!
Speaker Change: Thank you. We'd now like to open the lines for Q&A. If you'd like to ask a question, please press star followed by 1 on your telephone keypad. And to remove yourself from the line of questioning, press star followed by 2.
Speaker Change: Our first question comes from Peter Benedict of Baird. Peter, your line is now open.
Peter Benedict: Hi guys, good morning. Thanks for taking the question. First, we're just around kind of the membership 7.5 million members. You said 39% are at the higher tier. I just wanted to clarify, is that the right way to think about maybe the number of members that are paying 110 right now, so a little less than 3 million members that'll be going to 120, or is it a subset of that group, and how are you thinking about attrition rates? That's my first question.
Speaker Change: Hey, Peter. Good morning. Thanks for the question. Look, we're thrilled about our membership performance so far this year, as we've talked about.
Speaker Change: previous quarters and in today's call so far. Our team has done a fantastic job growing the size of our membership, growing the quality of the membership. We've got all-time high renewal rates.
Speaker Change: You know, that gives us the confidence to announce the fee increase that we announced today.
Speaker Change: Your question on the higher tier members, obviously those are our best members. They visit us most often. They spend the most when they're with us. They engage with all of our digital properties. They are really high lifetime value members. And as you know, that's a mix of folks that pay.
Thanks very much.
Speaker Change: you know, the base membership fee and hold a credit card, our pro-branded credit card, and those folks that either or both pay the higher membership fee and hold a credit card. So it's ...
Speaker Change: It is quite a bit of a mix. That population has been growing really, really nicely over the past several years.
Speaker Change: We see a path to grow it even further and faster than we have in the past on the back of the increased value proposition that we're putting forward as part of the fee increase.
Speaker Change: with two free same-day deliveries as well as all the past investments we've made and not to mention our co-brand credit card. So we are we're really thrilled with the performance from our entire team around the membership.
Speaker Change: area of our business. It's the most important part of what we do and we're excited about the future. Maybe I'll let Laura jump in.
Laura: Hey, good morning. The thing I would add on top of that, just for clarity purposes, I think when we think about the fee increase,
that we're putting in in January.
Laura: There's a little bit of that that flows into this year, very small.
back half-weighted, as you know,
Laura: It will ramp over the course of the year as those dollars flow through.
Laura: and we intend to run a very similar playbook to what we've done in the past. We will invest that back in the business and our members and make sure we continue to fuel the business going forward.
Speaker Change: Got it. Okay, thank you. That's helpful, helpful. My next question is going to follow up just on kind of the pace of SG&A growth.
Going forward you're investing in clubs
Speaker Change: You talk about how that kind of impacts a little bit the near-term earnings as you kind of open these you got pre-opening expense Maybe just or talk to us about the pace of SG&A growth going forward What level of merch comp you would you would you would envision needing to I guess hold that line? Steady as a percentage of sales just however you want to frame it But just curious kind of a longer-term view on on SG&A from here. Thanks so much
Speaker Change: Yeah, look I think as we step back and look at the business you know the story on growing our unit base and so that's an important piece.
Speaker Change: of our strategic priorities as we look forward for the long term. That does provide some SG&A fee leverage.
Speaker Change: Recall we've talked about those clubs take a number of years to ramp and so as we've ramped our pace of openings
Speaker Change: that SD and A leverage is or D leverage is coming through.
you know
Speaker Change: We will come back to you all in March when we talk about full year and set next year as we think about, you know, forward looking margin structure and SG&A for next year, but I would expect there's the leverage as we set in the prepared remarks for Q4 that we've seen all year this year.
Speaker Change: Maybe I'll just add a little bit. This is another area where we're incredibly proud of the progress we've made over the past several years, Bill and his team, and our whole team really.
Speaker Change: Not only have we gone from opening no clubs to now about 10 a year, but we're doing it in an incredibly effective fashion.
Speaker Change: were able to do it in big chunks as well. And, you know, we talked about opening a few clubs in Q3. We will open several in Q4.
Speaker Change: sort of all at the same time. That's a huge lift for any organization, but certainly an organization like ours that's learning how to do it. And, you know, we're really pleased with the performance of the team. We're really pleased with the performance of those new clubs that have come online.
Speaker Change: And, you know, it's really, as I think about the long-term growth of the company,
Speaker Change: you know, while it will, all the depreciation coming in and the expense loads from these clubs coming in will pressure our near-term earnings potential, you know, three, four, five years from now we will be absolutely ecstatic that we that we did it this way. So as Laura said, we'll talk about
Speaker Change: next year when we when we get to the fourth quarter call but that is part of the reason
Speaker Change: why, you know, we issued the guidance we issued for Q4 is we will open a bunch of these new clubs in the next few weeks.
Speaker Change: which will pressure Q4 a bit. You know, while we're on that topic, maybe I'll ask Bill if he has anything to add.
Bill Werner: Yeah I'd say we're excited about what's going forward. I think Peter we've talked about this a little bit with the investment community but you know the other thing I would just comment on and on the on the SG&A piece as specific as we think about new clubs is that we've
Bill Werner: we've purposely shifted to the model of buying the land, building the buildings ourselves, and then owning the real estate. And while that does come with some incremental pressure on the front end,
Bill Werner: it certainly creates a ton of shareholder value over the long term. And we'll continue to evaluate the overall capital structure position in terms of how much real estate we want to keep on the books, but we have a ton of flexibility at this point to make those decisions as we go forward.
Speaker Change: As we think about the right investment to keep on the balance sheet, vis-a-vis the right level of expense track to come through the P&L on the investment side. So, more to come on that, but again, to just reiterate Bob's point, I'm really proud of the team and across the board.
Speaker Change: the last handful of years building this muscle in terms of opening new clubs, opening them well. We've seen great results. One of our Q3 clubs is already across the 52-week membership goal.
Speaker Change: as we look forward to the clubs that we're going to open in Q4. Two of our gynoid clubs are already ahead of their pre-opening goals, so we've seen strong membership demand across the board, which, again, just speaks to the value that we bring to the communities and the real desire to see us open. So we're excited for what's ahead here.
Thank you very much.
Speaker Change: Good to hear. Makes sense. Good luck guys. Thanks. Thanks for the perspective.
Thanks, Greg.
Thank you very much.
Speaker Change: Our next question comes from Robby Ohms of Bank of America. Robby, your line is now open.
Robby Ohms: Oh, hey. Good morning, guys. You know, two questions. One, just on
Robby Ohms: You know for the fourth quarter guide, what's the holiday? Assumption for that two and a half to three percent comps, you know, what's the general merchandise comp assumption in there? Is it the general merchandise comps expected to accelerate?
Robby Ohms: you know, solidly from what you did in the third quarter, you know, any color of that, you know, also mix of digital versus in-store that you expect and maybe remind us whether that
Robby Ohms: It matters a lot to your margins if it ends up being more digital than in-store.
Speaker Change: And then maybe for Laura, just the fresh initiatives. I don't know if you can give us any more color on the margin impact assumed for that in the fourth quarter and any thoughts for next year that we should be thinking about on fresh impact on margins next year. Thanks.
Thank you for watching!
Yeah, thanks Robby, good questions.
As we think about about Q4.
Speaker Change: certainly a lot to take in given the holiday shift and coming out of the election and the weather we've seen here in the Northeast and all sorts of different things to to get through but overall we're we're cautiously optimistic we feel like we've got the right assortment out in front of our members we're very proud of what the merchandise team has
Speaker Change: has put out there. As I've traveled clubs in the last couple of weeks, it all looks great. Our Ops team has merchandised it very well for our members, and our members are in those aisles shopping.
Speaker Change: as I've traveled. So I think we're pleased. We've certainly got the traffic in our business.
Speaker Change: You know to support that it's obviously driven by the fresh business as we talked about a little bit earlier But as folks are coming in for their their holiday food shop, I expect them to to be in our general merchandise
Speaker Change: as well. I would expect a better performance in GM in Q4 versus Q3. We had some some weather noise in Q3 given the abnormally warm fall.
Speaker Change: and a few other items in the third quarter, but we really are happy about what we've got on the floor for Q4 and hopefully our members respond in the way that
Speaker Change: in the way that we expect them to do. You know, our digital business is frankly on fire at this point, putting up 30% growth.
Speaker Change: this past quarter, you know, on top of huge growth the previous quarter, previous year in the same quarter, you know, we're really doing a great job.
Speaker Change: And our members are really telling us all the time that we're helping them
Speaker Change: you know, save time as they do that. So, you know, it is a little bit more costly in some of those things. You know, certainly as we're picking orders, that causes a little bit more labor, but you know, the baskets are bigger in digital orders and folks that interact with us digitally.
Speaker Change: tend to have more incremental shopping behavior and better renewal rates as well. And so, if we have to invest a little bit more in labor, we're happy to do that for the long term.
and maybe Laura wants you to tackle the first question.
Speaker Change: We saw that business continue to do very well in the third quarter, as we talked about in the prepared remarks.
That business does come at a
Speaker Change: a lower margin rate just by the natural structure of it. But we continue to think that it's important for the long
Speaker Change: term for our members to engage in that category. And we know if our members engage in the fresh category, they are more likely to expand their basket over time.
Speaker Change: and shop more frequently, all of which are important to the life cycle of membership. If they have bigger baskets and they shop more frequently, they are more likely to renew. So we feel really good about that business.
Speaker Change: We continue to see it trending well and expect it will do so in the future.
OK.
Thank you.
Thank you.
Speaker Change: Our next question comes from Edward Kelly of Wells Fargo. Edward, your line is now open.
Thank you for watching!
Hi, good morning everyone.
Speaker Change: Bob, I was curious, you know, if you could just take a step back and maybe talk about the timing of the, you know, the fee increase.
Speaker Change: As it pertains to why it's right for your company today and as part of this, could you talk about first year retention rates, trend in discounting related to signing up members, and just kind of what I'm getting at is just a bit more detail around how you're feeling about the momentum of new member growth.
Thank you for watching!
Yeah, good morning. Thanks for the question.
Speaker Change: I'll take the last part of the question first. We feel really bullish about our momentum from a membership perspective.
Uh, thanks.
Speaker Change: I was asked recently what the biggest unlock in our company has been over the past several years, and it has been exactly this point, the ability to grow our membership, period, but also specifically to do it in comp clubs. Our team has done a nice job figuring out the right mix of ways to interact with potential new members.
Speaker Change: and then once they're signed up to engage those new members. And that's really allowed us to put up some of the numbers that we've been putting up quarter after quarter and year after year. We're incredibly proud of the team for doing that.
Speaker Change: It's quite possibly the thing that I'm most excited about in running the company. Obviously, membership underlies everything we do, and whether it's our ability to
Speaker Change: to sign up new members or renew the ones that we have. The team has made just incredible gains.
Speaker Change: in the last several quarters, in the last couple of years.
in our first-year renewal rates.
Speaker Change: are at all-time highs. They have a 7 handle on them. That's as high as we've ever seen them.
Speaker Change: We've got another good year on tap from a tenured renewal rate as well.
Speaker Change: And that's really a testament to the overall business that we're running, right? We're finding the right members to sign up. We are engaging them at the right time.
Speaker Change: and we are continually showing them value, saving them time through our digital properties and putting fantastic assortments in front of them. So I think we really do have that flywheel going in this part of our business.
Speaker Change: and hopefully we can we can build upon that in the rest of our business. As it leads into this fee increase discussion
Speaker Change: You know, we think this is the right time for all the reasons I talked about in the prepared part of the call today. We have invested an incredible amount in our business over the past seven years since our last.
increase, and I gave you some of those data points.
Speaker Change: They're fairly powerful when we look at it, and we you know we have been hearing from our members that we're doing a great job They're certainly showing us that through their
their performance and their behaviors.
Speaker Change: And frankly, we don't want to disrupt the momentum that we have out there, but I think the behaviors that we're seeing today would tell us that there's little disruption to come.
You know, we've done a nice job, as I've said.
Speaker Change: Getting them integrated into our business and renewing them. Well, there's always a little risk from a new array perspective when you when you raise the fee But I would imagine this time around given the performance of our business in general that it will be it would be significantly less risk than the last time that we raised the fees and so
Speaker Change: We're pretty bullish on our ability to do it, and we're doing it really because it will allow us to invest further into the value of a BJS membership. We will continue to raise our labor rates.
and our labor hours in the clubs.
Speaker Change: in order to best service our members and do things like the digital conveniences and obviously FRESH has a higher component of labor to it than other parts of our business. It will allow us to really focus even harder on the value that we provide in terms of price and promotion.
Speaker Change: and invest in other areas of our business as well. So I think it's the right time. I think we're very, very happy with the momentum that we have and I don't see that momentum slowing down.
Thank you for watching!
Great, thank you.
Thanks, Ed.
Speaker Change: Thank you very much. Our next question comes from Kate Machin of Goldman Sachs. Kate, your line is now open.
Kate Machin: Hi, good morning. Thanks for taking our questions. The first question we wanted to ask was just about your comment around adding gas stations to existing clubs. We wondered what kind of lift you see to membership and or comps and how big of an opportunity could that be going forward?
Hi Kate, good morning. Thanks for the question.
Speaker Change: You know, this has been an interesting thing to put a gas station in a club like Medford, Massachusetts. That's 40 years old Was a little bit of a feat of engineering and and it's obviously You know always an interesting proposition to to to get the zoning approval from from the
Speaker Change: relevant authorities to put gas in the ground anywhere, but never mind in the way that we did it. We'll continue to do that because we do see a big benefit in in the club's performance.
Speaker Change: I would venture to say every club that we have that has gas performs better than similar clubs without gas. And they do it in the two ways that are most important. They comp better and membership renewal rates are higher.
Speaker Change: You know that gas is probably the best way to show value out there. Everybody knows a good gas price. There's a sign on every street corner.
Speaker Change: and we tend to have better prices than the street. And we then layer on all sorts of gas discounts on top of it, up to 15 cents a gallon with our top tier credit card. So we take a.
Speaker Change: a great price and make it an outstanding value that way. And so it's a great way to show value. It's a great way to get people in our parking lots.
Speaker Change: It's a great way to get people shopping in our buildings as well. And we'll generally add gas just about anywhere we can figure out how to do it, whether it's
Speaker Change: with a new club or with an existing club, whether it's on the on the pad or shortly off the pad, because we do think it really improves the trend of the club.
Speaker Change: Bill seems done an outstanding job finding ways to do this and going back and sort of mining our existing club infrastructure to see if we can figure out ways to do it and we'll continue to do that for the foreseeable future.
Thank you.
Speaker Change: Thank you. And then we just wanted to ask a question on the CMP initiative. You mentioned you're through grocery and sundries. We wondered if you're ahead of where you thought you'd be when you spoke to us at the end of the second quarter and if there is an end date of when you're through and when these costs will persist into 25.
Thank you for watching!
Thank you for watching!
Speaker Change: That's a great question. You know, CMP, I don't think will ever really stop. It will ultimately become embedded in the way that our merchandising team goes to work every day. You know, we...
Speaker Change: relative to your cost question we did have some external help and it's up and running and the costs that are running through the P&L today are representative of that over time that will
Speaker Change: that that cost will fall off and it will it will be our internal team that's doing it. You know it's a great program it is is yielding yielding very good results those categories that have gone through the CMP process
Speaker Change: You know in the aggregate are doing better than those that haven't Will continue to go through those categories that that haven't been through CMP. We're sort of tinkering with other categories That are harder to put through this type of a model
Speaker Change: like our perishable categories given the volatility and the seasonality and things in perishables, but the core tenets of let's look at the data and understand what our members actually want from us from an assortment perspective and figure out the right cost to buy it at.
Speaker Change: are relevant in every category in the building. And so, whether we run it through the official CMP route or not, I think every category in the building will go through at least those two pieces of it.
Speaker Change: and hopefully yield great results. We did have some uneven execution as we went through CMPs this year and we will get better at doing that and changing the assortment.
Speaker Change: But the confidence that the results give us to proceed is significant. Like I said, those categories that go through this process perform better in comp and margin rate than
Speaker Change: than those that haven't. And so, you know, we'll continue to do it. Our merchandising team has done a fantastic job. Our analytics team has done a fantastic job with it. And it'll be a key part of how the team goes to work in the future.
Thank you.
Thanks, Jay.
Speaker Change: Thank you very much. Our next question comes from Simeon Goodman of Morgan Stanley. Simeon, your line is now open.
Speaker Change: Hi, this is Zach on for Simeon. Thanks for taking your question.
Given the
Speaker Change: increased rate of unit openings. Can you give us a little bit more color on what pre-opening expenses might look like in the fourth quarter, please?
Speaker Change: Hey, good morning, Zach. You know, we're thinking about pre-opening for the fourth quarter.
Speaker Change: around $15 million. That corresponds to the pace of openings in Q4 versus Q3. It will accelerate.
and so
That's kind of how we're thinking about it.
for the fourth quarter.
Thank you. And then just as a quick follow-up,
Speaker Change: Regarding the Fresh 2.0 strategy, I appreciate the color you've given on the call this morning. As a follow-up, are you finding vendors supportive at all to fund some of those investments in Fresh 2.0?
Look I think
Speaker Change: The supplier community has been great as we've changed our assortment, as we've talked about, we have...
Speaker Change: done a bunch of different things with the vendor community. We've put in different items. We've changed pack sizes. We've changed how things are transported, over what time they're transported. We've done a lot of things in those.
Speaker Change: Those supplier partners of ours have been very willing to help us in this initiative and frankly they've been rewarded as much as we have with double-digit comp growth mostly coming from units. That's all extra business for them as well.
Speaker Change: The thing that makes it a little bit lesser margin for us is frankly the labor component in our clubs. And you think about the difference between dropping a pallet of Fruit Loops on the floor versus hand stacking.
Speaker Change: Tomatoes or asparagus or bagged salad or something. There's a different, a slightly different model at play there that is a little bit more costly to
Speaker Change: to run in our environment versus a standard pallet configuration. That's something we're absolutely willing to tolerate because we believe in the ultimate payback from our members as we talked about those folks that buy our fresh categories from us are our best members, period.
Speaker Change: and they are worth tremendously more lifetime value than those that do not. We have a reasonable population of folks that don't buy fresh from us at this point.
Speaker Change: and we are day by day convincing them to do that.
Speaker Change: by putting better products on the floor and presenting them in a way that matters and at a pricing that is.
Speaker Change: that is, you know, an attractive value. And so we'll continue to make that investment.
Speaker Change: because it ultimately will help drive the entire box, not just the perishables business. That's really the key part to this program. If we just grow, you know, produce comps, that's fine.
Speaker Change: and we'll take that. But the real magic, and we're starting to see that in the clubs that have had this program for about a year now, we're starting to see the overall traffic in those boxes lift. And that's what we saw in the test clubs that we did, and now we're starting to see it in
Speaker Change: and other clubs. That will help us next year, the year after that, as we deepen our relationship with these members and really get that repeat traffic coming.
Thank you. Thank you.
Helpful. Thank you.
Thanks, Zach.
Speaker Change: Thank you very much. Our next question comes from Chuck Grom of Gordon Haskett. Chuck, your line is now open.
Chuck Grom: Great, good morning. Thanks a lot. Great results. Just two questions for me, one near-term, one longer term. On the near-term merch margins, can you talk about the expectations for the merch margin rate to be flat for the year? The fourth quarter guide looks a little bit conservative given the lap, especially against the co-brand card cost last year.
Chuck Grom: So you can talk about, you know, puts and takes here in the fourth quarter. And in bigger picture, you know, congrats on getting 7.5 million members. I think that's about 30,000 per club, which is up about...
Chuck Grom: I think from $23,000 per club in 2019. Can you just discuss the opportunity and strategy to expand the membership within your existing footprint? It just seems like there's still a big opportunity relative to your two largest peers, particularly, you know, Costco. Thank you.
Speaker Change: Yeah, thanks Chuck. Maybe I'll talk about membership and Laura can talk through Merge Margins.
Speaker Change: You know, I think you're right. I think 7.5 million members is fantastic. We're very proud of the progress we've made over the past several years in the total amount of members, but also the members for a club that...
Speaker Change: that you bring up. As we've talked about in the past, the disconnect between ourselves and our competitors over time has largely been a math exercise having to do with our renewal rates.
you know, for many years of...
Speaker Change: The company's history, the renewal rate, the standard renewal rate was in the low 80% range and having been at 90% now for a few years.
Speaker Change: And hopefully for the future, you know, we're obviously retaining more and more members every year. And that math is quite powerful. And as I said, we're also finding great ways to grow membership in comp clubs. You know, innovative ways to talk to folks.
Speaker Change: different different promotions to get people to to come in and be members you know we're attracting more and more members through digital properties today than we ever have
Speaker Change: You know well over 50% of our members come in through digital means today So we've just done a lot of things right not everything right not everything at the same time. We've still got stuff to work on But you know we've really we've really come a long way from where we were
Speaker Change: 3, 5, 7, 10 years ago from this perspective, where we were just trying to fill a leaky bucket 10 years ago and now we're growing day-by-day, quarter-by-quarter, year-by-year. So, lots to be happy about.
Speaker Change: We are by no means done and and all the things that we talk about whether it's fresh 2.0 or the merchandise transformation
Speaker Change: are the digital properties. Those are all aimed at the same point. We're trying to grow the total size and quality of our membership base. And that won't be done overnight, but hopefully the next few years make as much progress as the last few years did. We really are excited about the momentum that we have.
Speaker Change: and we have a lot of fun stuff on tap to try and keep that going.
Speaker Change: Gloria, you want to talk about Merch Mart just quickly? Yeah, hey Chuck, good morning.
Speaker Change: You know, on merch margins, I would offer a little bit more color on what we've already talked about.
Speaker Change: We're really happy with the March margin growth we delivered in Q3. It was a little bit better than we expected, gets us to about flat as we sit here today, year to date. As we think about Q4,
I think it's...
Speaker Change: Our guide for the full year is flat, and so that gets us to about where we are today. We're really happy with the progress we're making on CMP, which we've talked about, and our fresh business.
Speaker Change: And so both of those things we've factored in as we think about our margins in Q4.
Great, thank you
Thank you.
Speaker Change: Thank you very much. We currently have no further questions so I'd like to hand back to Bob Eddy for any closing remarks.
Bob Eddy: Thanks Carly. Thanks everybody for your attention this morning and for your support of our company. We're really excited about our future and hopefully today we've given you some idea of why that is. We will talk to you after our fourth quarter and we wish you all the best holiday season. Thanks very much.
Thank you very much.
Speaker Change: As we conclude today's call, we'd like to thank everyone for joining. You may now disconnect your lines.