BJ's Wholesale Club Holdings, Inc. (BJ) Earnings Call Transcript & Summary

Good day, and welcome to the BJ's Wholesale Club Holdings Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Robby Ohmes. Please go ahead.

Hello. Thanks, operator, and good morning, everybody. Thank you for joining the BofA Consumer Conference -- Teleconference. I want to thank BJ's Wholesale Club for joining us this morning. BJ's is an operator of membership warehouse clubs in the U.S., one of the leaders there. We're very lucky today to have CEO, Lee Delaney, on the line; as well as CFO, Bob Eddy. I'm going to turn it over to Lee for a few comments before we go into an analyst-moderated Q&A. And with that, I'll turn it over to Lee and Bob.

Great. Good morning, everyone. I'm sorry, we couldn't all be together today. We were looking forward to it, but obviously the situation in the world has changed lives for a lot of people. I'll keep my prepared remarks relatively short. We had our earnings call last week, and so I think folks who listened to that call have a pretty good sense for where we're at. But just to summarize, we've spent the time since being a public company really laying the foundation to grow our business at a faster rate. We've invested in systems and people and tools as well as piloting and trialing a host of growth initiatives, and we feel like that's the clear message from the market and a clear message to you. We need to grow at a faster rate, specifically as it relates to comp sales, and we're excited to invest more aggressively behind some of the things we know will work. We took actions that we're calling Project Momentum to create an investment pool to fund the growth out of our own pocket. And so as we disclosed on the call, we believe over the course of the next 2 years, we can take $200 million largely out of our SG&A cost base, which will serve as a pool of dollars. We can use to invest more aggressively behind our omnichannel platform, our membership, our marketing, our new club acceleration. And think all of those things will serve us well to grow our comp sales at a faster rate. And so with that as a basic open, I'm happy to turn it over to you, Robby, to facilitate questions from the group as you see fit. We're here and really excited to answer your questions.

Terrific. Thanks, Lee. I'm going to ask the question that I've gotten a lot on -- that you're getting a lot on, just -- I know people want to know if we can get any more thoughts on the stock-ups related to coronavirus and how you guys are thinking about that operationally and pressures on the system? And maybe how you think about what happens when you get beyond that period as well?

Sure. Let me answer it in a few ways. So one is we are taking increased measures to protect our team members and our members either in our kind of home office, distribution or club facilities that includes things like greater hygiene, cleanliness standards, et cetera, which is really important. I think it's something that all retailers can and should be doing. Two, we're very actively managing the supply chain. As we look at the supply chain today, there's a little bit of risk with long lead time items particularly out of China. We were first worried about goods that hit our clubs in April. There were a couple of dozen SKUs that we weren't sure we would get. As we sit here today, it's down to 2 SKUs that we're not sure we're going to receive, which is a very small risk and de minimis in terms of the impact on the business. As you look to May, you have the same basic size problem. There's a couple of dozen SKUs that we're not sure we're going to receive, but that in terms of overall risk is pretty small. We will just assort other things in the space that is freed up, but you'd have some categories where there are articles that we were excited about that we won't have. But out of 7,000 articles in the building, 25 is a relatively small constrained impact. And as you look further out, there's a little bit more uncertainty. And so we're kind of actively managing that. But then you have the flip side of that, which is there's certainly been some increased consumption for things you would have seen on the news, cleaning supplies, canned food, et cetera. And that is stressing with supply chains of the partners to provide that to us. And so we are in incredibly frequent contact with all of the key players to make sure that we're staying in stock for our members on, what you say is still a narrow set of goods where you're seeing more frequent shopping. I think as it relates to what that means to our business and -- for over a longer period of time, it's really hard to say. It's clear that some consumers are nervous about how the situation with coronavirus will evolve. And so we're seeing what clearly is some stock-up behavior on goods that would be associated with a broader change in kind of an everyday life in the country. But it's still, we think, a smaller portion of members on a narrow set of goods, and so we're not sure how that will evolve. And you could imagine in a few different scenarios, either broader kind of nervous buying or longer term but real change and things tied to school and work closures, et cetera. And so we're just managing supply chain in our business under a world of broader range of scenarios that we normally would do in making sure we're well prepared to pivot however the world evolves. Let me stop there. I know that's a bit of an incomplete answer, that's by design because it is a very fluid situation.

No, that's helpful. I'm going to hit you with the other topic of the day, which is fuel price volatility. Can you just maybe work into how you guys use fuel to drive your membership? And then maybe how we should think about potential increased fuel price volatility over the next year or so?

Sure. Our position on fuel continues to be the same, which is we believe we need to offer a terrific value to our members every day. And so our pricing philosophy is to be a couple of cents below whoever is the low-priced other player out there. And we hold true to that pricing algorithm regardless of swings in the oil market. That would also typically put us at parity pricing versus Costco and Sam's to near as we can tell hold true to a similar pricing philosophy as we do. When you have periods where the oil market drops, we're always looking for opportunities to invest at a faster rate. I mean general, if we lead the market down that's what ends up happening, other people will follow because there's -- even in boom times, from a margin standpoint, there's not enough margin relative to the price of the good to lead to dramatically an extended price dislocation. And so we'll be selective about that but generally, try to stay true to our overall pricing philosophy, which is to be at unbeatable value every day.

Got you. That's very helpful. And then one other question I just wanted to ask before I see if there's any from the audience. But on Project Momentum, you guys have talked about that $100 million over the next 2 years, and you also mentioned reinvesting all of that $100 million. Can you kind of walk us through where the key areas of reinvestment are for the next 2 years?

Sure. Do you want to talk to it, Bob?

Sure. So Robby, it lines up nicely with the different areas of investment that we talked about on our call last week. It starts, first and foremost, with our digital business and growing the penetration of that business within our overall company and within our members shop. The biggest opportunity there is, I think, just to tell people about the things that we offer, very often, our -- feedback from our friends around here is, oh, I didn't know you do a same-day delivery. Or I didn't know I could order things online for pickup in the club. And that's not exactly unexpected, given 2 years ago, we didn't even really have a functional website. And last year was about the beginnings of sort of commercializing the new platform that we've put in place. This year is really about amplification of those efforts and really telling people the story and continuing on the nice growth that we've already seen from a digital perspective. The next one is elevating our marketing, and that is a little bit just doing more, but it is also doing it better. And takes the form of increasingly personalized messages or different offers that are grounded in data and data science around what's the best offer for a particular category at which time of the year, followed there by membership acquisition, that's the foundational principle of our business is to get more members and to get them shopping. We've seen nice gains from a paid member count perspective, and we'd elect to invest in that to continue getting new members as well as driving them up into our premium tiers. And then -- I'm sure I missed one, but finally, I'll get to new clubs. We have started the acceleration process of getting more new clubs and gas stations out there. Last year, we got 3 clubs and 6 gas stations. This year, we'll hopefully do a little bit better than that, although we've guided to similar numbers. And the pipeline going forward looks a little bit more robust as well. And so we would look to invest in all of those different things and a few other items to try and speed up the top line growth of the company.

That's great. Operator, I just want to see if you can see if there's any questions from the audience?

[Operator Instructions]

And then maybe while we're queuing up for questions, another question I had was can you walk us through how you think about the profitability of your online offerings, pick up in curbside and ship to home, and how that's changing? And just how we should think about your whole approach to omnichannel? I know it's a relatively small business still, but you guys have called out how fast it's growing?

Yes. Sure. Why don't I take a shot at it and then Bob can weigh in. So it varies by business and by service. So let me start with same-day delivery. This is essentially a full margin sale for us with no dilution. The way the model works is a $15 delivery fee. That $15 fee essentially passes straight through to Instacart, who sends a shopper into our building and the member pays normal club pricing for the items and that looks like a full margin sale to us. And so growth of that platform, from our standpoint, is no different as if a member had walked in the building and shopped themselves. So that is the easiest one to wrap your head around and growth there will be really attractive. Next is buy-online-pickup-in-club, where a member shops online and then come into the store to get their items. The dilution there comes from the cost of picking the item. Important to remember, our average ring is -- our average basket is $100 with a $10 per item, kind of ring. And so as you think about the pick cost of those orders, we think it's pretty different than what you would see in a grocery store, even in the Walmart, where the average item is $2.50. We just have more margin dollars even at a lower margin percent. And so we can pick that pretty efficiently, 10 items to make $100 basket versus 10 items to make a $25 basket. We also -- we are seeing people shop the club when they come in, and you don't need a lot of incremental shop to how that pick cost pay for itself. And so while it's a little bit dilutive on the surface, if you have people shop more, it pays for itself quickly. And then the most dilutive, and this is true for, I think, every retailer, is shipping things to people's home, particularly if you eat the shipping cost yourself. And so you'll see pretty meaningful deterioration in the economics as something is sent that way. And so important to note, as we think about dialing up our services here, we are -- we're really excited about buy-online-pickup-in-club, really excited about same-day delivery. The ship to home business is a little bit more uses in terms of our excitement, because it will be dilutive. We think it’s best to help rectify that. So we've turned on, in the last year, ship from club, where we historically have done it all out of one of our DCs. So you get either more efficient picking cost because you use top labor, you get more efficient shipping because you're closer to the member. But that one's more -- a bit more -- that's one a little more challenging. And then the convenience is that we've digitized coupons. And so that saves us in a lot of ways, the person who was walking through the register with a stack of coupons that needs to be scanned with queue up labor or time at the front end and that -- now that goes away. And so often case, it's true that digital conveniences will make everything easier for the member and easier for us, too. So it's a bit of a mix. But on the whole, we feel like we're pretty competitively advantaged given the economics of our business relative to others. And so we're excited to invest behind it.

And Lee, just a quick follow-up. Are there any significant regional differences in the way your online business skews by the options, pickup or curbside or ship to home or like urban versus suburban or any differences?

Not huge. You'll definitely see same-day delivery, because of the $15 delivery fee, seemingly skewed to more affluent neighborhoods, right? At the core, it's people who are willing to trade money for time. And so that tends to over-index in places where there's a little bit more an affluence. You'll see a little less ship to home in some of the more urban geographies, where people who live in apartments or multi-tenant homes, it's a little bit harder to have something left on the doorstep than it is in other places. And to speak about kind of our overdevelopment in Metro New York, particularly in some of the less affluent communities of Metro New York, you'd see a little less of that. We view that as a favorable thing in the long term, because it will skew more towards buy-online-pick-up-in-club. And so we're competitively inflated, just given the premium on real estate in those geographies. But those are the big differences you'd see.

That's helpful. Operator, anybody in the queue?

And we have no one in the phone queue at this time.

All right, great. Then I will keep going here. Lee, I was hoping you could give us -- you spoke about it on the call, but maybe even a little more color on some of the efforts you're putting into the service businesses, I think, sort of the home improvement area was mentioned, cellular is a big new initiative, financial services I think is another, but maybe kind of walk us through those newer and ancillary businesses?

Yes. So I'll try to give a bit more color. So services has been an interesting business for BJ's over the years. It's not something that we've put a lot of focus on until relatively recently. In fact, the services organization up until kind of -- up until last year really reported not into the merchandising team, but into the operations team. It was not a business that we were looking at to say how do we offer the best member value and how do we really delight members with everything we do in services. As we studied that a bit more throughout the course of the last year, we recognized there were pretty meaningful opportunities for us to grab. And so that started with the optical business, where we were pretty dissatisfied with the third party we were using and the offering they were giving to our members. You didn't have great values. You didn't have great brands, the in-club presentation wasn't all that well done. We didn't have doctors in as many places as we would like to write scripts for our members. And so we in-sourced that last year and have been working to fix the brand portfolio, fix the in-club presentation, add doctors and telemedicine options, et cetera, and have seen good growth that we think is poised to continue. And as we step back and thought about the other places where we either had an offering that wasn't working terribly well or didn't have an offering, we got pretty excited about the potential. So an example of that is cell phones. The company had carried cell phones years ago, but up until really Black Friday, we didn't have a cell phone offering. And so we went out to the kind of carrier market and looked for an exclusive deal. And signed that with AT&T, where we're now able to offer to anyone who switches an AT&T line, gets $250 off the price of a phone, above and beyond anything else you see in the market, including walking into an AT&T store, because they were excited about the potential of our membership base to get exclusive access to that group. And so we saw nice growth over Black Friday. We went dark as we kind of had to get the fixed ring and the employment situation right in the club, and we've now turned that back on. And we don't see any reason why we can't have a pretty sizable cell phone business to build through our club, given the value we're offering to our members. Home improvement is a similar animal, where we do have a home improvement business today. It's largely outsourced to a patchwork of suppliers who offer inconsistent offering across our clubs, and we think by taking more control over that and delivering a more consistent experience, we can see nice growth. And it's not lost for us, but Costco, in particular, but Sam's as well have businesses which are dramatically more developed than ours and there's no reason we can't do similar things and see nice growth. And so we've recently built a small dedicated merchant team to focus on these businesses and look for new places for us to grow. And so we're considering all the possibilities, different elements of health services, financial services that we're not in today. And so there are things on the longer-term radar screen that we really haven't even evaluated. So you can have your taxes prepared, Walmart, and they give you a refund that you can spend in-store that day. There's no real reason why we couldn't do something similar for our members and offer great value, but we don't today. And so you'll see us look to launch a few key services this year and then look to expand that as we go forward.

That sounds great. And then just one other on -- forgetting about coronavirus and its impacts, I think you guys were looking for sort of better same-store sales as you move through 2020. Can you kind of walk us through how you've planned out the key drivers in sort of general merchandise in grocery?

Robby, certainly, we believe that the growth will be led by general merchandise for the foreseeable future. It's a business that we are -- have most accurately renovated. It's the farthest along from that standpoint, and it has driven our growth for the past couple of years, that shouldn't be any different. We will really just build upon the foundation that we've built in the last couple of years by doing things like according in the space of apparel. So remember, we switched apparel in for jewelry, and that's been a great thing for our company. We then added a little bit more square footage to the apparel set and that was also productive. But the one thing that our largest competitor does pretty well is change the size of their apparel set throughout the year, so that they can offer it when it's most relevant to their members and offer different things at different times of the year. So you will see, sometimes of the year, huge seasonal sets, you'll see indoor furniture, you'll see patio furniture, all sorts of things impacting the size of their apparel set. And we have chosen so far to not do that. That will be new to our repertoire for this coming year in the center of our clubs. So general merchandise should be driver #1. The digital business should be #2, I would think as we look forward to driving the awareness and penetration of that business as we've talked about on this call. And the third thing I would point out is marketing and membership. Certainly, we've had great success growing the number of paid members in our business, primarily by transitioning away from the free trial business, and we will continue to try and sign-up new members and work them up through the premium tiers of our memberships, but also to activate their shopping and the shopping behaviors of our entire membership through more personalized offers, through more data-driven offers and get people into our buildings more often and putting an extra item in their cart when they come in.

That's helpful. Operator, I just want to check and see if anybody is queued in to ask a question.

And no one has queued up over the telephone line.

Great. I've got plenty. Another question I had was, Lee, there's been -- I think you even mentioned on the call that there's some confusion about some of the SKU eliminations you're doing in addition to items that you're adding. Could you maybe walk us through what you're doing and how you're testing the changes you're making? And where do you really see the biggest opportunities?

Sure. Yes, I think people have misunderstood what we're trying to do as we think about simplifying our offering to grow. And I think the worry is that we would approach it as other kind of large assortment, large SKU retailers have done and have struggled. So the best example of that is probably the impact at Walmart, where you have a retailer with tens of thousands of SKUs, who attempted to trim some of the slower-moving things to drive operational efficiency and ended up not loving the sales impact. We're coming at it from a very different standpoint. So in a few regards, one, this is not about operational efficiency, and we're already a curated retailer, rather it's looking at the market and saying, where are there opportunities for us to grow. And we're finding a whole bunch of categories that we don't compete in. So we are over-indexed in center store, traditional grocery and sundry items that on the whole aren't growing a lot in the market. We're underdeveloped in kind of key growth sectors, and we talked about some of those on the call, but there are things like plant-based proteins, where we generally don't offer much of anything, and it's kind of active nutrition and healthy snacks and chemical -- reduced chemical cleaners, things like Seventh Generation [ All-Purpose Cleaner ]. So we haven't assorted that offering before, yet we would have multiple products with essentially the same consumer offering. And so it would be cleaners that all have the exact same profile, but wouldn't offer something new. So like an example of that is we had all kinds of countertop cleaners, but we didn't have anything to clean granite or stainless steel in the assortment. And so we are looking, first and foremost, that where are we underdeveloped? Where is there growth in the market? And what should we be adding? And then we're finding on the backside that there's also places where we just have lots of choice that people don't value. And we've built the tools from a space management and kind of data mining standpoint to make sure we get it right. And then we're piloting that. And so we're going to the market in a narrow set of stores and saying, does this work. The members respond favorably, and we're seeing good results. There are some halos that come with that. So one is as you reduce SKUs in places where there's not a lot of growth, you can go back to the market and source efficiently and create winner-take-most or winner-take-all scenarios. And so there's a little bit of sourcing upside tied to that. And then you create more headroom for our own brand, which has historically been crowded out a little bit versus other retailers and so that's an opportunity to delight members by giving them better value, but also to drive a little bit more margin for us in the process. But that's not, first and foremost, what this is about, it's first and foremost about tapping into categories and subcategories that we don't compete in. So our orientation is just very different from what other retailers have embarked on, and we think it can be accretive from the start, not that there will be a big period of disruption.

That's helpful. And you mentioned private label. Can you just remind us what you see as the long-term opportunity for private label and your largest competitor does some interesting private label vertical integration with chickens and things like that. How -- what is -- longer term, how does BJ's feel about pursuing those types of things?

Yes. So look, we're just about 20% own brand penetration today. Our 2 brands, Wellsley Farms and Berkley Jensen are our 2 biggest brands in the company, and then -- significantly bigger than any brand that follows. We also see great participation in our members' baskets. So it's well over 90% of our members that shop at least one of those brands as they come into the store. So these are big meaningful brands for us. And we also think there's good growth potential. So 20% penetrated is not all that high in the world of own brand penetration. And so we look at Costco, Walmart, Wegmans, other players with robust levels of own brand participation, and we think they're offering great value to their members. They have great economics. And we don't see a reason why we couldn't be significantly more developed than -- those guys are generally high 20s to low 40s in terms of their development. And so over the long term, I don't see any barriers to us getting to a similar level. We don't have any plans to vertically integrate right now. We still feel like with the vendor partners that are out there that we can source great value to our members and do it without investing the assets in manufacturing. I guess over the long term, that might change, but we're a long way from that today.

And then, operator, I just want to check one more time to see if there's any questions out there from the audience.

[Operator Instructions] And there are no questions in the queue at this time.

Well, so my next question would be on membership. And maybe you could help us think through what your key drivers are and keeping that retention rate at all-time highs? And how you're thinking about -- I think on the call, you spoke about driving growth of more profitable members, and I think there was commentary on younger customers or -- and/or millennials. And maybe walk us through how you're thinking about driving membership going forward? And how it may be a little different than what BJ's used to do in the past?

Sure. Yes. So as you think about acquisition and retention to grow the overall membership pool, we're pulling a variety of levers. I'll actually talk retention first and then come back to acquisition because that was kind of core to your question. So the best thing you can do to drive retention is to increase shop rate. And we know that the members we lose tend to be the ones that are shopping less. And so we're trying to target that in a few ways. What we're doing in terms of adding categories and services will make us more relevant across a broader set of transmissions. And so we think that has potential to drive greater shop rate. We also think omnichannel and the personalized marketing we're doing will resonate as well. It's increasingly true that people are looking for digital conveniences of one stripe or another. And as we've been underdeveloped there relative to the market, there's an opportunity for us to kind of catch up in that regard. And our personalization engine also allows us to really understand if you're likely to make a trip or not and what do we do as a result. And so you're getting people shopping as the primary way we'll drive renewal. And then you also flip to kind of the higher tiers of membership, in particular, the credit card. And so you'll see us invest more behind credit cards to make sure that people are saving the most amount of money they can with us, because when someone enrolls in that credit card, they save more, but we see terrific renewal. And if you kind of deconstruct the main drivers of difference between us in the high 80s and Costco in the low 90s, the credit card is clearly one of the biggest drivers of delta. And so that will be a pretty big focus for us going forward. And then when it relates to acquisition, we are trying to skew younger and using more digital means to acquire members. It is still the case that analog mechanisms work pretty well for us. And so we send out a lot of direct now. We do more traditional advertising of our membership, but we're increasingly using digital channels to find members. One of the things that's new this year is we ingested a huge ton of data attributes about every households in our footprint. And so we found a data provider that had a few hundred attributes on everything from how many kids you have and if you're married or not, how much you make, where you tend to shop, that type of thing. And we're using that, combined with our advanced analytics capabilities, to get much more surgical in who we market and how we market to them, and kind of integrating that across analog and digital means. And we think that has the power to allow us to invest more behind acquisition because we'll see higher returns as we do that. So just figuring out, is it new moms or recent movers or who are the relevant population to target and our acquisitions who are being a little less robust and a little bit more targeted in what we do.

That sounds great. Operator, one last time to check on the audience.

And we currently have no question in the queue at this time.

All right. I'm going to ask my final question. This may be more for Bob Eddy. Bob, I was hoping you could just remind us, just generally on gross margin and CPI sourcing initiatives. How should we be thinking about your merchandise margin ex gas kind of room for it to keep moving up? And then maybe just taking -- and again, this is all ex coronavirus impacts, but labor, freight, how you're thinking about that for the next year or so and wages -- sorry, wages in there, too?

Sure. So margin and then SG&A. Certainly, where we are -- we're expecting to continue to grow gross margin, albeit at probably a lesser rate than we have in the past. The headwinds and tailwinds there are really no different than the things that we've talked about here today. So start with CPI, that is our effort to use data to derive better prices from our suppliers. That effort has been tremendously successful over the past few years, we've gained about $350 million of cost of sales reductions over that period and has allowed us to invest meaningfully into our business. That effort continues, and we expect it to continue to bear fruit, albeit at a lesser rate than we have, just given the prior years were so successful, we've hit most of the categories multiple times at this point. But it is now embedded in the company's process and that discipline is resident throughout all the categories that we buy. Private label penetration should grow and that should yield some additional gross margin growth. Obviously, we invest in price every day and maintain our price gaps. So again, we're even priced with Costco and Sam's and 10% to 15% below Walmart and 25% to 30% below your traditional grocery store, that's incredibly important to us. We invest in price every day all the time and that will not change. What will change potentially on the downside is the increasing penetration of the digital business. As we've talked about, not all pieces of that are margin dilutive, but some of them are. And we will continue to invest in that business because it's important to our members and to our overall growth profile, but some of it will come at a cost and we'll at least partially offset the gains from a CPI and private label perspective. SG&A, I think I would answer that with the project momentum answer. We will certainly use the project momentum cost savings to accelerate our growth in the business. It will also obviously be used to offset some of the inflationary costs within the business. We are investing in our team members every day through increasing payroll rates. Rate hasn't been a tremendous headwind but certainly, the cost of running the business go up every year, and that is part of the reason why we embarked upon project momentum, because we realized that in order to invest in the business, you have to cover off your inflationary cost before you do so. So we are thinking that SG&A will grow, while acknowledging we didn't give a whole lot of guidance to the Street on our last call on that. SG&A will grow, and we will hope to get -- plan to get SG&A leverage by increasing the top line rather than reducing SG&A.

That's great. That's very helpful. And we are out of time. So I want to thank BJ's for a great presentation and Q&A session.

Thanks, Robby, and to everybody on the phone, we appreciate your time.

Yes. Thank you, guys.