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

Thank you again for joining us. This is Kate McShane, the Hardlines, Broadlines analyst at Goldman. It's my pleasure to introduce members of the management team of BJ's Wholesale Club to our fireside chat. BJ's differentiates itself with its membership model, which allows them to offer the lowest prices and its treasure hunt experience, which drives traffic. It operates in over 200 warehouses, generating revenue of over 2 -- I'm sorry, over $12 billion. The company reported a strong comp in Q2 and continues to expand margins. Today, we have with us Lee Delaney, President and Chief Executive Officer of BJ's. Mr. Delaney joined BJ's in 2016 as Executive Vice President, Chief Growth Officer and became President and CEO at the end of 2019. We also have with us Bob Eddy, Executive Vice President, Chief Financial and Administrative Officer of BJ's. Bob was named Chief Financial and Administrative Officer in 2018. He joined BJ's in 2017 (sic) [ 2007 ] and was named Chief Financial Officer in 2011. Lee and Bob, thank you so much for joining us today.

Thank you for hosting us. It's a pleasure to be with you.

Thanks, Kate.

Wondered if we could kick off with a question, just focusing on what you've kind of just been through with the pandemic. Looking back at the first half of the year, particularly during the time at the peak of the pandemic and right after, wondered if you could talk a little bit about what surprised you the most about your business during that time? And what did you think you did really well during the pandemic? And if there was anything you would have changed in hindsight?

Well, I think the last 6 months have been chock full of surprises. I think as we reflect back on the overall state of the business and how we've been performing, I've certainly been surprised by a few things, many of them positively. So one, I've just been surprised and quite pleased by the resilience and adaptability of our team. We went from a completely work-from-home model in the home office in mid-March with no experience doing that. We've been scrambling to find sufficient product to satisfy the kind of overwhelming needs of our members. We've had to put in place a vast array of safety protocols really quickly. And the team has just done a remarkable job. For that, I'm deeply appreciative. Second is just how well our business has performed during the recent events, in particular the pandemic, and its ability to scale to meet what for us was an unprecedented and continues to be an unprecedented level of demand. And I think we just have a number of things that are particularly applicable in our business model to the current environment. And so the model has scaled well and that the team has responded. And that's translating into a real growth in the membership, which is the thing that is always the start of everything that we do is membership and the more vibrant, our membership is the better prospects we have going for the long term. And so we've just seen a meaningful uptick in members. And we've been able to continue to make progress against many of our strategic priorities. So our digital -- investments in digital and real estate, et cetera. And so we're really proud of our experience over the course of last 6 months and excited about what it means for our transformation on an ongoing basis.

When we do think about how strong your comps were in the first half of the year, it seems pretty clear that BJ's did take some market share and we wondered what it was about BJ's model that enabled this level of growth compared to the industry, which was growing at a slightly slower rate. Do you think inventory levels, engagement with your suppliers or your geographic footprint had a material impact on your sales results?

We have had really strong results across the board. And so comp in the first 2 quarters, which was in the mid-20% range both quarters, which is very encouraging, we saw that across all of our geographies and across all of our categories. And so the degree of strength that we saw was relatively homogeneous across the entire business. It changed slightly from week-to-week and business-to-business. But on the whole, it was strong across the board. And we do think we're taking share. I think there's a few things that come together. So one is just we're a very relevant retailer in this environment. We are selling bulk groceries at market leading value. And with people trapped in their homes and not able to go to restaurants, we're just -- we're as on trend as you can be. Two is, we've made a number of investments in the business for the long term to change the assortment, to think differently about digital services to really make a number of things that were meaningful improvements to the business. And that, combined with just a real relevance, has allowed a lot more people than we would normally have expected to see the new and transformed BJ's. And we've also done a really good job operationally. And so again, it comes back to the scaling of the model, but there is a certain simplicity to a business with relatively low SKU counts with relatively simple buildings that worked in this environment and also allowed us to be pretty nimble. And so if we needed to add new suppliers or respond to changes in demand, we were able to do that. And so it's really the combination of those things that has made us particularly relevant that are on trend recently.

One of the questions that we get the most just for anybody who's really selling food is that how long can these above-average trends last, especially once the economy reopens and there is a vaccine? Could you maybe talk about your view on this and how it can impact your business and you can manage through?

Yes. I think none of us know. A lot will depend on the course of public health. And I think we would love to see a return to normalcy, along with everyone else. But I do think it's likely that some measure of eating at home and trip consolidation will continue for a while. So you may start with public health. And while we're hopeful there will be an effective treatment or a vaccine, we know that scaling those things will be challenging just given the incredible demand that will exist around the world. And so we think that, that likely sticks with us for a while. Somewhat related to that, our business tends to do well during periods of economic distress. So even if you're able to fix the public health challenges, we have an unprecedented level of economic displacements, in particular, unemployment. And I think being the low price retailer in that environment is a good thing to do, people will need to save money. And so it seems to us under a variety of scenarios. Some of the challenges that exist in the world will create tailwinds for our business. And if you step back from that and think about the membership model, we've had an unprecedented number of members joined. And we think some of that behavior will be sticky. There's just more people who are seeing our franchise than we've ever had before. And we're quite hopeful that in any scenario, we'll hold on to more of them because shopping in our business will be something they've become accustomed to and hopefully have enjoyed.

Wondered if we could talk more about the new member growth. I think that, to us, has been one of the -- I mean, the comps have been a huge positive surprise, but -- so has the new member growth. And we wondered how far ahead of your original new member plan are you? And how does the new member activity compare to maybe your more mature members?

Do you want to take that one, Bob?

Yes, sure. The member growth, as Lee said, that we've seen this year has been quite amazing and unprecedented, right? In Q2, we were up 10% in members. Importantly, we hit a new milestone as well in terms of number of paid members. We had 6 million paid members during the quarter. And I'd like to give people this context on the speed at which we're doing it. The trip from 5 million members to 5.5 million members took 9 quarters. And the trip from 5.5 million to 6 million members took 2 quarters. So we are acquiring members at a markedly different rate than we were in the past. And so we are well ahead of the membership plans that we had. Importantly, the complexion of those new members is encouraging as well. So they are younger than our average member. They are more digitally engaged than our average number. They are shopping more than a typical new member would as well. And so as we look across the new member profile, a couple of things matter. Typically, the more you pay for a new membership, the better member you will be in terms of your shopping and your lifetime value as a member. We are seeing far more members come in and pay full membership rates than that we've seen in any typical year. They're coming in unaided by discounted membership promotion that we may have sent them, and they're paying their full membership fee. Historically, it's been a very linear experience. The more to pay for the membership, the more you shop, the more you renew. And so that's encouraging. Their shopping patterns have been encouraging as well. They're shopping more often, and they're buying bigger baskets when they do. Some of that is undoubtedly driven by the pandemic and the trip consolidation going on. But again, our experience has always been the more people shop and the more often they shop, the more than they renew. And we're seeing that behavior across all of our membership cohorts, whether they are new members or existing members. And so that makes us feel great about the stickiness of the membership going forward and our ability to keep them engaged and retain them into next year and beyond.

Thanks, Bob. I just had a couple of follow-up questions to that. Could you maybe contextualize what new member contribution is to comps maybe in the first month or first quarter versus where they are a year from now from a contribution standpoint?

I don't know that we've ever broken it out in terms of the comp. But think about it this way, members season in their purchasing habits over time. A typical new member would come in and on average spend a little over $1,000. A couple of years into their membership lifespan, they're spending roughly double that, I mean, about $2,400 per year. And that growth happens over a couple of year period. So certainly, they're coming in this year and spending a lot and adding to our comp this year, but they will also mature in their spending pattern going forward and power the comps from here on out.

And that -- this might be beating a dead horse a little bit. But just thinking back to the question before that I asked to Lee about food-at-home demand. If that went back to normal for whatever reason, but you have all these new members, can we conclude that your business has structurally changed that you have this pathway to better-than-average comps that you were doing prior to the pandemic?

Yes. It's a great question, and I'll -- maybe I'll take a shot at and Lee can pile on. I think it's one of the things that the market has yet to pick up on about our company is the structural growth rate should be totally different post-pandemic than pre-pandemic, right? We were a 1% to 2% comp grower last year and the year before that. But just by virtue of having these extra new members in the funnel, regardless of the fact that some of the current demand is undoubtedly driven by more food at home. Just the sheer number of new members should allow us to grow that structural growth rate a little bit higher, whether it's 3 or 4 or 5, I'm not so sure yet, but there certainly are more people in the franchise today. They should be shopping more than any other reality. And then you get to layer our acceleration of real estate on top of that. So we all believe inside the company that our structural growth rate is better tomorrow than it was yesterday.

That's great. And that leads right into my next question about real estate. You talked a little bit on your last quarterly call about more opportunities to open doors. It sounds like maybe you want to speed it up a little bit more than what you've talked about before. I wondered if you could talk about what unit growth you're now targeting for the longer term? And are there any particular markets you're going to be more focused on in the near term?

Sure. As you know, Kate, this has been a multiyear process for us in making sure that we knew how to effectively open clubs, pick the right place to get the box built in the fashion we needed to attract a number of members and motivate those members to get in so that we can reliably open and grow those clubs nicely and provide appropriate returns on those investments. So as we all got together as a team a few years ago, we started with one new club, that was a success in Carney, New Jersey. Then we started with another new one in a new market, somewhere in South Carolina. That was a success. That gave us confidence to really start to go a little bit more quickly. Unfortunately, real estate is probably the longest dated thing that we deal within our business. It takes a couple of years to get something open from the time you identify the site to when it actually opens the doors. And so over the last couple of years, you've seen us accelerate a little bit and get a few stores open per year. This year, we will open 4, 2 of them have already opened and 2 in Metro New York will open right around the end of the year. And we talked on our most recent earnings call about as many as 6 next year. That's really all sort of organic growth in the sense of it results from this long-term desire to raise the number of new clubs. It doesn't include any sort of opportunistic clubs that have come about as a result of the tumult in retail in these days. It comes about from us trying to aggressively go after opportunities, streamline how we're doing the development process. And now we find ourselves in this place where we can do all that stuff reliably, having grown from 1 club a year to, hopefully, 6 next year and potentially layer on some additional clubs going forward. We'd love to grow the company at 10 or more clubs per year, and that's certainly what we're setting our sights on. I think our current process will get us there over time, but we're very hopeful that the current situation in retail will let us get there even faster. If we can pick up some opportunities from more troubled retailers or even other industries, whether it's movie theaters or the like, we'd be very happy to do that. And the balance sheet flexibility that we have today that is afforded to us by the pretty dramatic renovation of the balance sheet in this year allows us to go even faster. We can now go and buy sites and not worry about the cash flow impact or the debt impact of doing so. We're very excited about real estate. And I think our plans would be to open in new and existing markets. So as I look at the markets for next year, they contain both new and existing, right? One whole new market with a couple of stores in it, a couple in New York, one in New Hampshire. So a little bit of new and old. We have 3 clubs in Michigan that we've opened in the last 12 months. And I think you'll see us to continue to do both things, try and optimize our current fleet in the current states as well as push westward, right, looking into -- further into Ohio, into Indianapolis, Chicago and keep marching westward as opportunities present themselves.

When you think about the prototype for the new stores, are the Michigan stores what you're looking to build upon in terms of how the newer stores look?