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

Okay. Hi, everybody. Thank you for joining us today. I'm Robby Ohmes at BofA Global Research. We are really excited to have BJ's management team joining us today for a virtual fireside chat. With us today from BJ's we have Lee Delaney, President and CEO. We also have Bob Eddy, Chief Financial and Administrative Officer. I can't remember, is Bill Werner on? Is he on there as well? If we do -- if Bill is on there, he's SVP, Strategic Planning and IR, and then we have Faten Freiha as well, VP of Investor Relations. I'm going to do a little bit of Q&A. And then towards the end, we're going to open it up to questions at that time. We're going to use the Q&A chat functions to submit questions, so maybe write down your questions as we're going along here.

But Lee to kick it off, we just came off a Black Friday weekend. Anything you can tell us how it was versus expectations, early reads or anything like that?

Yes. Great. Good afternoon, everyone, and Robby, thank you to you and your team for hosting us. I hope everyone had a nice holiday. Look, we're not going to be making new news with a read into our Thanksgiving or Black Friday results. But let me add a little color behind some of our Q3 earnings call remarks, given some of the industry commentary describing pretty meaningful shifts in consumer behavior in the last few days. First, and as we said 2 weeks ago, we pulled forward our Black Friday deals, anticipating the possibility of less crowded stores on Black Friday. And we've continued to lean into our omni offerings, which are growing at market-leading levels. And we're happy we made those changes as it helped drive 20% plus comp in the first few weeks of the month. And looking ahead, we're really happy with the overall state of our business as we head into December and January for a few reasons. First, we've made steady improvements in our overall in-stock position. And while we're below what we would like, and there are still some categories that are tough, like paper towels, we're in pretty good shape relative to past quarters. Second, we've continued to flex our assortment to account for fewer holiday gatherings while leaning into seasonally relevant home categories. And third, we're still extraordinarily relevant as members consolidate their trips and search for value due to the pandemic and just the general state of the economy. And fourth, our omni offerings are working hard, and the overall business scales really efficiently. So while we're assuming there might be a little headwind going forward due to fewer holiday gatherings, and it's a bit hard to predict exactly how things will play out, we feel really good about the overall state of our business.

And then, Lee, maybe just a follow-up to that. How do you guys feel about the inventory position in the holiday? We were in your stores over Black Friday. It looked like you guys had what you needed, and it looked like some others maybe didn't. Just any kind of commentary you can give on that?

Yes, sure. Robby. It's better than it was earlier in the year, although still not as good as we would like. And so we've steadily improved our in-stock position, really going back to late Q1 and Q2, where we saw some of the initial large stock up purchasing. And we've been aggressively ordering really across all of our categories and have made a slow but steady progress improving the inventory position. And we'll keep doing that. We've gone all out. Our merchants and our supply chain teams, and our field teams have done an extraordinarily good job of keeping product moving, of looking for new sources of supply that we might not normally have tapped into. And so there's a few places where manufacturing constraints are tight industry-wide. But overall, we feel pretty good, all things considered.

That's great. I'm going to shift over to one of our favorite topics, membership. Lee and Bob, there was some confusion about membership following your third quarter earnings call. How did members look sequentially from 2Q -- 3Q versus 2Q? Lot of questions about cash MFI, maybe you could help us think about why that does or doesn't matter? And any thoughts you can share on expectations for membership fee growth and total number of members in the fourth quarter?

Robby, I'll take that. Let me first just say thank you to you for hosting this and for everybody on the call today for their interest. I know your time is valuable. So thank you very much. You hit on an important topic for our business. Membership is the bedrock of our business. And as we talked about on the call, we felt great and still feel great about the overall size of our membership, which has continued to grow, feel great about the momentum that we have behind the growth, and we feel great about the quality of the membership. And let me dive into each one of those a bit. And then I'll come back and sort of specifically address your question about the confusion following the call. So we talked on our call about membership being up 630,000 members year-over-year, about 12%. That's a great number. Typically, it would be 200,000, 250,000 members. And so we are significantly outpacing prior year's growth. The momentum has been great and sort of continuous throughout the year from that standpoint. Importantly, we're also improving the quality of the membership as we go. And we talked about a few things on the call where we're not only increasing the size of the overall membership, we are increasing the penetration of higher tier members. So more people are signing up for our rewards membership and more people are signing up for our co-brand credit card proposition. Additionally, more people are into our Easy Renewal program. So there's about 70% of our membership in the program today. All 3 of those things are great indicators of the quality of membership. You pair that up with the move away from trial memberships that we've talked about in the past and towards paid membership. You look underneath the covers and see the behaviors that these members are exhibiting. We are really excited about what's going on from a membership perspective and how that helps us look forward into our business. Unfortunately, the day after our earnings call, we ran into a little bit of a speed bump where one of your competitors at one of the largest Wall Street banks issued a report that said that our membership was shrinking, specifically shrunk from Q2 to Q3. That report was factually inaccurate as to that point. When, in fact, our membership grew by well over 100,000 members during the third quarter. That rate of growth is about twice to what we had last year. So from an overall growth perspective, we are continuing to grow. From a momentum perspective, we're doing twice as well as we did last year. We were a bit surprised by the confusion given we thought we were clear. Turns out the report just had a pretty basic mathematical error that was present in it. And people make mistakes, but it wasn't necessarily cleaned up in the way that we would like to see it cleaned up. It was sort of posted to that bank's website in the middle of the night on Friday night, and they didn't tell anybody about it. And so we feel an obligation to go out to everybody and say, our membership is, in fact, growing. The story is intact, that we have a growing membership with great momentum and great quality. And that really helps us feel very good about what we're seeing in our business today and what we think we'll see in the future.

That's great. And when you -- that was a great answer. I'm just -- but when you think about next year, one of the other questions I get about membership growth is how to think about the pull forward? Any kind of thoughts you can give us on how you think that dynamic works? Is it a pull forward? Or is it just something you build from and a new base that you can keep growing on next year?

I think that's an interesting question. I think we obviously have many more members today than we've ever had in the company's history. Most folks know that first year members renew at a lower rate than tenured members. And so we tend to look at the behavior of that first year cohort. We talked a lot about this, on the call a week ago, Thursday. As to those members coming to see us more often, shopping more, engaging more with us digitally, being a little bit younger, all sorts of great indications of what we hope will be stickiness going forward. The key differentiators in our business as to -- as to stickiness are, in fact, those things, right? When they -- the #1 predictor of renewal rate is frequency of shop and the biggest predictor of frequency is breadth of shop. We are seeing the new members and frankly, most of our members shopping more categories when they're with us, getting bigger baskets, consolidating their spend, as we've talked about, they are also seeing us more often. And those 2 things together should power our renewal rate going forward. And so we tend to think the members will be sticky, that we will see improvement in the renewal rates. And therefore, we will build on our membership going forward. We say that but we also need to be a little bit cognizant of the situation we have in our country at this point in time and recognize that some of these folks likely came to us because of COVID. And so we humbly submit that the behaviors are there that would indicate stickiness. We still don't know what's going to happen. I would say the one thing that gives me the most confidence at this point is the big slug of those Q1 members will obviously come due for membership in 3 or 4 months. I don't think that the public health situation is going to be much better than it is today, which gives us an even further confidence that these folks will renew and become part of our tenured base. So we sit here happy about the level of membership, the quality of membership, the momentum of the growth. We think they will be sticky, but we've got some water to go under the bridge before we actually see what happens.

That's helpful. And you've done a lot with the quality of the membership. How much do you think that was helped by COVID? Or how much of it was the way that you approached marketing in the use of the credit card to drive the higher tier membership?

Yes. I think it's a couple of things. First and foremost, I think it's outstanding execution at our membership desks, to ask those folks to process the number of new members that they have and improve the quality has been something beyond what we've seen from that team in the past. And so it's been very excited, and we're loving what we're seeing there. I would say that the co-brand has provided a great opportunity for us to do that going -- in the past and going forward. I think that our co-brand card offers the best value in the retail industry, certainly in the club space, and it provides an excellent selling point for our associates at the desk when they are signing up a new member. As you know, those are our best members. And the best sort of indication of that is really not so much their shopping pattern, even though they do show a lot more than an average member, but the renewal percentage is much, much higher, I think, very high 90s from a percentage standpoint. And so we love the fact that we can get them in and get them to shop more by using this card. We give them tons of value through their rewards all year long, but they effectively become members for life when they sign up for the card given that renewal rate. And -- so we've really been doing an outstanding job with that and investing behind that thought, so that we can improve the quality of the membership going forward.

And then when you think about the huge number of members that you guys have taken on just over the last 6 months, where do you think those people are coming from the most? Is there a different competitor that you think you're gaining share from because of the environment?

Yes, I think as we look at those members, we're encouraged by a few things. One is they're skewing a little bit younger. And catching people earlier in their household formation or creation of family is important because you lay the foundation for a very long engagement with us, particularly if they own a credit card. Two, they're more digitally engaged. I think that goes hand-in-hand with being younger, but we're seeing more members sign up online. We're seeing more members engage in our omni platforms. And we've shifted our assortment to try to accommodate that as well. But in large part, there are members in our catchment area, which is just really exciting. We're just penetrating more deeply. And to the point Bob was making about the stickiness, the great thing about having a larger base of members to start from is, we've been trying for the last few years to get people to experience the changes we've made across the business. And the pandemic gives us an ability to do that, but also to market on the back side and make sure that we're keeping people engaged. If we don't see someone renew, we have the ability to reach out to them, create different incentives to hopefully keep them a part of our franchise for a long time. And so the hallmarks of upgraded quality number demographics all seem to be really quite positive.

That's great. Lee, I'm going to shift to merchandising. You were at our conference in March, and right when all this broke out. And I asked you a lot of questions about merchandising back then. And one of the things that you had said was that the general merchandise is really going to grow faster than, say, consumables and the other part of your assortment. I'm not -- I don't think that has been the case because of COVID, but can you remind us what the goals were on general merchandise? And is that being accelerated? Or is that kind of on track? Like how do we think about where you are in the general merchandise SKU in addition to all the great things you were planning to do there?

Yes. So let me talk a little bit about kind of the journey we're on when it comes to merchandising and the assortment in the store and what we're trying to do. We have figured out that we offer a lot more choice in a narrower set of categories that our competitors do. In some places, that makes a lot of sense to us. So in fresh food, as an example, we have more choice, we drive more of a weekly trip than our competitors, and we're really happy with that degree of variety. We think it's relevant and appropriate, and it seems to be working well throughout the pandemic. In some of the more traditional center core grocery items, both edible and nonedible, we've had more choice than we needed, and we've been under indexed in some areas that are growing. And so as we thought about that assortments, we've been shifting towards less canned food and more healthy snacking options. We've been shifting towards different types of cleaning supplies. So natural cleaning supplies, where historically, we would have many things covering the same space. But importantly, what we're trying to do is we're trying to free up space to enter into categories where we haven't historically competed. And so if you look at our general merchandise and services business, in turn, so general merchandise is about 15%, 17% of our business, where our competitors would see a level that's meaningfully higher. It's because they compete in a whole bunch of spaces where we haven't competed. And so we've been shifting the assortment throughout the year to get into new categories. A good example of that is fitness equipment, where historically, we might sell low-end exercise bike kind of $100, $150 offering. And this season, we're carrying both a bike and treadmill at $699. We've integrated Internet experience, kind of similar to a Peloton, just at a different price point, that allows us to offer terrific value versus the market. We are meaningfully cheaper than other industry sources in a category we just haven't played, and it's working really well. Our members love the value we can deliver. And we just see that opportunity in so many places where we haven't historically played. Service is another great example of that, and we think it's a huge deal. So services for us captures a bunch of different businesses, it's our home improvement business, our optical business. We just relaunched our major appliances business, where we know our competitors have a business that is meaningfully bigger than ours. And so we've dedicated merchandising team with some very senior resources to grow our platform there. And we just see a tremendous amount of growth, of deepening our reach into services, things like travel, things like elements of health services, where we think there's opportunity like optical. And so we're just -- we're very excited about the possibility of giving consumers, our members the right degree of choice, which means a little bit less in places where we are way over assorted and then a lot more in places where we didn't play. And we think that growth algorithm will serve us really well for a long period of time.

And as you make this change in category focus, what's the profitability impact over time? Does it raise the long-term EBITDA margin potential? Or how should we think about that?

Yes. Our first focus is always to invest in member value. So we want to make sure that we have terrific opportunities. And we're not, by design, looking to margin up our business to any degree. We always start with how do we make sure we're delivering industry-leading pricing on whatever it is we sell. That said, a number of these categories, particularly in services, will tend to have a bit higher gross margin. So if you look at our optical business, it will be higher gross margin, but then you have an in-club labor component. On the whole, there is probably some degree of margin accretion that we would see from this, but we're not, by design, trying to lever the P&L that way.

And maybe along that line and also in terms of driving your membership and revenue growth, can you remind us how you're thinking about private label? I think you're way below a lot of your competitors and how much faster can that grow? What does that do for profitability? Like maybe walk us through the next 5 years?

Yes. So we're below our competitive set. So we are about 21% own brands penetration today. That's been increasing roughly 100 basis points a year for the last several years. So we've made good progress. But analogs would be in the 30% to 40% range for own brand penetration. Some players are even higher than that. And so there's clearly a big opportunity for us to drive that. And we want to do it. It creates some meaningful benefits. It's better value for members. It's better margin for us. And then it creates a novelty and point of difference for our members, where you can only get the items with us. And so we'll continue to lead into that. We have been a bit put off track by the pandemic. And that we're just so desperate for any goods. Given the degree of demand we've seen, we've been running essentially up 20% all year, plus or minus a few percentage points. And in that environment, it's hard to drive the same level of discipline around owned brands growth when we just want to keep the stores well stocked. And so we've added new national brands we never carried before. Some of those are working really well and will become a permanent part of our assortment. But we haven't been able to make quite as much progress. The good news is it's -- own brands are still growing with the overall business. Just the rate of growth overall has been high enough. It's hard to keep up with own brands and drive the same degree of penetration increases we've seen in past years.

And how has -- as your membership is growing a lot more than maybe would have been initially planned, and you're making these merchandising changes, what are you seeing in the vendor community? What are you seeing from brands' willingness to sell to BJ's? What kind of opportunities have maybe opened up for you guys?

Yes. We're definitely seeing increased interest. I think there's a few forces at play. Early on, we were one of the few essential retailers that was open and able to sell in categories where other classes of trade were closed. And so that was clearly an advantage. I think, two, people are taking notice of our growth in membership, our overall growth and share in the industry and our ability to buy at scale. And then I think there is broad long-term disruption that will happen in other sectors of the retail industry that will likely create distress, and that will create an opportunity for us. And so it's certainly been the case that we've seen better engagement and the merchants are having success reaching out to new suppliers, which is encouraging.

I think maybe something else that you had mentioned in the past, but maybe got delayed by COVID-19 is an increased focus on localization, is that true? And is that a future opportunity? Or how are you thinking about more localization in the clubs?

Yes. Localization for us -- let's start with today, we're still relatively a regional player. We're on the East Coast. So there's elements of our assortment that are skewed towards the East Coast player already. I think there's an opportunity for us to get further localized. It certainly is not something that we've been overly focused on this year. It's really been focused on get what product we can. We've been buying cleaning supplies and paper products from literally all over the world. So if anything, we've probably gotten a little less localized during the pandemic, but that's simply to meet the demand we've been seeing.

Another topic I really wanted to get you guys to talk about more is the Michigan stores. And it just sounds like they've just come on really strong. How different are the assortments there versus the rest of the chain? What is making them open up at such high rates and do so while -- I know part of it might be the environment, but -- and how does that make you think about store growth for the future?

Yes. Bob, why don't I just touch on merchandise and then turn it over to you to talk membership. So the nice thing about our new stores is we're able to set them, incorporating all the things that we've learned are working out elsewhere. And so in legacy stores, it's a little harder to do, right? You're upsetting the apple cart with members and with the space, et cetera. But in new stores, you can set them the way you like. And so we've leaned in with a greater share of space dedicated to new categories. And we've been able to sign and feature different things and make a first impression that lets people know we're in some categories where our normal members, our older members, may not have thought that we would play. So that clearly is working starting fresh with a clean palette. And Bob, do you want to talk just about our membership?

Yes. Certainly, the clubs in Michigan have done well. Frankly, since we restarted the club opening program, all of our clubs have done well in membership. And I think that is really a couple of things. First, I think we'd be silly not to acknowledge the environment. To your point, certainly, some of our success this year has come from what's going on in the world. But that's why I tie it back to more than just Michigan. Pensacola is doing well, of course, we opened last year doing well. It's really been sort of a fundamental shift in how we go to market. If I rewind the clock 4 or 5 years, we would spend about $1 million to open a club. Most of that was in preopening rent and payroll for team members, and we would open the doors and hope people showed up to become members. Now we are much more aggressive and invest much more heavily behind the new store opening. That takes many, many forms, old school and new school. So old school would be direct mail. So we have always been a direct mail heavy company. For some reason, our prospective members really don't fatigue from direct mail. And so we use it pretty regularly. We have done a lot more of that in this world. Importantly, we've optimized how we do it. So we've talked a little bit in the past about the better data models that we have. Our old data models would basically just stop being able to drill down at the ZIP code plus 4 level, like the carrier route level. And now we can go all the way down to the household level and understand the differences between people and distort our spending against better potential members. And so if Bill Werner were on the call, I would get to do my jag about -- both of us live in nice communities and make a lot of money. And our previous data would say, go after Bill and Bob equally. Our new data would say, wait a minute, yes, Bob's going to be a fine member, but he only has 2 kids and 1 just went to a college, and Bill has 4 kids under 10, and therefore, spending all of his money on food. And so we should really invest disproportionately behind attracting Bill. So we're taking something old and updating it. And I guess the other thing I'd point out is, in new markets, we've taken a much more comprehensive approach to marketing, right? We are not just doing the traditional direct mail reach out. We are doing television, radio, digital, all sorts of things all combined to try and really get the word out as to the fact that we're coming to town, who we are, why we're there, why we're interesting, how to shop a wholesale club, all sorts of different things. And those have really resonated in Michigan and in the other markets that we've gone into, provides us great confidence as we go forward. So we talked a little bit about on the call, we've got 2 stores left to open this year, 1 in Newberg, New York; 1 in Long Island City, New York. Next year, we see 6 at this point. And the following year, we see a path towards 10. So really ratcheting up how we go. The new stores we expect to be in existing markets and new markets. So next year, you'll see hopefully, stores in Pittsburgh, our next new market to go attack, as well as filling in our existing markets. We'll have a club in New Hampshire that's under construction, a club in New Jersey, a club in Florida. So really old and new, and we're really excited to continue the momentum that we've seen so far.

So I think related to that, I think historically, maybe you have to go back a while to when you -- when BJ's was opening a lot of stores consistently. But I think didn't -- I think when you open new stores, they kind of pressured the income statement a little bit. And that might have kept BJ's from opening large number of stores in a single year. Are you seeing things that make you believe that, that dynamic has changed, that you can open 10 stores in a year, and it doesn't have the same pressure in the income statement that maybe it would have half a decade ago?

Yes. Listen, we'll always have some element of pressure from a preopening standpoint. So think back to my earlier statement of spending $1 million. Now we're spending probably about $3 million on average. So that will pressure the income statement in the year before the club opens. Our clubs breakeven in the first year, really almost as a rule. So there's not tremendous in-year pressure, but there is that little bump at the beginning when you're trying to get the club open and to advertise to get members. I don't know that we really care about that, right? We are tasked with growing the company for the long term. We're finding sites that have tremendous ROIs. As we talked about, the ones that we've done recently have been great. And so we'll continue to invest to grow the company as long as those things are happening, and we're seeing both of them today.