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

Good afternoon, everyone. This is Kate McShane again from Goldman Sachs. We're entering into the final last couple of presentations here of our conference, and we're very excited to welcome the BJ's Wholesale Club management team. 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 a revenue of over $15 billion a year. Today, we have with us Bob Eddy, President and Chief Executive Officer of BJ's. Bob was appointed in the current role in 2021 and served as EVP and Chief Financial and Administration Officer prior to that. He joined BJ's in 2007 and was named CFO in 2011. And we also have with us Laura Felice, Executive Vice President and Chief Financial Officer. Laura was also named to this position in 2021 and served as SVP Controller prior to that.

So Bob and Laura, thank you so much for joining us today. I'm going to launch right into some questions, if that's okay. And I think maybe if we could just start with a state of the consumer, that's how we've been starting our fireside chats. We kind of are in awe here that as we move further and further away from stimulus that there still seems to be pretty robust demand throughout all of retail from the consumer and that the consumer's balance sheet still seems very robust. So we wondered if you could maybe talk to us a little bit about how you're viewing the consumer, especially as we get into the back half of the year? And any additional insight that you could provide.

Yes. Kate, thanks for hosting and for everybody out there. I appreciate your time and interest. I think it's a good question, Kate. It's something we look at and marvel as well. I think the consumer is in fantastic shape. Our members are actively spending across our businesses in ways we didn't anticipate this year. We, as you know, sure thought as COVID waned, food at home would decline a little bit, and we might go backwards in comp quite a bit. And that, through the second quarter, was not the case at all. All of our businesses did really well. And in fact, food led our business in the second quarter, which was a bit of a surprise as people had largely gone back to restaurants and things. And yet our food business really did very, very well during the second quarter. I think that is, to some degree, a testimony to us providing very good service throughout the pandemic to our members and folks consolidating trips and stealing market share, but I also would be lying if I didn't tell you that the consumers flush with cash that is driven to at least some degree by the stimulus dollars out there. In the second quarter, you could see that a bit with the child tax credit coming in and things like that. So look, I think the consumer is pretty healthy. It remains to be seen what happens as the child tax credit goes away and supplemental unemployment goes away. But through the end of the second quarter, our business did very, very well and our members were spending actively.

Thank you. So speaking of members, I think we should probably spend a good amount of time in this conversation talking about your membership growth because I do think that's been the linchpin here of the improvement we've seen in your business, it kind of ignites the whole flywheel. So can we back up to March 2020 when the pandemic began. And can you talk us through sequentially up till now how many new members you've seen since then, how many you've been able to retain? And of these new members, how many were truly new to the BJ retail store?

Yes. Certainly, COVID provided an incredible inflection point for our membership. At some points during the last year or so, we were up 20% in terms of members. We have about 6 million members today, about $1 million more than we had pre-pandemic. So quite a big difference. As of the second quarter, we were up 3% in members over the prior year and 14% over 2 years ago. So quite a big difference in the size of our membership. And more importantly to us, not only is the size growing, but the quality of the membership is getting much better. We measure that in a number of different ways. Most notably, we talk a lot about the penetration of higher tier memberships. So instead of paying $55 for your membership, you're paying $110 or you are in our BJ's Mastercard program. Those are important because folks in those membership tiers spend more, visit us more, engage with us in many different ways, including using coupons or digital properties. And most importantly, their lifetime value is much higher because in our business, what matters most is renewing your membership and these folks renew at markedly higher rates than an average member. If you have our BJ's Mastercard product as for instance, those members renew well over 95% of the time. So the combination of becoming nearly a lifetime member and your spend drives your lifetime value tremendously high as you might know. So we look at that a lot. That's been incredibly impressive. We were -- I believe it was 34% higher tier memberships at the end of the second quarter, a new all-time high there, getting people into our automatic renewal program that we call Easy Renewal. That was at 74%. That's another all-time high there. And if you look at another important measure of quality, which is the amount people are paying for their membership, that's been growing as well. So the membership is mixing up and providing a nice tailwind to membership fees. Buried in all of this stuff is the impact on renewal rates. And for those folks that have watched our story for the past few years, you know for a long period of time, we were in the low 80% renewal rate area. And over the past 5 years, we've been able to raise that pretty sequentially to a new all-time high every year. Now we're up to 88% when we last disclosed in our 10-K last year. And we continue to see particularly good renewal rates, both in the tenured base in that 88% calculation as well as in the first year base that we have coming out of last year. So we've got a shot at a new all-time high in the 10-year base, which would be wonderful. We believe we will have an all-time high in first year members, which is really the biggest goal we set for ourselves as we figured out what to do for this year. This year, we had the biggest class of first year members ever because of the pandemic last year and the inflection that we talked about. And so we really set out to say acquisition this year is really all about renewal. We've got this huge class of members that are engaged with us and shopping very well. The best thing we can do is to divert all of our attention towards renewing that class. And the good news is we're seeing great results. We are seeing an improvement over last year or every other year that we've ever seen. And I think at this point, it's a lock to have an all-time high from our first year perspective. Interestingly, when we talked about it at the end of the first quarter, we weren't quite sure what to tell anyone. We were seeing on-time renewal rates. So what -- whether a member has renewed in their month of renewal, we were seeing the highest on-time renewal rates we had ever seen in the company's history by a long shot. And we were -- we didn't have enough data to really unpack whether it was just a better on-time result or it was incremental renewal. The good news is it's both. On-time renewal is a cash flow play, right, from a membership fee perspective, but people don't renew unless they're shopping. And so we are seeing incremental business because people are renewing on a more timely basis, but the further we get away from that pandemic inflection point, the more data we have to look at, and it's very, very clear. We're seeing incremental renewal as well. So folks that in prior years may not have renewed, those folks are renewing this year, which is important and a great market for our future. So all the things are going very well in membership. We're excited to see what happens in the rest of the year. And hopefully, when we get to the end of the year, we can report at least 1, if not 2 all-time high numbers from a renewal rate perspective.

That's great. And I would imagine what I find interesting is a couple of retailers have mentioned that during the pandemic, you didn't have as much of a hunt for value just because people were so desperate to stock up their pantries at whatever cost to be safe. And BJ is, of course, just is all about value. So do you think you could see an even higher renewal rate or improving trend just as a result of -- as people start to get a little bit more conscious of value?

I do. I think what you saw last year was a dramatic consolidation of trips, right, in the name of safety and stock up. people just trying to avoid going to a bunch of stores to get their needs. We are a great place to do a one-stop shop because we sell tons of different categories, and we provide value on doing so. And so it was a great place for our members and for new members to get what they needed in the beginning of the pandemic. What you're seeing today is retention of those market shares, which is wonderful and participation in broad swaths of categories, which is great. So the newer members are shopping all over the building, which is something in the past, we would have to teach them to do or incent them to do. They're doing it on their own accord now, which is great. And I think the future will be interesting, particularly when you think about the value point that you bring up in view of the inflation that everyone is seeing across their categories. We're seeing pretty decent inflation across a big chunk of our business. And obviously, that pressure is consumer wallets. And if you see this world of free cash kind of go away a little bit and value becomes more important, we're a great place to save money. And that's true -- that's true with or without inflation but the inflation would make that even more pressing. So I think we do have an opportunity to capitalize on it. Inflation in the past has been generally good for our business as it widens price gaps against grocery and mass. There's a lot of variability as it works its way through the system and what we invest in price and all those types of things, but I think long term, the inflation will be good for our business and will really help solidify the gains that we've made in the member behavior that we're seeing.

That's great. And then if I could just wrap up kind of the top line drivers here for you. with regards to just the comp, how should we think about the comp going into back half of the year? And just with this new member contribution, can you talk a little bit or remind us about the ramp of spend as they get more mature? Is that something that we can see accelerate over time?

Yes, sure. We look across the back half. We're noticeably more bullish now about the back half than we were earlier in the year, really because the food at home trend has been so strong on a continuing basis. We thought it might go backwards a little bit as people went back to restaurants and went back to offices and that has not played out. So our business has remained very strong. Market shares remain very strong. And that's really driving our view over the back half. I still have to think that there's some risk as people go back to the office, but the longer this goal is where we're also working remotely, the more habituated consumers get and stickier all of this gets. So the -- I hate to have the pandemic persists, but it is good for our business. So it will be helpful from that standpoint. You point out an interesting question that we don't -- we don't yet know the answer to. Typically, members season into their ultimate spending patterns over about 3 years. They typically come into our business spending a little bit north of $1,000 a year. And 3 years later, are spending $2,400, $2,500 per year. And last year, they came in noticeably higher than that opening spend level. They are continuing to build on that spend bundle, which is interesting. We don't know where they ultimately season to at this point, right? Do they end up at that same $2,500 level? Or is it some place higher. A lot of water to go under the bridge to figure that out, but they are growing their spend as they renew. So that's another encouraging point that we're spending time trying to unpack and it's obviously driving some of our good results so far this year.

Great. If we could maybe now just pivot to the cost side of the business because there has been, during this conference quick a bit of focus on what's happening within the supply chain. And I know it's something that came up on your second quarter call. Just for BJ's in particular, where are you seeing the biggest backlog in the supply chain now? Is it internationally or is it more domestic? And many companies have noted they think this persists throughout most of 2022. Do you have a similar view?

Yes. It's interesting because we're winding the clock 6 months ago, it's really only stuff that was coming over from Asia that was restricted. And that is still true, but now you're seeing supply disruptions in many, many categories. The stuff coming on from Asia is still restricted. So think about categories like seasonal goods, like patio sets that are made in China and shipped over here on a boat, think about the electronics businesses that might be assembled in the U.S. or at least in North America, but many of the components come over from Asia. You're seeing TVs and computers and things beyond allocation. That stuff persists for a while, I think. I mean I've heard people say it will get better in the first quarter next year. I've heard people say it will be 2025. I tend to think it's somewhere in the middle that hopefully, COVID receives that will help countries like Vietnam get back on track. The shipping constraints hopefully start to ease. Every time we've seen shipping rates do what they have done, more capacity comes online and it sort of fixes itself over time. So I don't think it's going to fix in the back half. I would be surprised if it fixes in the front half of next year. But hopefully, by the tail end of next year, it starts to get better. The domestic stuff that's on allocation now is interesting, it's pet food, it's paper products, it's Gatorade of all things. And some of it's COVID-driven, some of it is labor-driven, everybody is experiencing the same challenges, right? How do you find enough people to do to do the work they need to have done and can you be as efficient in a COVID world as you were in a pre-COVID world? I think that persists for a little while, too. It's not as pressing as the general merchandise stuff coming over from Asia, but you look at paper towels and nationally, the biggest branded players are 60% in stock rates and things in Gatorade and juice and pet food are similar. So I think those are manageable. They're just -- the inventory is just spinning faster than it otherwise might have. There's is coming in 1 door and going out the other the same day. So we'll just keep a close eye on that and devote our energy to making sure we get what we need in getting our fair share. On the GM stuff, we're playing the same game as everybody else is playing, right, trying to accelerate in inventory, trying to figure out of air freight works, pulling in seasonal goods earlier than normal because everybody is playing those games, it sort of just moves the supply crunch forward a little bit. So I think this is something you see across the industry in the back half, right? People leaving some general merchandise sales on the floor that the inventory is just not available. And we'll do our best, and we've been successful so far this year getting our fair share, and I'm sure we'll do fine in the back half, but it probably -- whatever we post for numbers, I would expect it could have been better if we could have had more inventory.

Okay. And with all this disruption, I know it does create a lot of inflation. And so you have a good amount of inflation in COGS and SG&A, which we'll get to in a minute, but I think when we spoke after your Q2 results, you had mentioned you've never seen this level of inflation before, although sometimes inflation is a good thing because it allows you to help with the price gap. So I wondered if maybe you could talk to us a little bit about how BJ's thinks that through in terms of what you are passing through, what you're seeing in the competitive environment and how comfortable you are with price gaps today?

Yes. I think our price gaps are better today than they were a few months ago. I think it's really apparent out there that everybody is seeing pretty rampant inflation, right? It's coming loud and clear through grocery and mass and club. I think all the players out there are being pretty rational in terms of what they're doing. And I would tell you, most players are passing the inflation on. Historically, the grocers have passed it on most quickly and followed by the mass guys followed by the club guys, that's generally playing out. And everybody has their own methodology for what they invest in and what they -- how long they invested in for and things like that. Those things are generally holding true, but I would say as a broad brush statement, inflation is here. It's pretty meaningful, and most retailers are passing it on. We tend to invest to maintain our price gaps against our club competitors in the places we find the value to do so. So you think about in our business categories like meat and produce and super key value items like paper towels or like olive oil or bottled water or something like that, bananas, things that aren't on everybody's shopping list. We will invest all day long in those to maintain our value, and I expect some noise throughout the back half as we do that. We will be as aggressive as possible on passing things on, but when it comes down to a resale value, right? So people don't buy a membership if they don't see the value. And so we will continue to invest as we see fit to do that. The good news is that people are acting pretty rationally. So while we will invest, I think that's probably temporary, and most of the effective inflation gets passed on as we get through the back half, we'll see.

Okay. Great. And then if I could ask my question about SG&A expenses in the back half. I know you called out on the Q2 call that wages are a bigger factor than maybe what you originally contemplated at the beginning of the year. So could you maybe talk us through what that's stemming from? Is it just a very tight supply? Do you expect any alleviation as some of the unemployment benefits roll off here?

Yes. It would be interesting to see, it's certainly a supply and demand issue, right? Every retailer I know of is dealing with the same thing. And again, similar to supply chain, we're all pulling the same levers to try and combat it, whether it's moving wages, introducing new perks, doing bonuses, sign-on bonuses, all sorts of different things. We've done, I think, all of those at this point. The thing that's changed for us is we've sort of been a fast follower in wages historically and that's worked for us for a long, long time. This is probably the most dynamic labor environment I've ever seen. And it wasn't -- that posture wasn't working as well as we wanted it to do in the front part of this year. So rather than chase it a little bit, we tried to be a bit more aggressive and made some pretty sizable moves towards the end of the second quarter. I think the next month or 2 will be really, really interesting to see what happens out there from a labor supply perspective with all of the supplemental unemployment rolling off, the economic equation for the average team member changes. So I'm hopeful that the market loosens up a bit in the next month or so. I've got to think it does. The only thing that I think may challenge that notion is the Delta variant and people being scared to go back to work or god forbid if it gets really bad, and they don't allow kids to go to school again, that will really put a crimp in the labor market as people need to take care of their kids. So hopeful that we get some loosening and we can reap the associated benefits. But again, just like getting enough inventory or managing inflation, we need to have the right number of team members and the right quality of team members. And so we will invest appropriately to do that. I think this was the big gulp we need to take this year for sure. I don't think it's the end of it. I think we'll continue to invest, the market will continue to go up, I think, $15 minimum wage just coming everywhere. If you're not there already, you're going to get there. So heading into next year and beyond, I think there's still some more investments to go. But that will work its way through the pricing architecture and the margin architecture of everybody's business to try and invest and get those team members and be as profitable as we all can be.

I'd just add, just to bring it to life a little bit, I think you said this, but it's our biggest investment we've ever made in the history of the company, right? So in the back half, it's worth $30 million on top of our regular run rate for wages for our team members. And so that $30 million is an investment in minimum wage and is discrete from the onetime investment that we also made and talked about in Q2 of $8 million. That was a onetime bonus to recognize our team members. So it's a big investment and to what Bob said will continue in the future.

And Laura, maybe you can help us with understanding if there are any CPI improvements left here, just again in the context of a more inflationary environment, the CPI has been a big gross margin driver for you over the last couple of years. Is there anything else there that can be squeezed out to help offset some of these higher costs?

Yes. I think, look, that's really an old story for us now at this point. I think we have a great process in place. It's part of our everyday toolkit, and we'll continue to use it. I don't know that it's -- I think in the past, we've talked about it in big chunky numbers as that was what was driving our margin. So I think that door hasn't closed. We'll continue to use that, but not something we've put any guidance out on how much it's worth in the future.

Okay. Before I ask the next set of questions, I just want to remind the audience that we are going to take some questions at the end, just type it into your screen, it comes to my inbox. If you do want to ask a question, there's a little bit of a delay. So it's good to try and get the questions in now as we get to the back end of our chat. We are asking the companies that are attending our conference for common questions, just meant to be kind of lightning around multiple choice questions, some of which we've already kind of touched on, but the first question is, how do you think about consumer demand into the second half of the year versus the first half of the year? Will it accelerate, decelerate or stay the same, especially as we get further away from stimulus payments?

Yes. I think for us, it probably stays the same, maybe declines a bit, the further away from stimulus we get. That's sort of why we talked about guidance the way we did and being down a bit. We're very pleased with our membership and the things we've talked about there and our shopping patterns. If people start going back to work, there's still some risk we could go backwards a bit, and there is, I think, some risk that as stimulus rolls off, people get a little bit tighter in their wallets. So I would say, if I can get 2 answers, I would say, stay the same or go slightly backwards.

Okay. The second question, and I didn't get to ask too many questions about this today. But know it's another area that you're working on and investing in is digital penetration. Just how should we think about digital penetration for BJ's in 2022 relative to what we saw in '21?

I think it goes up, right? What we're seeing in our business is as we launch new services that solve members' problems, they engage with those services in a very robust way. So think back a few years when we didn't really have a digital business to speak of, and we made it incredibly hard on you if you wanted to buy something from us using any form of technology. Today, we have a state-of-the-art system and a great team that's making dramatic improvements and our measly $100 million business when we went public in 2018, is now over $1 billion. Largely that is because we have new ways to buy from us that are making it more convenient to access our value. And as Laura and I and the management team think about digital, it's really about enabling convenience, right? We know the club channel is wonderful at delivering value. You can save 25%, 30% off your groceries, buying from us and tremendous deals on general merchandise, but we know it's a bit of a pain sometimes, it's a big box to roam around, it's a little bit farther away than near neighborhood grocery store. It can be an investment of time to do it. If you can place an order while your kids are down for an app or while you're watching Netflix at night and it's picked for you in the morning and we can put it in your car in an economical fashion, that's a real game changer for people. They can much more conveniently access value. So as we launched curbside delivery as we launched BOPIC for the fresh side of our business as we've converted more people to using digital coupons, a number of different initiatives they've reacted quite nicely. And a year ago, we didn't have -- or we're just rolling out curbside today, probably 60% of our BOPIC orders are delivered at the curb. They're putting people's cars for them, and we've seen no noticeable deterioration in shopping habits in average ticket and category participation. It looks better, in fact. So we're pretty bullish on the digital business. We think we can and should invest in that for a while, and our members are telling us they love it.

Great. And then the third question we're asking is how we should think about promotions in 2022? And I know BJ's isn't really promotional necessarily, but just in the current environment, we expect it to be higher or lower versus 2021.

So it's a difficult one to answer, I mean, I think what you're seeing again is a pretty rational response to what's going on in the supply chain out there, less promotion because inventory is scarce. No need to blow your brains out on it, you can sell it at pretty high rates. We've seen that on our own general merchandise business. We've seen it in our competitors' businesses. So it's a weird base from which to ask that question because I think the supply chain challenges persist into next year, I think it will be pretty comparable from a promotional standpoint. Maybe if we start getting better from a supply chain perspective or if the COVID situation improves, we start getting some more promotion, but as I see it, we'll be pretty level.

Okay. And our last question is just what do you expect for inventories in the back half of the year? Will they grow faster or slower than sales?

Boy, I mean, I would love them to grow faster than sales. We have -- we are a little light in the inventory for our taste. I just don't see that happening in the back half. I think it will take until next year for domestic supply chains to be repaired and maybe a touch longer for international supply chains. So I tend to think we will grow it a little slower. And as I think about it, we've got to try and at least stay level. That's the goal that we're working towards. And we'll see what we do. It'll be interesting.

We have a couple of questions from the audience. We only have about 3 minutes left, so I'll try and get to a couple of them. But one question we received is, "how do you feel about raising member fees to fight inflation? Or do you wait for peers to raise their member fees first?"

It's a good question. We have historically followed Costco. And I don't particularly see a reason why that would change. Sam's has been a bit different. They sometimes have gone and sometimes not. We've tended to go every time Costco's gone. I think that's -- that should be the base case to think about. I don't see a reason why we would go ahead of Costco at this point.

And the second question we received was, "there was a grocer that reported today that saw a good amount of gross margin pressure, I believe. Why is BJ's more immune to the gross margin pressures versus a traditional grocer?"

Look, I don't think we're immune to some of the reasons that drove that, right? The inflationary environment and investing in price and probably the freight costs are things that we experienced as well as anybody else. We've done a great job over the past few years, building capabilities like CPI that you talked about a little bit ago that help us buy things at the right cost for resale. We've been great about building our private label business, which is higher margin. Obviously, we've started to dip into high-margin categories like services and have grown our general merchandise penetration, which tends to be higher margins as well. This year, we've got great success in simplifying our assortment and doing a lot more should cost modeling, if you will, to really understand that we're buying at the right price. So lots of tools that we've bolted onto our buying process to offset inflationary costs and to really raise margins over time. You know, Kate, you remember, we're probably almost 400 basis points more margin than we were 5 years ago. So we'll continue to do those things. And hopefully, they'll not only help us to fray what's happening from an inflationary cost perspective, but to grow margins long term as well.

Great. Well, with that, we're at 03:10. So, I want to thank you so much again for being with us at our conference today, and thank you to the audience for dialing in. I hope everyone has a nice weekend.

Great. Thanks, everybody, for your interest and your support. Appreciate it. Thanks, Kate.

Thanks, everyone. Thanks, Kate.