BJ's Wholesale Club Holdings, Inc.

Good morning, my name is Lisa and I'll be your conference operator today. At this time I would like to welcome everyone to the BJ's Wholesale Club second quarter fiscal 2019 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. If you would like to ask a question during this time simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the call over to Fitin Freja, Vice President, Investor Relations. You may begin your conference.

Thank you. Good morning, everyone. We appreciate you joining BJ's Wholesale Club's second quarter fiscal 2019 earnings conference call. Chris Baldwin, Chairman and CEO, Bob Eddy, Chief Financial and Administrative Officer, and Bill Werner, Senior Vice President, Strategic Planning and Investor Relations are on the call. Chris and Bob will provide you with an overview of our results, followed by a Q&A session. Before we begin, please remember that during this call, we make forward-looking statements within the meaning of the federal securities laws. These statements are based on our current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectations described on this call and in today's press release. Please see the Risk Factors section of our Form 10-K filed with the SEC on March 25, 2019, for a description of those risks and uncertainties. Finally, please note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release posted on the investor section of our website for a reconciliation of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. With that, I'll turn the call over to Chris.

Good morning and thank you for joining us. Our second quarter results reflect continued progress as we transform BJ's Wholesale Club. Our performance was in line with our expectations despite challenging weather conditions earlier in the quarter. We also delivered very strong free cash flows which exceeded our internal expectations. For the quarter, we saw merchandise comp sales of 1.6%, representing a 3.6% two-year stacked comp. Sales were negatively impacted by particularly cold and rainy weather in the first half of the quarter. For context, New York and Boston had twice as many rainy days this May compared to last year. After the slow start, our performance improved significantly in June and July, and we ended the quarter on a strong note. At the same time, we managed inventory extremely well. We're pleased with our improved sales trends and are well positioned to deliver on expectations for the full year. Adjusted EBITDA was $153 million, up 7% over last year. We continue to drive strong cash flows, and we ended the quarter with funded debt of 2.9 times adjusted EBITDA. Throughout our transformation, we continue to invest in capabilities that will deliver long-term growth. We remain focused on our strategic priorities. First, I'll provide an update on acquiring and retaining members. We delivered another quarter of record membership fee income supported by increases in members, higher tier memberships, and renewals over last year. We continue to use a data-driven approach to attract new and lapsed members through both physical and digital channels. In Q2, we nearly doubled the percentage of members acquired through digital channels over last year. Digital channels are particularly important in attracting younger members, and we continue to see great opportunities in this area moving forward. As we have said before, we use various membership acquisition tools to attract new members. Over the past three years, we have dramatically improved the quality of our membership base as we focused on paid first-year membership offers. As of today, less than 1% of total company sales come from trial members, a materially lower number than in the past. We are proud of the significant progress we have made in improving the quality of our membership base as reflected in our continued growth of membership fee income. From a renewal perspective, we continue to make progress in our easy renewal offering with nearly 60% of our member base enrolled in the program. In addition, our co-brand credit card remains a very powerful tool for delivering value and engaging members as we continue to see solid growth there. This group consists of our most loyal members with the strongest renewal rates and highest lifetime value. Our performance in this area has accelerated significantly. Higher tier memberships represented 21% of our member base in 2017, 23% in 2018, and now halfway through 2019, These members represent a full 27% of our membership base, the highest in our company's history. Our second strategic priority is to deliver value to get them shopping. Providing outstanding value to the families we have the privilege to serve is the fundamental commitment of our company. We continue to make significant investments in pricing. We monitor hundreds of competitors and collect over 50,000 data points per week to ensure that we provide members with outstanding savings. In this quarter, the gap between our prices and our grocery competitors continue to expand, which we expect to deliver value over time. In addition to pricing, we are investing in other capabilities that deliver value to our members. Earlier this year, we launched the new promotional system that allows us to run offers that we couldn't offer previously. For the first time, we're able to provide percentage off savings, as well as promotions that provide dollars off when buying multiple items. Through this system, we can engage with our members in innovative ways using personalized offers and targeted, digitized promotions. In addition to providing new ways to deliver value to our members, this system enables us to more efficiently use our promotional dollars. As a result, we've been able to engage our suppliers to add programming where it makes sense while also reducing total promotional spend. We're still in the early stages of rolling out this capability and expect this to become a powerful way to deliver value to our members and drive sales with our vendor partners. Let me shift to our work on assortment. We began our assortment transformation several years ago with general merchandise. This growing area of our business remains the key to creating the treasure hunt that drives trips and engages members as we introduce new categories, products, and brands, all at outstanding value. For the second quarter, our GM comp sales were up 6%, reflecting a 10% two-year stacked comp and a continuation of the strong performance we have seen in the last three quarters. We saw strong growth in a number of GM categories this quarter, including seasonal gift cards, small appliances, tires, home textiles, and seasonal products such as air conditioners and patio sets. We're pleased with the recovery we saw in our seasonal performance in June and July, and we are well-positioned from a seasonal inventory standpoint as we exited the quarter. Our grocery and perishable businesses remain key to delivering value to our members. The rainy weather in the first half of the quarter impacted a number of these categories related to outdoor entertainment and celebrations across our core markets. However, our focus on improved in-club execution continued to deliver growth in key areas, including produce, bakery, meat, and rotisserie chicken. Fresh fruits and vegetables represented one of the fastest growing areas of our business in terms of the number of units sold. As with our seasonal items, we experienced much stronger sales in the second half of the quarter in this part of our business. We continue to work on transforming our assortment throughout the club with a focus on providing outstanding value to our members. Our test of prepared foods while small is resonating well with our members. We have also expanded our international foods and Hispanic foods offerings in certain clubs. As we announced last quarter, we continue to simplify our assortment in a number of grocery categories. We are confident we can drive growth with a more focused assortment. Finally, the transformation of our optical business remains on track. We expect that optical, while still quite small relative to the rest of our business, will be a growth driver for us over the long term. Our next strategic priority is making it more convenient to shop at BJ's. We continue to improve our digital capabilities to make shopping more convenient for our members. As you may recall, we have invested in technology to let our members shop however and wherever they want. In the last 18 months, we have launched a revamped website, buy online pickup and club, or Bopick, same day delivery, and an app. Our app continues to resonate with our members as evidenced by our 4.7 star rating on the Apple Store. Approximately 15% of our membership base uses the app each month, primarily to take advantage of our convenient digital coupons. which represent approximately 15% of total coupons redeemed in the quarter. Sales driven by our BOPIC and same-day grocery delivery, while still small relative to the rest of our business, more than doubled this quarter compared to the prior year. Just over half of our BOPIC orders are general merchandise, with strong sales in areas like TVs, furniture, and air conditioners. More recently, we're encouraged by BOPIC sales growth in grocery and sundries, including beverages, paper items, candy, and snacks. Importantly, more than half of Bopix shoppers purchase additional items once they are in the club. Our next day tire installation offering, which allows members to order and schedule installations online, continues to drive significant growth in our tire business. We know that members can save $100 to $150 when they purchase tires from us, and our investments have made this process even more convenient. This is an excellent example of how we can use our online platform to conveniently deliver value to members. I'm particularly proud of the team's efforts in building our growing digital business. Over the last 18 months, we've invested in key talent and relentlessly focused on serving our members as we launched our omnichannel platform in a highly disciplined fashion. Finally, we plan to expand our strategic footprint. Our two clubs in eastern Michigan remain on track to open in Q4 ahead of the holiday season. We launched an innovative marketing campaign in Michigan to introduce and differentiate BJ's in this new market. The campaign is driving awareness in the market and early memberships are quite encouraging. We remain on track to open eight to 10 gas stations across the portfolio this year and have opened three so far. Our real estate pipeline is the strongest that has been in years. And today we're announcing plans to open a third club and gas station in Eastern Michigan. The club in Chesterfield, Michigan will open early next year. We also plan to open a club and gas station in Pensacola, Florida around the end of this fiscal year. This will be our 33rd club in Florida. We know this market well and see Pensacola as a great fit for our business. Before I close the call and turn it over to Bob, I want to talk a bit about the work we've done which has given us significantly reduced tariff exposure versus our competitors. Several years ago, we started to diversify our global supply chain to reduce reliance on China by sourcing high quality products from other markets in both Asia and Africa. As a very specific example, three years ago more than 90% of our internally sourced apparel came from China and Vietnam. This year that number is less than 10%. We also generally avoid sourcing food from China and now source only two food items from China in our portfolio. Chinese-sourced goods represent 3% of our cost of sales this year, which we expect to decline slightly next year. This gives us a much smaller exposure to tariffs than many other retailers, and Bob will have more on this in his remarks. I'm pleased with how we performed in Q2. We finished the quarter on a strong note and remain optimistic about the opportunities ahead of us. Going forward, we'll continue to drive growth by focusing on our strategic priorities and invest in the company for the long term. With that, I'll turn the call over to Bob, who will review our results and outlook for the year in more detail. Bob?