BJ's Wholesale Club Holdings, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to BJA's Wholesale Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer. During the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Fatin Frehar, Vice President of Investor Relations. Thank you. Please go ahead, ma'am.

Good morning, everyone. Thank you for joining BGA's Wholesale Club's first quarter fiscal 2020 earnings conference call. Lee Delaney, President, CEO, Bob Eddy, Chief Financial and Administrative Officer, and Bill Werner, Senior Vice President, Strategic Planning and Investor Relations are on the call. Please remember that during this call, we may make forward-looking statements within the meaning of the federal securities laws. These statements are based on current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectations described on this call. Please see the risk factors section of our Form 10-K filed with the SEC on March 19, 2020, 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 of the financial information presented in accordance with GAAP. Please refer to today's press release posted on the Investors 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 Lee.

Good morning, everyone. I hope you and your families are safe and healthy during these unprecedented and challenging times. Our thoughts go out to everyone who has been affected by the coronavirus pandemic. So much has changed since we last spoke. This pandemic has presented us all with challenges. I am proud of how we managed our business in this new environment and deeply thankful for the contributions of our club and distribution center team members. who have tirelessly served a surge in demand for our essential products while embracing new safety conditions and protocols. I also want to thank our home office team members for working hard to innovate on safety and product supply, as well as their flexibility in adapting to different ways of working. And also, thank our vendor partners who have been incredibly supportive of our outsized demand. Our team members' hard work and dedication has enabled us to safely serve our communities. We are humbled by our role in these difficult times and value the trust and confidence our members have in us to provide them with essential products and services. Our first and most important priority is the health and safety of our team members, members, and community. Since the outbreak of the pandemic, we have taken aggressive actions and implemented extensive safety measures across all our facilities. We have put in place increased sanitization and social distancing protocols. We have limited capacity in our clubs, provided and required team members to wear protective equipment, shut down our services businesses, given the close contact that they require, and introduced temperature checks for all our team members reporting to work. We have limited travel and asked nearly all home office team members to work remotely. We have taken hundreds of other steps, too numerous to mention, and will continue to work with federal and local authorities to ensure that we stay ahead of evolving safety and health standards. Our team members are working hard to serve our members, and we are recognizing them with well-deserved temporary hourly wage increases, as well as multiple bonuses. In the first quarter, we invested an incremental $51 million in pay and bonuses for our team members. And we are supporting team members through an enhanced benefits package, including a flexible sick leave policy the loosening of absenteeism policies, employee assistance programs, and financial assistance through our Employee Relief Fund. In April, we also decided to close all our clubs on Easter Sunday to give team members a day to rest. We will continue to support team members during these difficult times and ensure that we maintain a healthy and safe work environment. As you have no doubt already read, our financial results this quarter were strong. led by a 27% merchandising sales comp, and EBITDA was well ahead of our plans at $194 million. Earnings per share increased by 165%, and we generated more than $430 million. In the balance of my remarks, I will reframe our view of the three contributing factors that led to this outsized performance and the implications for our future. First, we clearly have become an even more on-trend competitor as consumer behaviors and needs changed in response to COVID-19. COVID-19 has brought with it a new way by which we live our daily lives, and the social distancing and stay-at-home measures we have taken as a society to fight it have resulted in dramatic changes to grocery shopping behavior. Grocery goods, which represent roughly 85% of our merchandise sales, were in extremely high demand throughout the quarter. bought bigger baskets to satisfy increased consumption at home needs. And while needs shifted throughout the quarter from cleaning supplies to pantry loading to perishables, we offered a one-stop destination with industry-leading value on the large sizes consumers need to stock up. These trends were relatively consistent in shape and magnitude across all our geographies. As a result, we believe we have gained considerable share in every region across most categories in which we compete. Second, our business model, augmented with the capabilities we've built over the last four years, are particularly well-suited for this environment. We run large clubs and distribution facilities with capacity for growth. We operate efficiently with focused labor and lower marginal expenses than many of our competitors. We have upgraded our operational standards with new practices and systems improvements, and we have built an expanded suite of digital capabilities with relatively advantaged economics. Together, the model and our improved capabilities allowed us to rapidly scale our business, meet unprecedented levels of demand for digital shopping, invest in our team members, deliver improved bottom line performance, and generate cash. Third, our team responded with extraordinary agility and dedication. Late in February, we were able to identify demand signals utilizing our new demand and fulfillment software to quickly and significantly bolster order flow and keep up with the surge in demand. Our merchants did an excellent job of working with existing suppliers, as well as expanding our sources of supply from new vendors, including those that service the restaurant industry. Our logistics and distribution teams worked around the clock to keep goods flowing. Our frontline employees worked tirelessly to keep shelves stocked and members happy. And our support team in the home office met an ever-changing set of demands. While we expect the supply chain environment to remain challenging in the near term in certain categories, we believe our systems, agility, and capacity should continue to serve us well. While none of us can predict the next few months with certainty, it is clear to us that we are well positioned to see increased demand for the foreseeable future. As a leading large format club store with regional scale in the Northeast and a grocery offering of unbeatable value, strong private label brands, robust digital capabilities, and an efficient store model, we are more relevant to shoppers consolidating trips than ever before. And while we would like nothing more than for public health fears to subside quickly, we expect the potentially recessionary impacts in the broader economy to drive increased demand for discount grocery options. We talked to you in the past about growing membership and engaging our members in digital capabilities, and the current environment has accelerated these efforts. positioning us to leverage this unique opportunity to set the foundation for a multi-year profitable expansion of the business. In our view, the consumer's need for digital services advanced considerably in the last two months. We have had more members join our club and try these services and believe our advantaged economic model will allow us to continue to invest. Before I update you on the progress of our strategic priorities for the quarter, I'd like to note that we remain committed to project momentum, and we are on track to deliver $40 million in savings for this year. All savings will be reinvested back into the business, as previously noted. Let's turn to our long-term priorities. First, let's talk about digital businesses, which remains a top priority. Over the last three years, we built a robust digital team that drove significant progress in our omnichannel transformation. The team launched pivotal platforms such as DJ's mobile app, Buy Online Pickup and Club, or Bopec, same-day delivery, and ship from club to better meet member demands. Our investments in these platforms set us up for success in the current shopping environment. Digitally enabled sales grew by more than threefold this quarter and represented 5% of our merchandising comp sales for the quarter, compared to 3% in the fourth quarter, and 1.5% in last year's first quarter. We believe we have a structural cost advantage as we continue to grow these businesses, especially in our same-day delivery business, which was up more than eightfold over last year's first quarter. We plan to continue to improve upon our existing capabilities and launch new offerings to delight our members and increase the value of their membership. In the first quarter, we began testing curbside pickup and BOPIC for perishables in select clubs. Second, we remain focused on membership, the cornerstone of our company, and a key leading indicator for the health of our business. In the first quarter, we saw a strong increase in the number of new members joining BJ's. This new member growth will drive long-lasting benefits, including MFI growth in the coming quarters, higher average members per club, and strong, comparable sales growth, positioning us for success in the near and long term. We expect this progress to continue, and we will use this moment to attract more members in our clubs. Looking ahead, we will continue to lean into membership investments, upgrading our acquisition tools, and integrating membership, marketing, and analytics capabilities to continue to accelerate positive membership trends. Early in April, we appointed Paul Chihaki to lead our membership, marketing, and analytics organizations. I'm thrilled to have Paul on the team, has his extensive experience in leading performance improvement and business transformation will help accelerate our efforts. Third, simplifying our assortment and expanding into high demand categories remains crucial to our success. As we simplify, we can operate with greater flexibility and better manage our supply chain to deliver the products members need. As we noted on our last call, we have built the space optimization tools that allow us to reflow space, optimize productivity, and allocate space based on demand. In the first quarter, we were able to accelerate various grocery assortment initiatives, like expanding into Better For You and organic snacks, as we sold through existing center store grocery inventory at a high rate. From a general merchandise perspective, we expect the go-forward environment to become even more favorable as other sectors of retail come under increased pressure. As evidence, our merchants saw early engagement this quarter from several leading suppliers who do not typically do business with BJ's. Our expansion into new service offerings such as cellular phones and home improvement remains on track. While scaling these offerings will be later than planned due to COVID-19, we are steadily working to enhance the portfolio with new and exciting services, elevate our value proposition, and prepare for an enhanced marketing strategy, which we anticipate rolling out this summer. Fourth, we remain focused on elevating our marketing and keeping it relatable to members. Our expanded digital capabilities enable us to engage with existing and new members across all digital channels. Our new marketing campaign, launched in the last two weeks, allows us to connect and engage with current and potential members across a variety of mediums in the context of the current environment, showcasing what sets us apart from other retailers like family pack sizes, in-club pickup, and same-day delivery. Importantly, we remain committed to integrating and simplifying messages across all channels to ensure members have a seamless and better overall experience. Lastly, I'd like to touch on club expansion. Year to date, we have opened one club in Pensacola, Florida, and we currently expect our club in Chesterfield, Michigan to open this summer. The Chesterfield opening was delayed as a result of COVID-19 related construction bans. We expect similar delays to impact our PAR club expansion goals for the year but hope increasing availability of good real estate will open more opportunity in 2021 and beyond. We remain confident in our ability to successfully open clubs and expand into new markets as evidenced by our success in Michigan. We will aggressively look for new real estate opportunities throughout the balance of the year. Looking ahead, we believe we are very well positioned given the structure and strength of our business, the progress we have made through our transformation, and our continued execution against our priorities. Before I turn it over to Bob, who will have more details on our financials and outlook, I'd like to close by saying that I am honored to lead BJ's Wholesale Club during these unprecedented times. I am thrilled to be working alongside talented and dedicated team members who are critical to helping our members get access to essential items and executing against our strategic priorities. Again, I would like to sincerely thank all our team members and members for their support and loyalty as we navigate these unprecedented times and continue to make progress in transforming and expanding our business. With that, I'll turn the call over to Bob. Bob?

Thank you, and good morning, everyone. Before I begin, I'd also like to take a moment to thank our team members for their incredible dedication and hard work during these challenging times. Our business is well situated to exceed expectations in an emergency such as the coronavirus pandemic that we all face. We are a one-stop shop capable of extremely high volumes while providing great value to our members. COVID-19 has heightened demand for our products and services, and our team members managed well through this environment, embracing their important role in serving our communities. As a result, our performance for the first quarter was extremely strong. Net sales for the quarter were $3.7 billion. Merchandise comp sales, which exclude gasoline, increased by 27%, significantly exceeding our expectations and were driven equally by ticket and traffic. Our digitally enabled sales grew by approximately 350% and drove about five full percentage points of our 27% merchandise comp. About three-quarters of the Q1 growth in digitally enabled sales was driven by same-day delivery and buy online, pick up and club, or BOPIC. As we noted in the past, we have an economic advantage here compared to others. We operate in a limited skew warehouse environment with significantly higher average tickets, which allows us to be much more efficient. As a reminder, BOPIC sales tend to skew towards higher ticket items, And through our partnership with Instacart, a same-day delivery sale has the same margins as a sale in our clubs. Before I turn to our divisional comps, let me give you a little color on our merchandise comp sales cadence for the quarter. For the first three weeks of February, comp sales were in line with our plan. In the fourth week of February, comps accelerated to the low teens level. This acceleration continued to ramp in March, where we saw comp growth north of 40% for the month. March provided the three highest sales days in our company's history. April's merchandise comp was 23%, driven by continued demand and increased EBT and stimulus payments. Importantly, that strong April comp number was not adjusted for the negative impact of being closed on Easter Sunday this year. Let's now turn to our comps by business. Beginning with this quarter, we have decided to revise our divisional reporting slightly. Going forward, we will be reporting comps for two divisions. First, grocery, which includes perishables, edible, and non-edible grocery. The second division will be general merchandise and services, which will include general merchandise and our service businesses, such as optical and cell phones. Grocery saw incredibly robust comp sales of 33%. Perishables, edible grocery, and non-edible grocery all saw comp sales north of 30%. We saw very strong growth rates in all the categories you would expect. Paper products, cleaning essentials, fresh meat, frozen, dairy, fresh produce, packaged goods, and beverages. And as Lee noted, the team worked hard on ensuring we remained in stock by working with alternative distributors to continue to provide our members with these essentials. Overall, we feel great about our position in the grocery business as we exit the quarter. Our general merchandise and services division saw a decline of approximately 3% as sales of apparel decreased and we turned off our services businesses. Our apparel business drove the bulk of that decline. We saw healthy growth in other categories, including TVs and other consumer electronics, small appliances, and recreational products. Membership fee income, or MFI, grew by 8.4% during the first quarter to $80 million. As Lee noted, we saw a significant increase in new members, which will bode well for us in the future. As you know, membership fee income is a lagging indicator of the health of the membership given that we amortize the fees into the future. Cash MFI, which is an unamortized look at the cash that came in the door, presents a more current view. Cash MFI for the quarter was up 16%, driven by 40% growth in new member acquisition over last year's first quarter. This growth in new members should benefit us for years to come. In addition, despite these gains in the number of new members, we maintained our higher tier penetration at 28%, and more than 65% of our members are now enrolled in our easy renewal program. Membership is at the heart of what we do, and as we attract and retain more members, we position ourselves for growth and success. Let's move now to our gross margins. Excluding the gasoline business, our merchandise gross margin rate declined by approximately 30 basis points over last year. Continued execution of CPI initiatives as well as improved shrink and salvage rates provided approximately 10 basis points in rate tailwinds. We experienced approximately 40 basis points of headwinds from three areas. First, markdowns we took on apparel inventory were worth approximately 20 basis points. Next, incremental distribution expenses associated with COVID-19 were worth approximately 10 basis points. Lastly, as we experienced significant inflation in some commodities, like eggs, we invested meaningfully in price in order to provide outstanding value to our members. That investment was worth about 10 basis points. Both prices and demand for gasoline decreased during the quarter, driving our sales of gasoline lower. However, we continued to grow market share meaningfully. Offsetting the decline in sales, the dislocation in the gasoline market provided robust margins. The net of all that was a very profitable gasoline business during the quarter. We estimate the benefit of unusual gasoline gross margin in the first quarter to be approximately $30 million. SG&A expenses were $590 million during the first quarter compared to $501 million in the prior year. Our SG&A expense included approximately $62 million of total costs associated with COVID-19. Let me break that down. totaled down for you into three main buckets. $51 million was invested in team member wages and bonuses, $9 million in safety and protective equipment, and $2 million in other operational costs, such as security. Please note that these costs have not been adjusted out in the calculation of our adjusted EBITDA metric. In spite of these additional costs, we leveraged SG&A by approximately 50 basis points, enabling great flow through to earnings. Interest expense decreased to $22 million from $28 million a year ago. The decrease was driven by continued de-levering and the repricing of our first lean term loan, which we completed during this past January. For the quarter, we recorded an income tax expense of $26 million compared to $7 million in the prior year period. The variance between our normalized tax rate of 27% and this quarter's reported rate of 21% was driven primarily by $4.5 million of windfall tax benefit from stock options exercised. Net income in the first quarter was $96 million, or 69 cents per share. This incredible performance was 165% greater than last year's first quarter on a per share basis. Adjusted EBITDA grew by 56% to $194 million, reflecting the considerable sales beat offset by investments directly in our team members and in their continued safety. Moving now to the balance sheet, our AP to inventory ratio was approximately 97%. We spun our inventory considerably quicker than last year, providing strong working capital benefits. We ended the quarter with approximately 5% less inventory than at our last quarter end. Typically, our first quarter is not particularly cash generative. As an example, last year's first quarter provided $8 million in free cash flow. This quarter was much different from that perspective. As a result of our outsized performance and working capital benefits, we generated record free cash flow of $435 million for the quarter. No other metric highlights the strength of our business, our results, and the accomplishment of our team better than this one. In addition, while we clearly did not have a need to participate in any of the programs provided under the CARES Act, we had a small cash flow benefit from the deferral of payroll taxes this quarter. Early in the quarter, pre-COVID, we began executing the first trades in our stock buyback program. When the crisis began to show in the markets, we quickly pivoted to a focus on liquidity. We stopped the buybacks, drew on our ABL, and aggressively managed our cash. As it became clear that our business was strong and the markets began to function more normally, we fully paid down the revolving portion of our ABL, and allowed cash to build on the balance sheet. We ended the quarter with $133 million in cash balances and a funded net debt to adjusted EBITDA leverage ratio of 1.9 times. Let's turn to our outlook. Let me start by saying that the current landscape has so many more external variables to track. The evolution of the public health crisis, government interventions and stimulus, Consumer behavior and unemployment levels will have tremendous effects on the entire economy, including our business. Given the uncertainty and unprecedented nature of today's environment, it is extremely difficult for us to predict how the year will play out. For this reason, we have made the decision to speak to you qualitatively about the trends that we are seeing currently and expecting in the near future, rather than updating guidance. We believe that our business is strong, healthy, and poised for growth. The next few weeks and months may be hard to predict, but the capabilities that we have built and our ability to lean into growth positions us well for the future. It's our current expectation that something like the current consumer behavior persists for a while. As a result, we expect to see strong merchandise comp growth. We anticipate operating in a recessionary environment, even as activity in our geographical footprint begins to resume. Historically, our business has comped very well during recessionary environments where value becomes even more important. We expect government stimulus to continue, and when you overlay a much higher need or desire to eat at home, driven by government regulation or just the basic human desire to stay safe, the expectations for higher comps in our business crystallize. As we noted earlier, our Q1 exit rate on merchandise comp was north of 20%, and May has not slowed. While I wouldn't say that we should expect that comp rate for the balance of the year, I do think that our previous annual guidance of low single digit comps is considerably low. Following that line of thinking, we also expect to continue to see strong growth from a membership perspective. We believe that new members will be easier to acquire in this environment, and we will invest considerably into membership acquisition and analytics. Further, the new members that joined this past quarter will result in benefits for this year and beyond. Given the fluidity of the environment, it's difficult for us to predict where merchandise margins will land throughout the year. In addition to the benefit of strong revenues, our CPI process will provide further gains, and we expect continued private label expansion. Potential negative impact rates include product mix, near-term inflationary pressures on certain perishable categories, the timing of reopening our service businesses, and the contribution from our apparel business. We feel good about our general merchandise business as it has returned to positive comps in May. It's also difficult to predict what will happen in the gasoline business. We do expect gallon sales to recover as the economy begins to reopen. We also expect to see margins normalize and possibly contract below planned levels. This is often the case in periods following those with outsized margins like we saw in Q1. Let me touch on SG&A expenses. As we think about the go-forward run rate of COVID-19 expenses in Q2, we expect to incur approximately $20 to $25 million of incremental costs. We will continue to manage the level of expenses with a prioritization on the health and safety of our team members and making sure we're providing the high level of service that our members expect. As Lee mentioned earlier, we are on track to deliver $40 million of savings from Project Momentum this year. All savings will be reinvested back in the business, as previously noted. Lastly, we will spend into the beat in order to continue to invest in our business with a desire to take Q1's results and turn them into a multi-year growth phase for our company. Despite these costs and uncertainties, we expect to achieve profitability for the year that significantly outpaces the high end of the growth range of our original long-term algorithm. It's important to note that we feel extremely confident in our liquidity and ability to prudently manage capital in this environment. One only needs to look at our first quarter results to our cash flows, especially when we turn. In fact, this accelerated benefits that drove a significant portion of Q1 free cash flow performance. We do not expect this benefit to fully recur in Q2. Further, as we rebuild our inventory balance, some of the Q1 working capital benefits may reverse. Lastly, we expect our full-year cash flows to benefit from tax deferrals provided by the CARES Act in the amount of approximately $30 million. We will be opportunistic from a capital allocation perspective and adapt to our environment. As I said earlier, we have met our medium-term leverage target. Given our robust cash flow generation, we are in a strong position that allows us to be aggressive in investing behind business growth in addition to considering capital returns to shareholders. In conclusion, our business is more relevant than ever before. Consumer behavior trends are in our favor, and the capabilities we have built over the last four years enable us to thrive in today's environment. Our comp trends are strong, and our member growth is heartening as we look toward a bright future. We go forward from here with a team that meets the challenge every day to serve our members and take advantage of this opportunity to build our business for the long term. Finally, our hearts go out to all of those affected by the pandemic, and we offer our thanks to our team members for their outstanding work during these challenging times. Now I'll turn the call back over to the operator to begin the Q&A session.

At this time, if you would like to ask a question, please press star to the number one on your telephone keypad. Your first question comes from Chris Hovers with JP Morgan.

Thanks. Good morning, guys. So my first question is on the membership fee income growth. You talked about 16% cash in the quarter, but 40% new member growth. Does that suggest that the signups accelerated over the quarter, i.e., you're not picking up all the cash to get more in April versus March versus February? And as you think about the year, if you drew the line today, you know, how would, what would be your expectations for overall MFI growth and, you know, any comment on cadence over the rest of the quarters would be helpful, too.

Great. Good morning. This is Lee. As we begin, let me just locations, and so I'll play a bit of a role of MC. I think on this specific question, Bob, you're well-suited of MFI. Do you want to take it?

Absolutely. Good question. So we certainly had robust membership growth during the quarter from a new member growth as well as a renewal rate perspective. I think this is probably the first time we've talked about cash MFI in a call. The purpose of doing so was just to give everyone a view at exactly what you're pointing at, which is acceleration of membership growth. growth during the quarter. Certainly, as the quarter progressed, we signed up a whole bunch of new members, and as we pointed out in the prepared remarks, versus last Q1, 40% growth in new membership, so certainly much higher than we had planned at the beginning of the year and much higher than the prior period. As far as membership going forward, we would expect more of the same. As we said in the prepared remarks, we believe that acquiring members will be a little bit easier to do. We certainly have a lot of cash to invest behind that idea, and the membership team now led by Pocha Hockey is poised and primed to really take advantage of this one-time opportunity to do so.

So there's plenty of color in terms of the MSI growth for the year?

Again, it's difficult to predict, Chris, given all the different pieces of uncertainty out there, but certainly heading into the second quarter, we would expect an accelerated rate of growth there at least, and then we'll see how the rest of the year plays out.

Got it. And then my follow-up question is, it sounds like you've hit your debt target very, very quickly, probably a couple years faster than what we thought you would. So as you think about capital allocation going forward, great here that you're spending into the beat and also looking to reinvest to gain share, but in terms of the excess cash, do and considering the ability to open stores at this point, as you think about the next 12 months, is share repurchase going to be your number one option in terms of reinvesting that excess cash flow?

Let's start with the fact that it's the number one focus of our entire team to take this opportunity to turn one quarter's fantastic performance into many years of growth in front of us. We've got earnings to invest. We've got a ton of cash to play with. And we will be aggressive in doing so. That will as we go. Real estate is just one of them. And as you point out, a little bit of a bump in the road from a timing perspective as construction was slowed down during the pandemic here. We have opened one club this year in Florida. We will open Chesterfield, Michigan in July, hopefully. And we have two other clubs under construction today. Both of those are a little bit of a delay given what's going on in the external world, but they will open around the end of the year, either late in this year or early into next year as we sit here today. Any real estate opportunities that come along, and we are firm believers that there will be many as the pandemic's fallout makes its way through retail, we will be very aggressive in trying to take advantage of those opportunities. Our real estate team is already out in the markets, beating the bushes, trying to get out in front of the opportunities. Bill Werner is on the call here today. He leads the new club identification team. That team is out there understanding and mapping where all of our retail competitors are, who are the ones that we think might be in trouble and that have considerable real estate opportunities of size that we could use. And so we will take every opportunity to be very aggressive, even within our own portfolio. If we can restructure leases or buy properties, we have certainly enough cash to play with there. We will invest in growth in all other ways as well, whether that's through membership or through any of the other growth vectors like Omnichannel that Lee talked about in his performance. As we get to the rest of cash, certainly we would expect to have some left over. We are a little bit behind our plans from a stock buyback perspective given what went on in the markets and our pause on the buyback program. We would certainly... consider going forward with that and also consider other forms of returns of capital. We have no firm plans at this point because we need to see how the next couple of weeks and months play out and work together with our board to figure these things out. But I do think this is almost a once in a lifetime opportunity for this company. Understood. Best of luck. Thank you.

Your next question comes from Peter Benedict with Baird.

Oh, hey, guys. Thanks for the question, and congrats on the good execution here. One membership question and then one pricing question. Just on the new members, can you give us a sense for maybe the percentage of those new members that signed up on auto-renew and how have their kind of repeat shopping changed? Um, the patterns look like, I know it's only a short timeframe, but any color on that would be helpful. That's my first question.

Sure. Peter, thanks for the question. Um, so today when we sign up new members, all members are enrolled in auto renew and then need to make the choice to opt out of that. So the penetration of auto review in the new member base would be considerably higher than the 65% that we see across the overall penetration. It's really the members who've been in the franchise for a while and have chosen not to auto-renew that represent the gap to 100%. And not surprisingly, the new members we're seeing are shopping at rates that are elevated versus what we might normally see. That's clearly driven by the increased consumption tied to the pandemic. But in terms of onboarding of those members, we feel good. They're shopping well. at a faster rate and engaging in our omnichannel platforms as well. So, you know, good early momentum with that crop of members.

Good to hear. And then with respect to what Bob, I think, mentioned, the inflation in certain categories, you guys were kind of holding price and delivering value. How are your price gaps versus some of your grocery competitors evolved over the last few months here. I'm just curious what you're seeing on that front. Thank you.

Yeah, when you step back and look at inflation across the business, there's a minor impact on the business percentage point, although across considerable changes. So as Bob mentioned, eggs saw a pretty meaningful increase in the price. to drag the price on eggs simply because we felt like it would be a kind of large measure of sticker shock to our members. It was a high-frequency category with kind of good grocery and other competitors really quickly. So it felt like an opportunity for us to invest in our price impression. There have been other places more recently, like Protein, where the sample has gone up pretty considerably. We are reflecting that in slightly higher retails to make sure that we are covering our costs. That is considerably below what we've seen some other players do, where their retails have floated higher than ours. And so, overall, we feel good about our price impression and feel like large pack sizes, a discounted grocery option, And the really great value we have every day is only being accentuated in this market where people need to buy more or building bigger baskets. We've become a more logical destination.

Okay, great. Thanks, Lee. Good luck. Thank you.

Your next question comes from Edward Kelly with Wells Fargo.

Hi, guys. Good morning. Just a quick follow-up on the membership trends. Could you give us a little bit of cadence on the member growth, sort of like you did with sales? And I'm just kind of curious as to how the pace currently looks. And then as you look at these new members, what do they look like relative to the base, you know, the typical BJ's member?

Sure. Thanks for the question, Ed. Let me start, and maybe I'll ask Bob to build a little bit on it. The pace of membership growth looked relatively consistent with the comp. We became more on-trend as people looked to stock up and make bigger purchases and drive fewer trips. We saw the shape of membership ride pretty consistently with the shape of the comp sales performance. And so we exited the quarter at a nice rate of membership growth, and we've seen continued membership growth on an ongoing basis. So we're excited by that. And then, as I mentioned previously, the overall dynamics of that membership growth are pretty appealing. We're seeing, on average, slightly younger members, slightly more digitally enabled members, where growth in online platforms has been quite strong. And then we're seeing really good shopping behavior, clearly tied to the pandemic and changes there. But the overall crop of members we're seeing is seemingly quite positive. Bob, anything you'd add to that?

No, I think you hit all the right topics, Lee.

And just as a follow-up to that, how do we think about incremental margins return on a member. I mean, I do remember you guys talking, you know, it's 25,000 members per store. Just getting to 26 is, you know, such a big deal, but that still only really scratches the surface on the gap to peer. Think about incremental margins on this business.

Yeah, Ed, I think that's one of the things that clearly benefited us throughout the quarter is the flow-through we're seeing from the growth in members and from the growth in sales. As we've talked to you about in the past, our boxes on a membership basis have historically been less developed than some of our competitors. We would average slightly north of 25,000 members per box versus Costco in the 60,000 plus member per box range. So we clearly have room to grow. We've seen that growth with the membership base, but we've built capability over the last four years and have a model that drives pretty profitable marginal growth, which is exciting to see. We're very efficient at getting palleted goods to the sales floor and with a relatively efficient labor model. So as we grew quickly, we were able to see good flow-through throughout the P&L and leverage from the G&A line, despite pretty considerable investments in safety and increased pay for our team members. Despite all of those investments, we still saw good flow-through, which is exciting.

Great. Thanks, guys.

Your next question comes from.

Hi, thanks for taking my question. I was wondering actually if you could give a little color on ticket and where that's standing now in terms of COVID. And then I was wondering if you could just give, and I know you said that you're seeing slightly younger demographics, I think, on the new signups, but maybe a little more, can you elaborate a little bit more on that? And Just to throw a number out there, it looks like you're probably close to 8 million members or yeah, I think it'd be about 8 million members as of now and still growing. Is that fair?

Sure, you Bob, you want to take the question?

Sure, apologize if you can hear my landscapers outside my house, but happy to happy to take that question. So so we talked in the prepared You know, the 27% comp for the quarter was pretty equally driven between ticket and traffic. And you probably heard us talk about, you know, our historical ticket somewhere in the $95 to $100 range. So you can do the math on it from there. You know, so that takes it to somewhere near $110 for it. a ticket, pretty sizable growth during the quarter, and similar results so far into Q2. I think your total members' number is, at least on a paid basis, a little bit high, but certainly we're seeing great growth into May as well. Okay.

And then, well, I guess anything on the – any more color on the demographics other than, you know, you did say skewed slightly younger, but any other color you could give there?

I would say, you know, the membership growth we're seeing is really across all of our geographies, which is encouraging, and that was true of the comp sales performance as well. It was surprisingly uniform and surprisingly strong across the business and in terms of the new membership enrollment. In terms of the new members specifically, as I said, they're a little bit younger on average. A little bit younger for us is still people with families, so it's not people in their early 20s. It's older than that, but relatively young for our franchise. a meaningful higher portion signing up digitally and engaging with our digital platforms, and then a considerably higher early shopping behavior than we would normally see, although that does owe to the business. Beyond that, we're still just getting to know these members from an analytic and from a qualitative standpoint. So we may have more to say on future calls, but the early read is quite positive.

Okay, and then can I follow up?

Karen, our ability to acquire these members in a digital way has really, really jumped. We've talked to you about numbers that were in the 10%, 12% range in past quarters, and this result in Q1 was almost 30% members acquired digitally. So incredible progress from that standpoint as well.

Okay, great. And then you commented that three-quarters of the econ growth was digital. same day delivery and OPEC. Actually, can you just give more granularity on the split between those two?

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

Sure. I mean, we saw tremendous growth in all things digital during the quarter, as we talked about, 350-ish percent growth in digitally-enabled sales. vast majority coming from same-day delivery and BOPEC. And I believe, Lee, correct me if I'm wrong, from the previous watermark. So that was the predominance of that number.

Yeah, that's right. I think, as we've talked to you in the past, we do think we have an economic advantage when it comes to Omni sales, right? So think about the simple formula of bigger pack sizes leading to bigger rings. Even though we have lower percentage margins, we have higher dollar margins. And we're picking in an environment of 7,000 SKUs versus 100,000 SKUs for you pick your other mass merchant or grocery competitor. And so we were very excited to see the considerable growth in same-day delivery and buy-on-line pickup in-club. And as I mentioned, we've already started to pilot that, including curbside delivery and then inclusion of fresh goods as well. And so we're going to continue to lean into Omni as a real differentiator for us, and the engagement this quarter was fantastic.

Great. Thanks very much.

Your next question comes from Robbie Omas with Bank of America.

Oh, hey, guys. Thanks for taking my question. You know, Lee, maybe for you, I was wondering if you could just, you know, tell us how you're thinking about the reopening phase and anything you've seen in regions where restaurants have reopened or, you know, discretionary retailers start reopening stores. I'm just curious how you're thinking about, you know, how that could change the dynamics you're seeing now and how you would be planning for that.

Yeah, Robbie, it's a great question and something that we've been thinking a lot about. You know, our footprint is essentially Maine to Florida and as far west as, you know, is now Michigan. And the reality is the bulk of our footprint is still under pretty considerable stay-at-home orders. And so as you think about our concentration in the Mid-Atlantic and the Northeast in particular, we remain under those orders and we will likely be that way, at least for an extended period of time in large measure. But in our business in the South, including in Georgia, we've been watching this closely because it is the early indicator of how demand will change. So far, we haven't seen meaningful change or deceleration in the business. It would appear that people continue to consume significantly larger quantities of food at home. They haven't ventured back in large numbers to restaurants. And I think a number of the office jobs stay at home. So as you think about schools closed, offices closed, fewer people out and about during the day, you're seeing large quantities. And I think Even as restaurants begin to open, they'll do it with limited capacities. And so as we look at that as that whole mix, it's really hard to predict what demand will look like going forward. But as we said in the prepared remarks, it's hard to see there not being elevated demand for the foreseeable future, even as the world begins to open back up. And that's part of the reason we gave the intra-quarter caller on Q2 and that we're not seeing a slowdown in May because we felt like giving a little bit more about the current state of the business would be important and help you think through the potential future results, which we're quite excited about.

Really helpful. And just one follow-up. Lee, any thoughts from the stimulus checks heading and how you guys? supporting comps?

Sure. I think there's two factors that are likely supporting comps in terms of an economic impact, and that's the stimulus checks as well as an increase in EBT food stamps. And we certainly saw late in the quarter into Q2 and acceleration in some different categories. So as Bob mentioned, general merchandise went from a negative comp in Q1 to being positive in Q2. And we saw relatively significant growth in work-from-home categories, but also some potentially more discretionary categories like electronics and TVs. And we would imagine that there is certainly an impact from stimulus checks that are impacting the business. It's hard to quantify exactly what that is because the overall shape of demand has remained elevated and relatively consistent. But I think it's right to assume there is some benefit flowing through from stimulus checks in the business.

Gotcha. That's helpful. Thank you so much.

Your next question comes from Chuck Grom with Gordon Haskett.

Hey, thanks. Good morning. Congrats on a great quarter. Lee, you talked about something I don't think I've heard come out of BJ's in a long time about suppliers that you typically don't deal with starting to knock on your door. And if you look back at the history of Costco, it's obviously something that's helped them over the past 10 to 15 years. So I'm just wondering if you can maybe just amplify on that a little bit for us.

Sure. I think it's a combination, Chuck, of us knocking on their door and them knocking on our door. As you think about our general merchandise business in particular, we've been fortunate to remain open when large sections of specialty retailers, mall-based retailers, the department stores have been closed. And so many of the vendors who supply those channels have had their own challenging dynamics. And in that world, we become a potentially attractive outlet either for opportunistic buys or for ongoing relationships. And so we have certainly asked our general merchandise team to push and engage on this measure because it's likely true that a lot of the the other players, particularly some of the weaker or more financially leveraged players, may struggle if demand does not snap back pretty meaningfully. And so as those businesses come under potential distress, it creates an opportunity for us to engage with companies that may not normally choose to sell to club or sell to us specifically. And so that's a potential silver lining in this for us as we may get access to some new categories, some new brands that would be new and exciting for our members.

Okay. That's great to hear. And then just to circle back on membership again, you know, the 40% growth, is there a way to put that number in perspective maybe if you look at the past, you know, four to eight quarter average of what the average has been for new membership growth? And then, you know, I think there's been a lot of retailers that have seen a surge in customers and For you guys, clearly, there's a fee attached to it, so the stickiness you would think would be good, but just wondering what steps you guys are going to take to cultivate those relationships going forward so you can keep them, not for just the next two to three quarters, but for multiple years.

Sure. Let me start, and then I'll ask Bob to comment on it as well. Sure. 40% is really strong, and we're very excited about that growth. The challenge for us is, in a lot of places, we've been in the markets for a long period of time. Some people feel like they know us, and so it's always the biggest challenge to get people to walk through the door and see how we've changed the business, that we have Omni platforms, that we have new assortments that we've changed. lots of things about the environment. And the pandemic has created an extra motivation to walk in the door that is above what we could drive simply by traditional marketing. And the trick once you get them to walk in the door is to get them to shop and to shop early. And that's been impacted as well. And so we're hopeful that people signing up for a year-long membership and shopping early affords us a nice opportunity to engage those members on an ongoing basis and convince them of the value of our franchise. And so we'll be looking to pull all the levers we've developed, so engage people from an omni-channel standpoint, try to get them enrolled in our credit card offering to save even more money, promote to them to get them to explore different elements of the business. And against the backdrop of a potentially recessionary environment, we think people will be looking to save money. And so some of the challenges of shopping in a club, a little bit longer trip, a little bit bigger pack sizes, are sacrifices people may be more willing to make. And that's certainly been the history of the company when there's been recessionary environments we tend to outperform.

Okay, that's great. And then just one quick follow-up for me would be, Just curious how big of an opportunity BOPIC with Fresh could be for you guys. I'm sure you've started to test it. Anything you can learn or share with us, you know, targets and that, so they're going to start doing that in the next several months. So just curious how big of an opportunity that could be. Thanks.

Yeah, we think it could be a pretty meaningful opportunity. In the test clubs, we're seeing really strong engagement in terms of the number of baskets that have Fresh goods in them. It clearly introduces an extra operational challenge in that you need to keep the goods refrigerated and be even more disciplined in terms of pickup times and making sure that people don't abandon the baskets, but the early dynamic has been quite favorable. We're working to get the operational model right, and then with that, we think there's an opportunity to scale it. As Bob described, we would look to lean into that in this environment in terms of Omni investments and other investments we can make.

Great. Thanks a lot.

I will now hand the call back to Lee Delaney for closing remarks.

Thank you for your engagement. We're clearly excited about the quarter, but more so for the potential signals it sends for our future. So thank you for your engagement. Thank you for your questions. And please stay healthy and safe in this environment. We'll talk again soon.

That concludes today's conference. Thank you for your participation. You may now disconnect.