BJ's Wholesale Club Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the BJ's Wholesale Club third quarter fiscal 2020 earnings conference call. At this time, our participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Sutton Frager, Vice President, Investor Relations. Thank you. Please go ahead, Madam.

Good morning, everyone. Thank you for joining BGA's Wholesale Club's third 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 our 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 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 Lee.

Good morning, and thank you for joining us. I hope you are healthy and safe. Q3 was another outstanding quarter with considerable strategic, operational, and financial success. We are clearly benefiting from a unique combination of factors, allowing us to dramatically accelerate our transformation and strengthen our business for the future. For the balance of my remarks, I will describe the major factors contributing to our success and discuss their implications for our future. First, our team has been amazing, and I could not be prouder of them. They have stepped up to meet incredible challenges all year. Across our distribution centers, clubs, and home office, our team's creativity, resilience, and dedication has been so impressive. They have kept safety as our highest priority with extensive protocols to ensure a safe and healthy environment for our entire community. In partnership with our vendors, who too have been incredible, our team has continued to provide for members when they needed us most. Let me offer my sincere thanks to everyone who has and will continue to power our success. I deeply appreciate your contributions and partnership. We continue to support our team with investments in bonuses, enhanced benefits, and safety measures. Year to date, we have invested $128 million in these practices and will continue to prioritize our team's well-being. Importantly, we have also upgraded our team's capability over the last six months with key senior hires in membership, marketing, merchandising, digital, analytics, operations, and IT. We know these recent additions will further speed our transformation and we expect to continue to invest in great talent as we become an even more attractive employer. Second, and perhaps most obviously, we remain on trend. Members are consolidating their trips, buying bigger baskets in response to the pandemic, and searching for savings given broad economic anxiety. Our industry-leading value, bulk sizes, and broad category participation work exceptionally well in these times. As a result, we have gained considerable share. More than half our growth was driven by share gains based on IRI data. Furthermore, our growth outpaced the market by more than twofold, and we gained share in more than 90% of the categories we track. For example, our perishables business outpaced the market by more than two times, and our non-edible grocery business grew at 8x the rate of the market. Our strongest share gains occurred outside our core northeast geography as more people discovered our relevance. These share gains outside of our core markets further support our confidence that we can successfully expand our reach and assert our relevance far beyond the Northeast. And we are gaining share digitally. We anticipate elevated shopping trends will continue well into 2021, given the current state of the pandemic, likely timeline for vaccine distribution, and ongoing unemployment trends. Third, I believe our business model is competitively advantaged for current and future times. We run large clubs and distribution facilities with capacity for growth as others are closing stores. We operate efficiently with focused labor and lower marginal expenses, positioning us favorably should wages rise. We sell a limited selection of larger size items, offering advantage economics in a more digital world. We offer industry-leading value, critical as prices become more transparent and consumers seek out savings. All these factors will allow us to meet elevated levels of demand with favorable economics under nearly all potential future environments. Our Q3 share gain and profit is evidence of these structural business model advantages. Finally, we've accelerated our transformation in six key areas. Growing our membership, delivering value, improving convenience with digital, expanding our footprint, lowering our cost position, and improving our capital structure. Let me say a bit more about each. From a membership standpoint, we are ahead of our expectations on all metrics. We continue to attract new members at high rates and retention remains robust. Our tenured members and new members continue to shop at elevated levels, driving increased trips to our clubs. In addition, new members continue to skew younger and engage more with our digital platforms. We are leaning into membership investments to drive acquisition and engagement. Through our data-driven approach, we are focused on attracting members with the highest lifetime value. Similarly, we are also concentrating on retaining members by helping them discover all the ways in which BJS can deliver value. These efforts have powered 12% growth in our total member base year over year. These investments also drove a meaningful improvement in the quality of membership. This quarter, our highest tier penetration increased by 200 basis points to 30% of total members compared to the prior year period. Higher tier members renew at much higher rates and have greater lifetime value. We expect gains in membership, size, and quality will yield benefits well beyond the current environment. Assortment optimization remains a key initiative to deliver value to our members. We continue to work hard to remain in stock on high-demand essential products and have quickly pivoted to add new suppliers and categories. In-stock levels improved this quarter, and we continue to mitigate supply chain challenges. Our strategy remains consistent, simplified to expand into high-growth and high-demand areas and remain agile with our space to meet member demand. This quarter, we expanded our assortment in categories where we were historically under-penetrated, including fitness equipment, household goods, indoor furniture, and select consumer electronics categories. We accelerated the reset of our food business with more healthy and organic options in the first half of this year. These changes drew market share gains in several categories, including alternative snacking, where we grew our sales eight times the market rate. We also saw significant share gains in many perishables categories with growth two to three times the market. Our new prepared foods business also gained share. We know these improvements will serve us well with the younger new members we have recently added. Let me touch on our holiday planning. First, we pulled our Black Friday deals to start earlier in November with a seamless experience across all channels and an enhanced focus on relevant categories like furniture, fitness and recreation, small appliances, housewares, and consumer electronics. We have adapted our grocery offering to account for fewer large gatherings, for example, by downsizing our party platters and buying more small turkeys. While we anticipate some headwinds from fewer holiday gatherings, we feel great about our holiday assortment. From a services standpoint, the team continues to enhance our capabilities. Services, including optical, cellular, and home improvement, all return to growth. We recently relaunched our major appliances business with a new assortment and improved digital experience, and it is growing at a significantly faster rate. We believe services will be a significant growth driver for many years to come. Our digitally-enabled sales grew by approximately 200% this quarter. Our biggest gains came in channels where economics are most attractive, with Buy Online Pickup and Club, or BOPIC, and same-day delivery representing three-quarters of the growth. The growth in our digital platforms continues to surpass our expectations. In the last nine months, we have grown by more than four times all of last year's growth. This quarter, we expanded Bopec to include curbside service, including fresh and frozen grocery items chain-wide. Although still early, results from this expanded offering have been very promising. For example, roughly 40% of our Bopec orders post-launch were delivered curbside. We will continue to aggressively invest into digital platforms given their increased relevance and our competitively advantaged economics. We believe shifts to digital will bode well for us on the top and bottom line. Our efforts to expand our footprint are progressing well. We remain on track to open two new clubs in New York at the end of this fiscal year for a total of four this year and as many as six clubs next year. To further expand our reach, we are pursuing additional locations in new and existing markets with a focus on attractive demographics. We are pleased with the performance of our clubs so far, especially from a membership standpoint, where in Michigan, our members per club average is 20% better than the chain wide average. We plan to invest aggressively to support our new clubs, given our ability to gain share in new markets and the performance of recent openings, the latter of which continues to run ahead of expectations. All told, we expect greater unit growth to be a multi-year growth factor. Our cost reduction efforts and enhanced balance sheet afford us increased flexibility to invest in our business and return capital to shareholders. We remain on track with our project momentum cost reduction goals and have used this year's considerable free cash flow to transform our balance sheet. Our leverage now stands at 1.3 times EBITDA compared to 2.9 times a year ago. and we return capital to shareholders by opportunistically buying back shares. Before I turn the call over to Bob, let me leave you with a few takeaways. Our business has been transformed and we expect to continue to gain share over the near and long term. We are well positioned structurally and strategically with an extremely relevant and extendable value proposition, a growing and upgraded member base, advantage digital capabilities, faster unit growth and geographic expansion, and a better cost position and transformed balance sheet. As we look past the current environment, we see a stronger business with robust sales, higher profitability, and strong cash flows. With that, I'll turn the call over to Bob.