BJ's Wholesale Club Holdings, Inc.

ladies and gentlemen thank you for standing by and welcome to the bj's wholesale club fourth quarter fiscal 2020 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 session to ask a question during the session you will need to press star one on your telephone keypad if you require any further assistance please press star zero thank you I would now like to hand the conference over to your speaker today, Fatim Freehar, Vice President, Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining BGA's Wholesale Club's fourth quarter fiscal 2020 earnings conference call. Lee Delaney, President and 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 most recent Forms 10-K and 10-Q filed with the FCC for a description of those risks and uncertainties. Finally, 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're healthy and safe. 2020 has been a remarkable and challenging year. I am humbled by our role helping our communities through this pandemic and immensely proud of our team members' dedication to serving our members during these unprecedented times. Our highest priority continues to be the safety and well-being of our team members, our members, and the communities we serve. We have implemented extensive protocols to maintain a safe and healthy environment. We continue to support our team members with investments in bonuses, enhanced benefits, and safety measures. And in 2020, we invested over $150 million in these practices. Our performance this year would not be possible without the hard work and dedication of our team. The unique circumstances brought on by the pandemic challenged us in almost every dimension. Our team remained intently focused on meeting short-term challenges and positioning the company for long-term growth, enabling us to deliver extraordinary financial performance and accelerate our long-term strategic transformation. Let me touch on both. From a financial perspective, we delivered industry-leading results this past year, including comp sales growth of 21%, adjusted EBITDA of $857 million, reflecting 47% year-over-year growth, adjusted EPS of $3.09, or 112% growth, free cash flow of $676 million, or 276% growth, and a leverage ratio of 1.2 times compared to 2.8 times a year ago. In addition to the great performance, we made transformational progress on each of our long-term strategic pillars, namely growing and retaining our membership, delivering value with merchandising and marketing, improving convenience with digital, and strategically expanding our footprint. Let me say a bit more about each. From a membership standpoint, we are seeing great results across all key metrics. Our membership base has strengthened in size and quality. This year, we attracted new members at record levels, including in the fourth quarter, where we added approximately 80,000 net members relative to the third quarter. Our retention rate for tenure members improved to an all-time high of 88%, and we made even greater gains with our first-year renewal rate. Higher tier penetration is at 31%, reflecting a 300 basis point increase compared to the prior year. In total, our membership grew by 11.3% on a net basis relative to the prior year. Across member cohorts, we are seeing elevated shopping levels, including larger baskets and increased trips to our clubs. In addition, our new members skew younger and are more digitally engaged. Assortment optimization remains a key initiative to deliver value to our members. Our merchants met a changing demand profile by adding dozens of additional suppliers and new relevant categories, including personal protective equipment. We meaningfully adjusted planning to account for rapid shifts in consumer demand and leverage relationships with suppliers to receive priority for inventory allocations. These short-term actions combined with market growth and the increased need to buy in bulk led to outsized performance, where our food business grew at two times the rate of the market. We also made significant progress on longer-term simplification and expansion into new high-demand categories. We reset the food business with better for you and organic options. We expanded into new categories where we were historically under-penetrated, including fitness, sporting goods, household goods, such as outdoor heaters and fire tables, and select consumer electronics. Owned brands continued to grow with penetration increasing to 21%, driven by success in several new categories like basic tableware, dairy, spreads, and home storage. We expanded our services offering significantly to further elevate the value of BJ's memberships. Specifically, we upgraded our offerings in optical, home improvement, major appliances, and financial services. For example, we just announced our consumer point of sale financing partnership with Citizens Bank. Through this partnership, our members will be able to pay for large purchases in-club or online through simple, transparent, and affordable installment loans by Q2 of 2021. We are thrilled to offer this flexibility and provide our members even more payment options to conveniently shop at BJ's. We continue to believe services will be a significant growth driver for many years to come. Our digitally enabled sales grew by 168% this quarter, surpassing our high expectations. The centerpiece of our digital strategy is our recently upgraded app, which continues to resonate strongly with our members. Our app delivers real utility, including personalized promotions, improved shopping experiences, and an efficient gateway to our fulfillment options. Total app downloads exceeded 5 million compared to a little over 2 million last year, with roughly 30% of our membership regularly using the app compared to 12% last year. Our app receives a higher rating than many of our peers, and we have a robust roadmap to further enhance it with new features that deliver convenience. On a scale-adjusted basis, our digital app engagement appears ahead of many of our competitors as we're making shopping meaningfully easier and faster. We continue to expand our digital fulfillment options. Following our Q2 launch of curbside pickup, we added the ability to fulfill fresh items through BOPEC and curbside late in Q3. More than 50% of our BOPEC orders for the fourth quarter were delivered curbside. In recent weeks, we began the rollout of a multi-phase plan to enable our members to use EBT payment when shopping on bjs.com for in-club pickup and curbside pickup. By spring 2021, we plan to have this payment option available to all locations and states participating in the SNAP online purchasing pilot. Our efforts to expand our footprint remain on track. We have strengthened our real estate pipeline considerably, enabling us to accelerate the pace of new club openings. After opening four clubs in 2020, we plan to open as many as six clubs in 2021. Even more exciting is that we can see a path to 10 more clubs in 2022. This progress is underpinned by the performance of our newest clubs, where we are gaining market share and driving membership growth. The two clubs we opened in the first half of 2020, Chesterfield, Michigan and Pensacola, Florida, the membership per club averages 20% higher than the chain. And in our Michigan clubs, first-year retention rates are well above chain-wide averages. We believe we have cracked the code on successfully opening new clubs and will invest aggressively to grow share in an expanded market. Overall, we are incredibly proud of the progress we have made, both managing through the challenges of 2020 and redefining our go-forward business model. Against this backdrop, we suspect you will have two key questions. What should we expect in 2021, and how has your long-term growth algorithm changed? Let me address each. In 2021, we will continue to do everything in our power to stay in stock for members and lead into investments that will drive long-term growth, all while prioritizing health and safety. We face uncertainties driven by market factors outside of our control, most notably the trajectory of at-home food consumption and the overall macroeconomic environment. These uncertainties lead to a range of possible scenarios for 2021. Our expectation is that current trends will continue for at least the first half of the year but may change in the second half as vaccine distribution expands and life looks a little more normal again. Should the public health situation fail to materially improve in our markets, we would expect a longer period of elevated food at home consumption driving our sales further. Under any scenario, we expect our membership, sales, and profitability to be well ahead of our historical plans. We have considerable confidence in our long-term algorithm, which we anticipate will be well above the levels we framed at the time of our IPO. Our conviction is grounded in shifts to long-term trends and our progress against our strategic initiatives. Let me elaborate on the underlying factors. We believe at-home food consumption will reset at a higher level, and economic uncertainty has heightened consumers' focus on value. We have a loyal, growing, and higher-quality membership base that has changed their shopping behaviors to our benefit. We will continue to upgrade our assortment, particularly in services, general merchandise, and owned brands, to power the next wave of growth and grow share of wallet with our members. We have a relevant and growing digital business with industry-leading levels of engagement and advantaged economics. We expect dramatically higher unit growth rates as we push towards 10 plus units per year, allowing us to tap into considerably expanded addressable markets and grow share. In summary, we have truly transformed our business by every measure. We are not the same company we were 12 months ago. Our underlying growth rate will accelerate as we benefit from long-term trends and continue to accelerate on our strategic initiatives. While the short-term COVID-related uncertainties may create headwinds that temporarily mask these long-term gains, we will reset at a higher base and faster growth rate. Our team members continue to execute at the highest level, enabling us to take advantage of the opportunities ahead and positioning the company for long-term success. With that, I'll turn the call over to Bob. Bob?

Thanks, Lee, and good morning, everyone. We delivered industry-leading results during this past fiscal year, enabled by a terrific performance by team members throughout the chain, taking great pride in serving their communities through these unprecedented times. I'm so proud of their efforts, and I'm thrilled to share the results of their work with you today. This past year has, in many ways, been the most transformational year in our company's history. Our team's efforts have allowed us to capitalize upon the opportunities afforded by the challenges of 2020. We have record membership, a relevant and growing Omni business, a robust real estate pipeline, and a revamped balance sheet. BJ's is a much stronger company than it was at the time of our IPO, and the opportunities provided in this challenging year set us up to be even stronger in the long term. Let's turn to our results for the fourth quarter. Net sales for the quarter were $3.9 billion. Merchandise comp sales, which exclude sales of gasoline, increased by 16%, and were driven by ticket and traffic. Across our geographies, we continue to gain share and our members are expanding their baskets and increasing their trips to our clubs. In the first three weeks of November, comps were running north of 20% as we continued to see increased food at home trends and elevated consumer home investments. We also experienced much earlier holiday shopping. In the last week of November, we began to see a relative slowdown given the absence of large parties and holiday gatherings. This continued through December, followed by a stronger January. Our digitally enabled sales grew by approximately 168% and drove about five percentage points of our 16% merchandise comp. We continue to invest behind digital platforms, particularly in Bopick, curbside pickup, and same-day delivery, which together drove more than 80% of our digital growth during the fourth quarter. As you know, with digital, our economics are advantaged versus many of our peers, and the concentration of digital orders being fulfilled by our clubs furthers that thought. We operate a limited skew warehouse environment with higher average ticket, allowing us to be more efficient. OPEC and curbside sales tend to skew towards bigger baskets, and same day delivery sales have the same margins as traditional sales in our clubs. Most importantly, the growth of these businesses highlights our increasing relevance with our membership. Digitally engaged members shop more categories, have average baskets that are 30% larger, and make on average five more trips per year than members who only shop traditionally. Our success in capitalizing on these trends bodes well for membership renewal rates, as generally the more a member shops and spends, the more likely that member is to renew. Comps in our grocery division grew by 18%. We saw robust comps across all categories, most notably in perishables, where we saw strong growth in fresh meat, frozen meals, and fresh produce. In edible grocery, beverages and salty snacks grew nicely. And in our non-edible grocery division, paper products, cleaning supplies, and wellness solutions led the way. Our general merchandise and services division saw comp growth of 9%, driven by strong sales of TVs, indoor furniture, small appliances, and consumer electronics. Although we made great progress, our services business is still ramping back to its full run rate potential and represents a great opportunity for growth in the new year. In our gasoline business, although sales were impacted by lower prices, we continued to gain market share. Gallons sold at comp clubs in the fourth quarter grew by approximately 5%, significantly outpacing overall market performance. Over the course of the year and this past quarter, we delivered industry-leading results that demonstrate strong market share gains. While these share gains were in part driven by demand associated with the pandemic, Our execution, accelerated merchandising activities, and digital expansion were also significant drivers. In stock-up categories, such as household cleaning products, where we grew almost three times the rate of market growth, our share gains were driven by strong inventory levels and elevated member demand for these key items that are valued. At the same time, we're extremely pleased with share gains in new categories we introduced, including better-for-you snacks, which grew at six times the rate of market growth, and prepared foods, which grew nine times the market rate. We continue to focus on improving our perishables assortment, enabling us to grow twice as fast as the market, with strong share gains in dairy, fresh produce, and frozen meals this past quarter. In our sundries division, where we continue to make significant progress, we grew at 13 times the market rate with significant gains in wellness solutions, cleaning, and baby food. Our focus is to continue to build on these share gains and drive further growth. Membership fee income, or MFI, grew by 11% during the fourth quarter to $86 million. The transformation of our company takes root here. We have unprecedented levels of total members, retention rate, and membership quality. We saw growth in new members, renewals, and favorable membership mix during the quarter. We delivered a new all-time high renewal rate of 88% for our tenured members, along with increasing our new member retention rate by 300 basis points relative to the prior year. Our penetration of higher tier memberships increased to 31%, and easy renewal enrollment is at 70%. As you know, we're beginning to lap the heights of new member acquisition of the pandemic back in March and April. While it's obviously too early to discuss renewal rates for these members, we find their elevated shopping behavior and digital engagement encouraging. When we look at their baskets in Q4, they are approximately 19% larger than typical first-year members. In addition, they're opting into easy renewal and are higher tier programs at higher rates. These new members are utilizing our app at double the rate of historical first-year members and leveraging our digital services, including BOPIC, curbside, and same-day delivery at more than six times historical new member rates. Let's move now to our gross margins. Excluding the gasoline business, our merchandise gross margin rate increased by 50 basis points, driven by CPI initiatives and the mix of general merchandise sales. These gains are partially offset by increased COVID-related distribution costs. SG&A expenses for the quarter were $593 million and included approximately $27 million of total costs associated with the pandemic. These costs are primarily driven by increased labor, safety, and sanitation costs. Our adjusted EBITDA grew by 36% to $205 million, reflecting robust sales growth and margin expansion. Adjusted net income in the fourth quarter was $97 million, or 70 cents per share, and reflected a 75% year-over-year growth on a per-share basis. Our earnings growth highlights the strength of our business and reduced interest expense provided by our transformed balance sheet. If I could take a moment to highlight our full-year performance. During 2020, we had merchandise comp sales growth of 21% and eclipsed $15 billion in net sales, membership fee income of $333 million, an increase of 10%, Margin rate grew by 10 basis points despite significant price investments and elevated distribution costs associated with COVID. Adjusted EBITDA, $857 million, growth of 47%. And we more than doubled adjusted EPS. It's hard to overstate the strength of this performance, but for just a bit of perspective, know that we started the year with a plan to do just over $600 million in adjusted EBITDA. Our team should be very proud. We also generated a record $676 million of free cash flow this year. This cash flow has allowed us to transform our balance sheet with 1.2 times funded leverage versus 2.8 times last year. This tremendous free cash flow allowed us to repay more than half a billion dollars in debt. More importantly, this reduced level of debt will allow us great flexibility with which we can invest into our future. As we allocate capital going forward, our overwhelming priority is to grow our business. Investments to support membership, Omni, and our real estate growth plan will be funded by these cash flows and enabled by this newfound flexibility. Our next priority is to opportunistically enhance our already strong and healthy balance sheet. Finally, we plan to continue to return capital to shareholders. In 2020, we returned approximately $100 million to our shareholders by repurchasing 2.6 million shares. The evolution of the pandemic and associated member behavior, government stimulus efforts, and associated costs of running our business are far from clear. As a result, 2021 is very difficult to forecast. Given these uncertainties, we will not offer formal detailed guidance. We do hope and expect that the pandemic will fade as we progress through this year. Based on current pandemic trends and vaccination timelines, we expect consumer demand will remain elevated through the first half of the year when compared to pre-pandemic levels. If current shopping trends continue, that would imply high teens double-digit stacked comps in Q1. We also currently expect something that looks more like normal life to emerge as more people are vaccinated. As that happens and more people venture back to restaurants, We expect to give up some of the sales gains experienced in 2020 that resulted from increased consumption of food at home. But at this point, we cannot accurately judge the timing or degree of these changes. From a membership standpoint, we expect member count to be flat or better during 2021 and expect MFI growth to be in line with historical years. Lastly, we expect to continue to incur COVID related costs for at least the first half of the year. Note that we will also continue to invest in our business and our team, particularly in membership, digital, and geographic expansion. Despite these costs, we expect to achieve strong adjusted EBITDA and earnings growth relative to 2019. BJ's Wholesale Club is a much different and better company today than at our IPO in 2018. This is true in ways big and small, but let me focus on just a few. At the conclusion of this fiscal year, we had nearly 20% more members, about a million more than at our IPO. Not only do we have more members, but the membership is of vastly better quality. We have the highest renewal rates for both new and tenured members in our history. Tenured renewal rates are 200 basis points higher today than at our IPO. Higher tier memberships are 600 basis points higher at 31%. Easy renewal penetration is 1,700 basis points higher at 70%. We've discontinued the practice of offering free trial memberships, pivoting towards acquiring paid members with better lifetime values, and continually engaging those members through renewal. Most importantly, we are intent on investing heavily to retain the members gained in 2020. We have tremendous momentum here and are intent on keeping it going. We have a relevant and growing Omni business. At our IPO, our digitally enabled sales were approximately $140 million. Today's business is more than five times that big and growing. In 2018, we had launched BOPIC and same-day delivery, but the experience was not great, and we lacked key current capabilities such as curbside pickup and the ability to order fresh goods. In the fourth quarter, approximately 50% of our BOPIC orders were picked up curbside, and the usage of our app is twice as high as it was at our IPO. We continue to invest in these offerings as they are the future and enable members more convenient ways to access our tremendous value. We've witnessed the tremendous acceleration of our real estate pipeline. In the year of our IPO, we only opened one new club. This past year, we opened four new clubs, all successful, and we will open six in 2021. Five of the six will be in the back half. Moreover, we see a path to 10 clubs per year in 2022 and beyond. Finally, we have a transformed balance sheet. At year end in 2018, we had more than three times funded debt to adjusted EBITDA. we find ourselves today at just above one times. This allows us tremendous flexibility to invest in our business and return capital to shareholders in ways we couldn't have considered just two short years ago. While the coming year's financial results may be noisy and hard to predict, we have great momentum and are pivoting from a deleveraged story to a story about growth. Our pre-COVID algorithm included very low single digit top line growth. While a return towards normal may temporarily cloud the picture, We expect membership trends and our progress on our real estate pipeline to power a revised algorithm that includes mid single digit top line growth in the future. Those early signposts in membership and real estate should be easy to see concrete and powerful unlocks of future growth. In conclusion, we have a team doing the best work I've seen in my long tenure with the company. I'd like to once again thank them all and I can't wait to report their future results. And now I'll turn the call back over to the operator to begin the Q&A session.

As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. To withdraw your question, press the pound or hash key. Your first question comes from Peter Benedict from Baird. Your line is open.

All right, guys, thank you for taking the question. I guess first, just, and appreciate kind of the color, given all the uncertainty, but maybe speak a little bit more about kind of the thought process, the high teams stacks for this kind of, I guess, first quarter, first half of the year, just how you're seeing the, the initial cycling of i assume that that's just extending what you're seeing right now but just maybe any more color you can add on that um and then my second question just just is really more around um how you think about uh the average spend per member here i mean you gave a lot of detail there which was helpful but um i guess as we think about versus 2019 levels Do you assume that – safe to assume that the members should be spending more than what they spent kind of in 2019? Is that kind of the trend that you're seeing? Thanks.

Do you want to take that one, Bob?

Sure. Hey, Peter, good morning. Thanks for the question. So, listen, we are really pleased with the way that the fourth quarter turned out, and – As you said in the prepared remarks, it's incredibly hard to forecast what the next year is going to look like. We simply tried to take what we saw in the fourth quarter and sort of tell you what we would be versus last Q1 if those fourth quarter trends persist, right? So just very simply, we did a 27 comp last first quarter and a 16 comp in Q4. And so you can do the math from there. None of us is very certain on how this will roll out. We're very encouraged by what we're seeing under the covers. And you bring up a good point with average spend. The early read, I think, is good. But I do think we'll see some pressure on the comps as we cycle the amazing results of Q1 and Q2. Beyond that, it just gets really tough to understand what will happen, which is why we didn't issue any guidance for the full year. I think it's the right way to think about it on a stacked basis. I think we built our plan off of 2019 levels and tried to moderate that based on what we're seeing throughout 2020. Under the covers, we see a lot of encouraging things, particularly in membership levels and the quality of the memberships. We tried to reflect that in the prepared remarks, but all-time high number of members, all-time high renewal rates, increasing renewal rates in both tenured and new members. The quality of the membership is amazing. Higher tier members continue to rise 31%, up 300 basis points. Easy renewal is going great across all the cohorts, elevated shopping levels, larger baskets, trip consolidation, taking share from from all sorts of classes of trade. We're very, very bullish about the long term of the business. It's just going to be a little bit muddy as we get through this next year.

Yeah, no, totally understood. Thank you for that. And I guess my one follow-up would just be around the COVID expenses, I think, which were I think around $150 maybe million this year. I know you said you expect some to extend into 2021. Can you sense maybe how much you expect to extend? And also maybe what was the COVID kind of hit to gross margin, I guess, in the fourth quarter? How much of, I think you said, elevated distribution expense or was there any wages and stuff like that up there? Thank you.

Yeah, no worries. So that's, again, a little bit difficult to give pinpoint guidance on because it largely depends on the state of the virus. I do think it's fair to assume as we go through the front half of this year, we will spend less than we did in the front half of last year. As you know, we were paying extra wages, bonuses, and the state of the disease caused all sorts of spending in that period around PPE and keeping our team members safe. We'll continue to do that to the degree that we need to almost forever. Our team members and our members and their safety are our first priority. But I do think that will moderate versus what we saw in the first half. The back half of 2020 spending is probably a decent proxy to think about on the front half. of this year. But again, it's a little bit difficult as that spending has tended to vary based on the state of the disease.

Sure. Okay. Listen, thanks, Bob. Appreciate it. No worries. Thanks, Peter.

Your next question comes from Steph Wissink from Jefferies. Your line is open.

Thanks. Good morning, everyone. Leah, question for you on new unit and new market growth. I think you had walked us through the plans for six new units this year, 10 plus 2022 and beyond. Help us think through the greenfield versus the existing market penetration. And then I think you referenced you've cracked the code, or Bob may have said you've cracked the code. Can you just talk a little bit about what you're doing differently that you maybe weren't doing in the past where your new clubs are opening up much stronger, much faster? And it sounds like your performance of your new members within those clubs is even higher than what you would have seen in the proxy cohort. So talk a little bit about new clubs if you could. Thank you.

Sure. Thanks, Steph, for the question. As we said in the prepared remarks, we're very excited about the possibility for much faster unit expansion. At the time of our IPO, we were opening one club per year, so to do four last year and towards six this year and then 10 next year is a real change. We spend a lot of time just getting the model right, and we feel like we've done that. If you look at Michigan, we're seeing membership levels that are 20% above the chain averages, a little more than a year in, with terrific first-year renewal rates. I think the key underneath that is a whole bunch of work by a lot of people on the team. We're applying some fairly advanced analytics to figure out what the right site selection looks like in the markets, how do we place ourselves in the right location with good distances and good demographics. We've opened with much more aggressive and strong marketing. We have the right assortment from the start. We've got the right in-store environment from the beginning with our new signage package, the right layout. We're enrolling far more people in the credit cards at opening with just a really clear value proposition. We've got higher engagement with Easy Renewal, where essentially everyone in a new club joins Easy Renewal. And so that's really all working for us. As we look forward, it will be a mix of infill locations because there are still a number of places in our existing geographies where we see opportunity, but it'll increasingly be new markets. And that's really exciting for us because there's so much of the country that is open to us that as we push largely further west, we open up meaningfully big opportunities to gain shares. And, you know, we're setting our sights on six this year and ten next year. It takes a little time to get there to build a real estate portfolio, but we're seeing really good real estate availability given the broader world of retail and just really pretty unlimited potential to have a multi-year unit expansion story that we're very, very excited about.

And anything on construction costs or CapEx that we should be thinking about for this year, maybe even timing of those units into the models?

Do you want to take that side of it, Bob?

Yeah, sure. Not too much to think about from a construction cost perspective. Even though the price of lumber, for instance, is up a lot and steel has been increasing as well, that's largely offset by the cost of the real estate getting a little bit cheaper. I wouldn't stray too far from the historic levels of cost per club that you may have in your models. As far as when the clubs should come into the chain, so for the sixth this year, one should open towards the end of the first half. That will be in New Hampshire. And then the remaining five should be probably in the fourth quarter as we As we are just starting construction on those here in the spring, it usually takes eight or nine months to get them done and open. So they'll be certainly back half-weighted. As I look forward to the following year, that same trend should hold where we get one or two in the front part of the year and the remainder in the back part of the year.

Very helpful. Thank you very much.

Your next question comes from Robbie Ohms from BOA Securities. Your line is open.

Hey, good morning, guys. You know, my question is, I know you're not giving guidance, but could you talk about maybe give us some puts and takes to how to think about your, you know, gross margin SG&A ratio or sort of your structural EBIT margin? going forward, you know, under different scenarios. Is there, do you think there's been an upshift in, you know, the profitability of BJs, you know, under most scenarios post-pandemic? Like, maybe just how should we think about the puts and takes on scenarios as we try and model, you know, your needed margin, et cetera, for next year?

Yeah, hey, Robbie, it's Bob. Good morning. It's a good question. It's a bit hard to answer given any rate you talk about is obviously impacted by sales. But I do think as you step all the way back and compare against 2019, it's fair to assume that our company gets more profitable over time. And I would make that statement because of two reasons. One, we have more members and more sales, I think, under really any scenario than than we did in 2019. And the revent balance sheet provides much less interest costs. So 2021 interest should be probably almost half of what 2019 interest was. So the company should get more profitable over time. It's a bit hard to unpack all of those things.

And I would encourage everybody to

remember some of the key things that are sloshing around through the compares against 2020. So you take, you won for instance, and remember we had outsized gas profit. We had a huge bonus accrual where we basically capped out the management team's bonus for the year. We had huge apparel markdowns, for instance, as the apparel business stopped and then really restarted in Q2. So there are all sorts of things to think about among the quarters, but I think the story is great when you back all the way out and think about it in the long term. Once we get through this noisy period, the company should be growing at a higher rate, as we talked about, and it should be more profitable as we go. because we're increasingly leveraging our costs.

Gotcha. That's helpful. And just a quick follow-up maybe for Lee. You know, when you look to merchandising changes moving forward, you know, is it more on the fresh side of the business or it sounds like you have more success in hard lines? Maybe some insight on what's in the pipeline for DJs on the merchandising side as you move through 2021.

Yeah, thanks, Robbie. It's... It's a bit of a mix. We're seeing opportunities across the board. So certainly in our fresh food business, which is the heart of our shop, we will continue to tighten and refine the assortment. With the influx of younger members, we're seeing it's becoming increasingly relevant to have organic options, natural options, good-for-you options. And we're evolving our assortment in those directions and seeing really good results. You know, we're equally, if not more excited about the opportunity in general merchandise and services. You know, think about our business as, you know, roughly 17%, you know, general merchandise where some of our nearest competitors are meaningfully higher. We know that we're not competing in all the places that our competitors compete. And as we've moved in that direction by tightening up the rest of the assortment, we're seeing really good results. We got into a meaningfully higher assortment of fitness equipment this past year. That was obviously timely with the pandemic and people at home. But it's broader than that. We're seeing good results in consumer electronics, in our home assortment, some of the seasonal goods. And we're really excited about that. And then services, I think, is an underappreciated area of upside for us, where many of our competitors have quite large businesses and services. It had never been a major priority for the company until roughly a year ago, where we built out a new merchandising team focused entirely on services and then set about to build and construct an entirely new set of offerings. And in this past year, We've got it into major appliances in a big new way. We've added a meaningful offering in cell phones. We've totally retooled our home improvement offering. We talked on the call about our pay later options and We think the opportunity for growth there is just enormous, and we're very excited about what we're seeing. Now, to be fair, a lot of that is driven by in-club experiential shopping, where we would have, you know, in our optical business, we would have people come in and try on glasses, and that wasn't happening as much during the pandemic. So we've been rapidly building out infrastructure, and we would expect as some of the pandemic-related restrictions fade, that that business will be particularly well poised for growth. So, you know, it really is across the board.

That sounds great. Thanks so much.

Your next question comes from Edward Kelly from Wells Fargo. Your line is open.

Hi, guys. Good morning. Thanks for all the color today. I want to first ask about membership and retention. Obviously, some big renewals coming up. You're optimistic about... Retaining a lot of these members, you've mentioned, you know, investment into that. Can you just provide a bit more color around sort of what you're doing to, you know, try to ensure that a lot of these members are sticky? And then maybe just go back and remind us about how these guys are shopping. Like how often are they coming to the store, what their baskets look like, and what is that telling you about retention?

Sure. It's a great question. You know, thanks for asking it. You'll remember it was about this time last year when there was a meaningful change in consumer-related behavior tied to the pandemic. It was just a few days from now when the national emergency was declared. The NDA canceled their season. And we began to see a meaningful influx of members at that time that was well ahead of what we would normally see. And so that first COVID cohort of members is really important to us. The early data is quite encouraging, and we're fortunate because we have a whole slew of metrics to look at. So we look at shop rate, how much they're spending, what their basket size looks like, are they engaged with us digitally, which membership tiers are they enrolled in, credit card, higher tiers, are they included in Easy Renewal, are they engaging with us on promotions, are their demographics favorable? And really across the board, it's very encouraging. So in the prepared remarks, we talked about baskets up 19%, app usage at double the rate of normal new members, BOPIC, curbside, same-day delivery at 6x the rate. And so these are very engaged members. The shop rate looks relatively similar to what you would normally see in a world of kind of broader trip consolidation. So across the board, we are quite hardened And we appreciate that these members are coming due for renewal in a period where pandemic-related shopping behaviors are still largely holding across our footprint, and there's likely to be another infusion of government stimulus soon. And so those two things, along with the underlying shopping behavior, would bode pretty well for strong renewal rates. But we'll find out shortly over the course of the next few months what that looks like. But as we sit here today, The signs are all quite promising.

Great. And maybe just a follow-up on new stores. So the new store commentary, obviously very encouraging. What are you seeing in Newburgh and Long Island City so far? And then, you know, just a question around how you're thinking about the financing in new stores versus sort of company-owned versus leased. You know, generating the cash, your stock's really cheap. you know, how are you thinking about balancing, you know, the spending there relative to the option around sort of like returning cash to shareholders?

Sure. Let me take the first half and I'll turn it over to Bob for the second half of that question. So Newburgh and Long Island City opened at the very end of last year. It was in the last couple of weeks. The early performance of those clubs is quite encouraging. We're seeing really good shopping results, good membership results, and we're excited about the potential for both of those. They're a little bit more of an infill set of locations, although there's white space for us, both in and around the boroughs of New York and Long Island City, and then a little bit further north with Newburgh. But we're excited about those markets, and we'll obviously have much more momentum included from them as we progress into this year with just their opening in the back half. And, Bob, do you want to take the question around just kind of structuring and financing?

Sure. Ed, good question on how we're pursuing all these things. I hope everyone's noted the bullish tone here and the tone of aggressiveness and wanting to really grow quickly defensively. the way we're attacking the real estate growth profile is that way. We are effectively doing any type of deal that will get the new buildings open quickly. And if that means that it's a lease, great. If it means a purchase, great. If it's a ground lease and we own the building, great. The fact that We are seeing so many opportunities and the fact that we have a newly transformed balance sheet allows us so much flexibility to go to market quickly. So we will do any deal that makes financial sense in any structure. I think that means realistically that we end up buying more buildings, buying more land and building buildings than we have in the past. There will be a fairly meaningful pick-up in CapEx this year as we currently buy more buildings as we go. But we've got the cash flow and the balance sheet to do that. I suspect that continues as we go forward as well, and we use the balance sheet a little bit more than we have using exclusively leasing. That makes it a little faster, usually makes the deal a little bit more accretive to us as you take out the developer's margin in the middle. But if the quickest way to do a new store that we're attracted to is a lease, we'll still do that.

Did you give CapEx guidance, Bob? I don't know if I heard that.

We didn't. We didn't give guidance because it's a little bit uncertain as to actually what will get done given COVID delays and all sorts of stuff. But I think the best way to think about it, Ed, is two more clubs than last year plus increasing investment across the chain behind digital and other investments. So it's not a game changer in our view, but it is more spending than we spent last year.

Thank you.

Your next question comes from Kate McShane from Goldman Sachs. Your line is open.

Thank you. Good morning. Thanks for taking my question. My first question was just on any thoughts or insights into where some of your market share gains are coming from, just based on where you're seeing the strength in some of those categories. And then my second question was just focused on It looks like it was up double digits. Just wondered if you are where you need to be when it comes to inventory going into the next couple of quarters.

Sure. Thanks, Kate, for the question. You know, on the share gain side of it, we're really excited by what we're seeing. So we saw share gain in every market that we compete in from Maine down to Florida. across almost every category, and we think versus every competitor, just given our industry-leading comp results for the year and for the quarter. Some of that is clearly related to just the on-trend nature of buying in bulk in a pandemic, and it's flowing into us, into club stores. But some of it, I think, really does tie to the progress we've made against the strategic pillars. And so, You know, if you think about our gains in membership, we've had really nice gains in membership at a high quality. We think that will be sticky going forward. We've made a number of changes to the assortment, which have positioned us well in new categories. And so that's helping to drive share gain by just competing in places we hadn't competed before. With the new club openings at a higher rate, even last year, We're getting into new places where we haven't been before, which is structural share gain. And then the digital side of it is really encouraging. So we're seeing just incredibly strong digital engagement. We've talked before about having an advantage set of economics there, where we're essentially picking in a warehouse with limited SKU. And we highlighted in the call kind of the app engagement as just the centerpiece, but our app is delivering is delivering real utility with shopping lists and personalized promotions and coupons, access to all of our fulfillment options like Curbside, the ability to pay in clubs through the app. And the usage rate there is great. We're talking 5 million downloads with 30% effective monthly usage of that app. If you were to compare that with scale competitors, on any kind of adjusted basis, we have amazing app engagement that is well ahead of some competitors who get a lot of credit for being quite omni-enabled. And so we think that's sticky, too, and it's helping to drive our share gain. And so just across the board, while some of the share gain is clearly tied to buying in bulk and pandemic behaviors, we do think a lot of the share gain is tied to some of the progress we've made on initiatives. And the tough thing is just dissecting those two factors, and we're going to stay focused on what we can control. On the inventory side of things, clearly we had a bit of an inventory build against a year where we were never quite in the in-stock position that we would like. And so We spend time repairing that in-stock position and then also just being really thoughtful about some of the upcoming large seasonal businesses that are largely sourced out of Asia, in particular, particularly China. You no doubt have heard about some of the container shortages, some of the port shortages, and we wanted to make sure with that kind of Chinese New Year smack at the end of our fiscal year, that we were well positioned. And so we made a number of aggressive buys, leaned in the inventory to both plug holes in our in-stock position, but also position as well for kind of the spring season coming up and summer season coming up. And, you know, in that regard, we ended up being a little bit heavier in inventory, but we did it to support the business going forward, which we thought was the right call.

Thank you.

Your next question comes from Chuck from Gordon Haskett. Your line is open.

Hey, good morning. And obviously, congrats on a really great year. I wanted to ask you a question from a little bit of a different angle. I think you guys added around 700,000 new members in calendar 2020. If we're talking to you guys a year from now, I guess I'm curious what percentage of those would you be happy with if you retained them as long-term shoppers? And then, Bob, just on the guidance for MFI growth, if I look back, average MFI dollar growth from $13 to $19 was around around 4%. Is that a good proxy for the next couple of years? I think you guys said historical, so I just want to sort of frame that up.

Sure. Let me start on the membership side. It's a good question. I think we've done, I think, a nice job improving renewal rate, taking the 10-year renewal rate to 88%. I think really important as you think about that metric, remember the definition is such that it really reflects progress through the middle of last year. So we're looking at renewals through the midpoint of the year with a six-month lag thereafter. And so our hope would be we can continue to make progress on renewal rates. Since IPO, we've improved about 100 basis points per year. We're very relevant. We're making good progress with our credit card penetration, our higher tier penetration. And my hope would be with continued increased relevance with all the progress we're making on the strategic priorities that we will be able to continue to make gains there. But this year will be a pretty important one for us to demonstrate that trend. And so we did stop short of issuing guidance because it's very hard to say what exactly that will look like, but we're you know, we're very focused on maintaining that. And Bob, do you want to kind of weigh in and take the second part?

Yeah, I think, Chuck, you centered on exactly where we were trying to get you to in that historical years MFI growth statement. So I do think, you know, we are bullish for all the reasons we just stated. But again, it's a little bit hard to figure out what might happen. And so the prepared remarks basically said we expect membership count to be flat or better, and that would imply something in the neighborhood of a 4% MFI growth for next year at the flat level. If it's better, it's better, and we're certainly going to pull every string to try and make it better as we go through this year.

Got it. And then just to follow up, Curbside's been really, really successful for you guys. Just wondering if we could compare the basket size of somebody that purchases Curbside to somebody that comes in the store. How does the merchandise margin compare? And I guess how that's evolved over the year.

Thanks. Basket size is bigger across the digital platforms. So anybody that with us on BOPIC or curbside or same-day delivery tends to buy a lot more in those baskets than they do if they... But that's great for our economics, obviously. There is a little bit more cost of a BOPIC transaction or a curbside transaction for us, but if we can offset that with... Got it.

Thanks, and good luck, Chris.

Your next question comes from Mike Baker from DA Davidson. Your line is open.

Hi, thanks. So I know you're just starting to come up against those new members that signed up early in the pandemic, but but I think you try to get people to renew before they get to 12 months, right? Don't you sort of go after them after 10 months or so? So that would have been, you know, a couple months ago already. So any I know it's the near term short term question, but any sort of color into how that has progressed as you try to get these guys who first signed up during the pandemic to renew?

Yeah. So, you know, we, the renewal rate really, really happens at the one year mark. And so when people enroll in easy renewal, there can be a little bit of pull forward because it typically would trigger a lot of trigger on the first of the month. And so we're not, we're not renewing, renewing, you know, at the 10-month marker earlier. What we are doing is looking very intently at all of the shopping-related behaviors to understand, are people visiting the clubs? Are they using our digital services? Are they expanding their shop to include a broad variety of categories? And we're giving them, you know, as appropriate, targeted incentives to try to foster the behavior that will lead to renewal rates. And so there's a large focus on making sure that people are engaged, they're shopping. That starts earlier than the 10-month mark. We're kind of constantly monitoring that through the lifecycle of a member. But the real renewal rate is at the 12-month mark shortly. shortly earlier. So we're just entering that window now. And so we don't have a lot of, you know, kind of quantifiable results other than the early indicators, which, as we said, across the board are quite promising.

Okay. That makes sense. And I really, really hate to ask another really short-term question, but you did talk about it a year ago, so I guess I'll ask it. In your first quarter call last year, you said the fourth week of February was was up in the low teen level, and then I think it started to accelerate to the first week of March. So, you know, as we're cycling up against that, I mean, can you talk about are we sort of on pace with that high teen stacked comment, you know, at the end of February and early March, or is that, you know, more what you think might happen as we progress through March?

Hey, Mike. I realize you had to ask that question. That's why we gave Q1 guidance and not any texture in February. We're trying to cover the whole quarter with that texture that we gave rather than any one week within the quarter. There's just too many things splashing back and forth within the quarter to really make one week a reasonably predictive metric. So we think the high-teens stack is the right way to think about it, and we'll see what happens as we get through the quarter.

Okay, well, since you didn't really answer that, I'll slide one more in. If you're high-teens stack, that means down 7%, 8%, or 9% even in the first quarter. What happens to your cost structure in the first quarter? Do you lower SG&A? Do you lower hours? Do you somehow adjust to a negative comp?

You know, listen, we certainly try and target our cost structure to the rest of our business. And you have all the extraneous things that we're lapping as well that you need to consider. So, you know, simply put, if we've got less shopping, we would have slightly less labor. And more shopping, we'd have slightly more labor. But this is a fairly fixed cost heavy business. So, yeah. So I guess what I would say is it's a bit tough to give you an answer to that question as well. As we learn to be nimble throughout the entirety of last year, we'll need to be nimble as we go through this year as well, and that's what we'll do. I think all of these short-term questions – and I don't mean this to you – All these short-term questions are just noise. I think the thing that people should focus on is the long-term transformation of this business, more members, more sales, more margin. It should be structurally more profitable versus 2019 as we go forward. And we'll invest behind all of those notions. We're in a little bit of a weird period here, but the entire management team here is very bullish on of our company and how we will grow from here.

Yeah, I think that makes perfect sense. And it's pretty clear that the long term, I think, should be better, which is why I focus on the short term. But thanks to the caller. Appreciate it.

And your final question comes from Chuck Sterankoski from North Coast Research.

Hi, everyone. Good morning, everyone. Congratulations on the year. I want to get into a little bit the faster club growth. What new markets can you talk about at this point? And how have you restaffed or increased the staff of your real estate department?

So, we've certainly added some capacity across the organization, Chuck. to deal with it. Going from four clubs to six clubs is not a Herc or Gillian lift. Going to 10 clubs is a little bit more. As we continue to make progress against this incredibly important strategic goal, we'll certainly invest behind that. As we have invested behind digital and membership and all the other things that are key to our success, there's not much to worry about from a structural cost increase behind the real estate

What – could you talk about any of the new markets you'll be entering, specific cities, for instance?

Sure. So, as Lee talked about in his remarks, there'll be new markets and existing markets as we go forward, and this year will be a mix of those. I mentioned New Hampshire as the first club, and then We should be getting into a new market this year in Pittsburgh. Undoubtedly, that's been in the press, so many of you have probably seen that. We're very excited to get into that market. It's been lacking from our Pennsylvania assortment for a long time. And as we go forward into the new year, there will be more new markets, and it will be a generally westward march from there. We're very excited. We're seeing all sorts of good deals come across our transom. and our team's working hard to keep up with them all.

And when you enter a new market like Pittsburgh, do you want to enter with more than one location immediately, as you did in Michigan? And then how about distribution capacity? How are you thinking about that?

Sure. You know, every market's a little bit different, Chuck, but certainly in a big market like Pittsburgh, we would love to enter with more than one club. We will open two clubs there this year and hopefully more in the future. Distribution capacity right now is not a limiting factor. Out towards Mississippi is where you get into a little bit of trouble. As we move westward, we may have to consider how we do that, but right now we're comfortable servicing all of our new club needs out of our existing distribution format.

Thank you, and good luck for fiscal 21. Thanks, Chuck.

Thanks, Chuck.

There are no further questions at this time. I'll turn the call back over to the presenters.

Great. Well, thank you, everyone, for your time today and your interest in the company. I hope going forward you all remain healthy and safe during these continued trying times. My hope today is even though This year is a bit tricky to predict as we lap the incredibly strong performance of last year, and some of the COVID-related shopping behaviors may change. I do hope that you came away with a sense for how bullish we are on long-term prospects for the business. As you think about all the things we're doing to drive a different long-term algorithm between membership, the digital assortment that we're offering, the product assortment, and then the new club growth, We're all very excited about our prospects for the years to come and look forward to hopefully seeing you all in person in the not-too-distant future. Take care, everyone. Thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.