BJ's Wholesale Club Holdings, Inc.

Hello, everyone, and welcome to the BJ's Wholesale Club third quarter fiscal 2021 earnings conference. My name is Victoria, and I'll be coordinating call today. If you'd like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad. I'll now pass over to your host, Ange Stein, from BJ's Wholesale Club to begin. Ange, please go ahead.

Good morning, everyone. Thank you for joining BJ's Wholesale Club's third quarter fiscal 2021 earnings conference call. Bob Eddy, President and Chief Executive Officer, Laura Felice, Chief Financial Officer, and Bill Werner, Executive Vice President, Strategy and Development 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 sections of our most recent Form 10-K and Form 10-Q filed with the SEC 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 an isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release posted on the Investors section of our website for 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 Bob.

Good morning, and thank you for joining us. We delivered another outstanding quarter with results surpassing our expectations by every measure. I'm proud of our team members' dedication and extremely thankful for all of their hard work, which continues to power our momentum. Our business accelerated during the third quarter and our results were balanced across a number of dimensions. We saw growth in all of our divisions, acceleration in traffic and ticket, and growth in digitally enabled sales and conventional sales. all underpinned by strong membership statistics in both new and tenured members. And we continue to transform the business as we go. Key to any transformation and any successful company is talent. We've continued to add world-class talent during the third quarter, appointing Rachel Vegas as chief merchandising officer. Rachel is a key member of my team responsible for the strategic leadership of merchandising and assortment planning and allocation. The talent and expertise she brings from her background at HEB and Target will allow us to take our team to the next level. We have welcomed Rachel with open arms. We have a lot to do together. Let me touch on our third quarter results at a high level. We delivered 5.7% positive comp, reflecting a two-year stacked comp sales growth of over 24%. Adjusted EBITDA of $228 million. adjusted EPS of 91 cents, and free cash flow of $99 million. I'd first like to remark on progress against our strategic priorities, which remain centered around growing and retaining members, delivering value with optimized assortment and services, improving convenience with digital, and strategically expanding our footprint. Let me speak to each one of these. Membership is at the heart of what we do, And over the past several quarters, we have grown the size and quality of our membership base significantly. In Q3, we grew our membership by 3% relative to the prior year and 15% compared to 2019. This growth was primarily driven by record renewals. We continue to believe that we are on track to deliver all-time high renewal rates in both first-year and tenured members for the year. In terms of membership quality, Higher tier penetration is now at 34%, representing a 400 basis point improvement relative to the prior year. This group consists of our most loyal members with the highest lifetime value. In addition, more than 75% of our members are now enrolled in Easy Renewal. Recall that many new members join on some sort of discounted membership proposition and graduate to full membership fees as a product of Easy Renewal. As we move people up into higher tier memberships and renew first years at full rates, we see a notable improvement in MFI per member as a result of the mixed shift. Our MFI dollar growth has surpassed member growth so far this year, and we expect it to do so for the fourth quarter. When you think about our flywheel spinning faster, you don't have to look much farther than membership to see it. It's incredible to look back to the time of our IPO when we had about 5 million members. We have well over six million today and growing. We expect membership fee income to be about 30% higher than it was then. Higher tier membership penetration is nearly 15 points higher and I could go on. We have truly transformed this business. The progress we are making in membership in terms of size, retention and quality has elevated the lifetime value of our members across the chain and is the best evidence that our flywheel continues to move ever faster. From an assortment perspective, we remain focused on curating the best assortment of products and services to meet our members' evolving demands. For a few years, we have been making incremental progress on our simplification efforts. More recently, product constraints and inflationary cost increases have allowed us the opportunity to make more revolutionary changes to many categories. This is most evident in many household goods categories in our sundries division. In October, we reduced SKUs in eight sundries categories by nearly 40%, significantly improving the clarity of our offering as well as operational efficiency. Our plan is to continue to drive these changes through strong partnerships with our suppliers and creative solutions to continue to enhance our assortment. Another area that showcases the progress we have made in our assortment is own brands. This strategy is essential in providing great value to our members, to our assortment simplification initiatives and our category profit improvements. We continue to make strong progress here, growing own brands penetration by nearly 200 basis points to 23% of merchandise sales. This increase was driven by better sales of grocery and sundries products during the quarter, partially owing to better in-stock rates on own brands items. We will continue to focus on further expanding our own brands portfolio over the long term, which we believe will strengthen member loyalty, increase value, and improve our margins. Let's turn to another key strategic pillar, our digital business. Our digital platforms continue to resonate with members and allow us to offer convenient access to tremendous value every day. Our digitally enabled sales grew by 44% this quarter and over 240% on a stacked basis driven by strong growth in our BOPEC and curbside offerings. More than 60% of BOPEC orders were delivered curbside this past quarter. As we've said in the past, digitally engaged members have higher average baskets and make more trips per year than members who shop in-club only. Allowing our members to save on their purchases in a more convenient format is what we are after in our digital efforts. We intend to win in digital, And in the last few days, there have been a couple of notable areas of progress toward that end. First, in October, we successfully launched a product we'll call Express Pay across the chain. With Express Pay, members are able to shop the club and pay for their purchases entirely on their mobile device, allowing them to skip the lines, a huge convenience. Prior to launch, we tested this service in a number of clubs, and member feedback and engagement was very positive. Our second bit of news revolves around our same day delivery product. I'm thrilled to announce that we just signed a partnership agreement with DoorDash to augment our existing partnership with Instacart. We expect the DoorDash marketplace to be live in January and Dashers to be making their first deliveries of orders made through bjs.com in Q1. This will be the first step towards a new model where our team members will pick all bjs.com orders and a stable of transportation partners make the deliveries. This vision should drive better experience and value to the member and better economics for us. Our members' experience will be better as our team members pick with greater quality and care, driving better order accuracy. More competition also lowers prices on marketplaces. Further, by having more than one partner, we can dynamically route deliveries based on a number of variables such as service levels, speed, member ratings, cost, and so on. Finally, as we will combine picking of same-day delivery orders with BOPEC and curbside orders, we will gain efficiencies in picking economics. We are thrilled to partner with Tony and his team at DoorDash to grow both of our great companies. Our efforts to expand our footprint also continue to progress. We expect to open five new clubs this year. Our Seabrook, New Hampshire club opened in June. We will enter the Pittsburgh market in December and open in January in Port Charlotte, Florida, Lansing, Michigan, and on Long Island. Our second club in Pittsburgh was scheduled to open in January as well. It has slipped by a few weeks due to construction supply chain challenges and will open in the early days of next year. This club that will be a few days late will join as many as 10 more new clubs on tap for 2022. In addition, we expect to open seven gas stations this year, followed by a dozen or more gas stations in 2022, which means about three quarters of our clubs will have gas stations by the end of 2022. We're excited about our expansion and our confidence is underpinned by the strong performance we are seeing in our new clubs. As you can see, we are making strong progress against all of our strategic priorities, despite what continues to be a challenging backdrop that features heady inflation, a dynamic labor market, and inventory constraints. Let me provide an update on how our team has managed through them to continue to drive our growth and success over the long term. Let's start with inflation. We continue to experience meaningful inflation, and its impact was felt across almost all categories. While we passed on price increases in many areas, we invested to maintain our price gaps against our competitors in the places we found value to do so. For example, meat and produce, as well as super key value items like beverages, which are on most of our members' shopping lists. Ultimately, we sell value to our members, and we will continue to invest in order to maintain that proposition. As we've said before, historically, Inflationary pressures have widened our price gaps relative to grocery, leading to market share gains and top line growth. We certainly saw that playing out during this quarter. Moving to the dynamic labor environment, we've shared that we made the largest increases in starting hourly wages in our history at the beginning of the third quarter. We've made great progress since making these moves and our teams are in great shape. We will continue to invest in our team so that we can recruit and retain talent across our footprint. Finally, as you know, there are widespread challenges in the global supply chain, including port delays, truck, container, labor, and packaging shortages, to name a few. We expect supply chain and sourcing challenges to continue for the foreseeable future, and we have activated various remediation plans to mitigate the impact. We're looking for alternate suppliers while also leveraging own brands to drive further penetration. We're partnering with new transportation providers and bringing in products early as vendor lead times have gotten longer. we will continue to work hard to mitigate the effects of this incredibly challenging environment. Overall, we are incredibly proud of our results. Our year-to-date performance has exceeded our internal plans across all metrics. While there continues to be a tremendous amount of uncertainty in the near term, our ability to retain members and market share has been strong, and we continue to execute at the highest levels. Looking ahead to the first quarter, Our team is focused on engaging our members to continue to drive strong renewals and ensuring we remain in stock for products our members demand during the holiday season. We believe that we are well positioned to exceed our members' expectations and remain a convenient one-stop shop for holiday needs. Laura will talk a bit more about our expectations for the fourth quarter. You will note that we are considerably more bullish about our prospects than we were earlier in the year. As a final proof point to that notion, I'd like to highlight that our board has authorized a new $500 million share repurchase program. We have many ways to grow our business, and that will always be our first use of capital. But the fact that we are a different and better company than we were just a couple of years ago should also allow us opportunities to use our considerable cash flow to reward our shareholders. Let me turn the call over to Laura to give a bit more color on our results and view of the future. Laura?

Thank you, Bob, and good morning, everyone. We are extremely pleased to report another fantastic quarter with strong financial performance and significant progress against our strategic priorities. I'd like to also take the opportunity to thank our team members across the chain for their continued hard work and dedication. Their efforts continue to fuel our momentum and have enabled us to deliver these strong results over the last 21 months. Let me now turn to our results for the third quarter. Net sales for Q3 were $4.2 billion. Merchandise comp sales, which excludes sales of gasoline, were 5.7% and reflected an accelerated 24.2% two-year stacked comp. Our performance exceeded our expectations for every month of the quarter and we are very pleased with the results we are seeing across categories and geographies. Importantly, membership trends were strong throughout the quarter and consumer spending habits as well as our market share gains exceeded our expectations. We saw robust growth across all divisions in the third quarter, however, our performance was again led by our grocery business, which had a 6% comp for the third quarter and a 25% two-year stack. Despite in-stock challenges in certain food and other household categories, the team delivered a strong performance, which demonstrates our continued relevance with our members. Our general merchandise and services division comps were 17% stacked. reflecting a positive 4% comp for the current quarter. Our growth was driven by home and seasonal. It's important to note that our general merchandise sales this quarter were impacted by inventory availability in certain seasonal categories. Digitally enabled sales grew by approximately 44% and over 240% on a two-year stacked basis and drove about two percentage points of our merchandise comp. We saw robust growth across all our digital channels, particularly in BOPIC and curbside pickup, as well as same-day delivery. The nature of this growth is important because it is centered on the fulfillment methods where we have advantaged economics. As you know, we operate in a warehouse environment with a limited number of SKUs and a higher average ticket, enabling us to be more efficient. Bow pick and curbside sales tend to skew towards bigger baskets and same day delivery sales have the same margins as traditional sales in our clubs. In our gasoline business, we continue to see strong gallon growth and gain share. Gallons sold at comp clubs in the third quarter grew by approximately 20%, significantly outpacing overall market performance. Margins certainly contracted in the gasoline business relative to prior year. However, the performance of the business exceeded our internal plans. Membership fee income, or MFI, grew by 8% during the third quarter to $91 million. Our MFI growth was driven primarily by strong member renewal and improved membership mix. Our renewal rates for first year members remain at historic highs. We're pleased with the progress we're making in improving the quality of our membership base. Higher tier members now represent 34% of members and more than 75% of our members are enrolled in EZ renewal. Let's now move to gross margins. Excluding the gasoline business, our merchandise gross margin rate decreased by 20 basis points. As Bob mentioned earlier, we continued to invest in price in order to show our members significant value, particularly in inflationary key value items. We also experienced freight and logistics cost headwinds driven by the supply chain shortages seen widely across industries. These headwinds were partially offset by improved private label penetration and the mix of our general merchandise sales. SG&A expenses for the quarter were 618 million compared to 552 million in the prior year and 598 million in Q2 of this year. Of the 66 million year-on-year increase, about two-thirds was related to recent investments we've called out as well as higher volume we experienced and is in part of our run rate going forward. The remaining one-third was timing related with about $14 million related to management, incentive compensation, and the rest being other discretionary operating costs. Our reported Q3 adjusted EBITDA declined about 6% to $228 million due to the wage investments, incentive compensation, along with higher freight, logistics, and sanitation expenses compared to Q3 last year. Had it not been for the timing of the aforementioned incentive compensation, our Q3 adjusted EBITDA would have been flat year on year. Adjusted net income for the third quarter was $126 million, or 91 cents per share, highlighting the strength of our business and reduced interest expense as we continue to enhance our balance sheet. As a result of our solid performance, we generated $99 million in free cash flow during the quarter for a total of $530 million year to date. In addition, year to date, we paid down approximately $360 million in debt and ended the quarter with 0.8 times funded leverage. We have also bought back approximately $135 million worth of shares on a year to date basis. Further, subsequent to the end of the quarter, we exhausted our current repurchase authorization and are pleased to announce a new $500 million share repurchase authorization approved by our board of directors. We intend to execute on the repurchases opportunistically after investing in the business growth. Let me now touch on the outlook for the year. As we wrote in our press release, we continue to refrain from providing formal guidance given the number of uncertainties in the market. That being said, I will share with you our best high-level view as of today. Looking at our top line, our current expectations have improved from those conveyed during our last call. We currently expect low single-digit positive comps for the fourth quarter. Our assumptions are primarily based on our strong momentum and membership results offset by lower stimulus payments impacting our members. From a membership standpoint, we expect total member count to grow by low single digits versus our previous outlook of flat to slightly better. We also expect growth in MFI dollars to outpace member growth. MFI growth for the year is running ahead of our prior expectations due to stronger than expected renewals and higher tier penetration. We expect continued investments in price as well as significant increases in freight, distribution, and labor expenses. Altogether, we expect merchandise gross margin rate pressure of approximately 50 basis points versus last year's Q4. Given the generally inconsistent nature of last year, it is worth noting that both our reported Q3 and anticipated Q4 margin levels are very consistent with margins generated in the respective quarters in fiscal year 19. We continue to anticipate that our investments in labor will drive an incremental SG&A burden of approximately $15 million for the fourth quarter on a year-over-year basis. While these costs could certainly escalate if market conditions change, they should serve as a good placeholder when you think about flow through for next year, as we won't last these effects until the second half of the fiscal year. We will continue to invest in our business and team particularly in membership, digital, and geographic expansion. While external factors are impacting our near-term results, it's important to reinforce three things. First, our business has dramatically outperformed our initial expectations for the year, accelerating throughout the year. Next, our performance for 2021 continues to be ahead of any historical plans we had for this year. Finally, our confidence in the long-term health of our business remains very strong. Our enhanced membership trends, improvements in digital, robust real estate pipeline, and assortment initiatives will lead to a much better comp algorithm that includes mid single digit top line growth in the future. At this point, I'll hand it back to Bob to close. Bob?

Thanks, Laura. I'd like to leave you with a few key messages. First, we continue to add talent to our world-class team, and we are seeing results every day. Rachel Vegas is but one wonderful example. Next, our business is far ahead of our historical and current year plans because our flywheel is spinning faster than it has in a long time. One only needs to consider our membership progress to see that. Next, we will win with digital. Our members have embraced it and so have we. Our DoorDash partnership is one more step in that direction. Finally, we have the capital and flexibility to invest to continue our transformation. We have a robust real estate pipeline, a list of growth initiatives, and the team has a growth mindset. Any cash that we can't use will be used to repurchase shares. I'm incredibly proud of our team and thankful for the opportunity to lead them. We are all excited about our future. And now I'll turn the call back over to the operator to begin the Q&A session.

Thank you. We'll now hand over to the Q&A. If you'd like to ask a question, please press star 1 on your telephone keypads. If you'd like to withdraw your question, please press star two. Thank you. And our first question comes from Kate McShane from Goldman Sachs. Kate, please go ahead. Your line is open.

Hi, thanks. Good morning. Thanks for taking our question. You had mentioned a couple of times during the call how things had exceeded your expectations versus what you thought at the beginning of the year. I know that includes membership as well. But what do you think is driving the difference in your expectations? Is it that you're more in stock than you thought you would be? Or is it more of a market share gain than you expected? Any kind of incremental color there would be helpful.

Yeah. Thanks, Kate. Good morning. I would tell you a few things. Certainly, the team has executed very well, to your point, in stocks. My point of view would be our membership is much stronger than we thought it would be, and our members' purchasing habits and market share as a result has been much stronger than we thought it would be. You remember at the beginning of the year, we were forecasting food at home to drop quite precipitously in the back half of the year. That obviously has not turned out to be true. We were a little bit conservative when we thought about what that might mean from our membership statistics perspective in the beginning part of the year. You know what we're seeing today is everything is all green lights and membership right we have we've grown the membership year over year quite quite nicely 3% over last year 15% over the prior year we've grown a sequentially over Q2. The quality of that membership is improving meaning getting up into higher tiers a lot more members into easy renewal the mix benefit is great so MFI per member is up somewhere near $3 per member. over last year. You might have noticed in the prepared remarks we were slightly more bullish from a renewal rate perspective. We've been trying to telegraph all-time high renewal rates from a first-year perspective, but we added to the script this quarter that we now believe we will announce at the end of the year an all-time high in tenured renewal rates, which is a much bigger deal than first year given the size of that population. So we're really bullish from a membership perspective, and that's driven our performance all year long.

Thank you. And then my follow-up question was just if you could give any color on cadence of comps throughout the quarter. And would you describe your seasonal inventory today for holiday better than what maybe you had in Q3, where I think you said you were a little bit lighter because of the supply chain challenges?

Yeah, you know, the cadence got a little bit better as we went through the quarter. I don't want to get into specific monthly comps, but certainly each month was better than the last in Q3. So we saw some continuing acceleration through the quarter. You know, what I would say on inventory is sort of what we said in the prepared remarks, right? It's a challenging environment out there. One of our grocery competitors described it as playing whack-a-mole. I think that's a very accurate illustration of what happens. You fix one problem and another one pops up. With that said, it's an environment we've been very successful in for the past two years. Our logistics and merchandising teams have done yeoman's work keeping us in stock. I think our clubs look better than many of our competitors, and we will do the things that we've been doing all along to try and do that. We've learned to operate our box in a much more efficient fashion in terms of inventory than we did pre-pandemic. And as we sit here today, we feel good about our ability to service our members through the rest of the year.

Thank you.

Thanks, Kate.

Great. Thank you, Kate. And our next question comes from Christopher Hovers from JP Morgan. Please go ahead. Your line is open.

Morning, Chris. Are you there?

Sorry, Chris. Good morning. Yep. Sorry, I was on mute. Rookie mistake. So my first question is on the margin outlook for the fourth quarter. Laura, you talked about some commentary around consistent levels versus 2019. Was that in reference to the Merchandise margin and how should we think about just overall operating margin in the fourth quarter?

Yeah, good morning, Chris. So our commentary around March margins for the quarter and going into the fourth quarter is that we expect some contraction to prior year. What we were trying to get at is the consistency of our merch margins to LLY.

So that's the way you should think about it.

You know, there's certainly a lot of uncertainty in the markets driven by macro environment.

And we're taking that into consideration. But we feel good about where we are. We feel good about the value we're delivering to our members. And that's certainly... first and foremost on what we're looking to do.

And then any comments just in terms of the overall profitability of the business? You've been running about a 4% total operating margin for the first three quarters of the year. Is that a decent proxy as we think about the fourth quarter?

Yeah, I think that's right, Chris. We've certainly talked about all the investments we've made back into the business and we will continue to do that.

We've called out some of those numbers specifically in prior quarters and again this quarter.

So you'll recall we invested pretty heavily into our wage base for our team members and our clubs.

to ensure that we can retain them and attract new team members to continue to drive the flywheel forward. That will continue to be a drag, but you should expect our operating margins to continue at a relative pace to where they are currently.

Got it. And then my follow-up question is, you know, you mentioned that the – is the same margin as someone shopping the club. Can you just talk about that a little bit? That's pretty impressive. What drives those factors specifically as you think about that cost of the actual delivery?

I think you're talking about our same-day delivery partnership with Instacart as it operates today. So that margin structure is exactly the same as the margin structure for in-club sales. The Instacart team members are coming in, picking that for our members and delivering it to them. So we benefit from the same margin structure.

Got it. Thanks very much. Have a great holiday.

Thanks, Chris.

Great. Thank you. And our next question comes from Chuck Grump from Gordon Haskett. Please go ahead.

Hey, good morning. This is John Park. I'm for Chuck. Congrats on a strong quarter. I guess, can we dig into the core gross margins in the third quarter a little bit more, maybe some of the magnitude of the headwinds and tailwinds you saw there? And I guess just from a standpoint of the higher volumes and I guess, you know, some of the freight pressure out there, how are you guys thinking about that freight piece? as part of that down 50 basis points.

Yeah. Hey, John. Maybe I'll start and Laura can flush it out. So certainly we saw a bunch of pressure in the third quarter, both in inflation and in freight. That was mitigated nicely by our merchandising team as they worked to mix the margin a little bit better and offset some of those challenges. Probably the biggest one in terms of magnitude was investment in price. We invested quite heavily during the quarter as inflation really ramped up for us and for others. Inflation has been pretty widespread and at levels we haven't seen in a long time. It's been interesting to read the headlines in the newspaper as our competitors have reported in the last couple of days about the question of margin versus share. In my view, margin versus share is a false choice in our industry. because the number one product that we sell is membership, and it has 100% margin attached to it. And so we invested quite heavily during Q3 in places where it made sense to us to do that. We will continue to do that going forward to protect the value of our membership. With that said, our price gaps are where we are comfortable with. They historically have improved in times of inflation against grocery. That certainly happened as well. during this quarter, and I would expect it to happen going forward. Freight is a continuing headwind as well. That was sort of a handful of million dollars during the quarter. I think that's probably the right proxy to think about for Q4. It's getting maybe a touch better out there on spot rates on containers and things, but it's still a very heavy burden for the industry to bear. And I don't think that'll stop in the next few quarters either. The tailwinds that we saw include private label, right? A couple hundred basis points of penetration increase there was a meaningful offset to the pressure and the investments that we made. And that should continue as well as we focus on growing our own brand's penetration. And then the mix of our general merchandise business was favorable as well. The team did a nice job managing promotions and assortment to mix up the overall margin rate as well.

Great. Thanks.

Great. Thank you. And our next question comes from Edward Kelly from Wells Fargo. Please go ahead. Your line is open.

Yeah, hi. Good morning, guys. Nice quarter. I wanted to just touch on food price inflation a little bit more. Any more color that you can find in terms of how you're navigating inflation and then specifically what you're seeing from competitors in your market in terms of how quickly they're moving? And then I think historically, you've kind of talked about this dynamic really just being a temporary lag, but I think we're hearing a little bit more about investment. So just curious, any additional color on the puts it takes there as well?

Yeah, it's a good question. Thank you for that one. Certainly, as I said earlier, inflation has been pretty widespread. It's been pretty significant in terms of The number of SKUs it's impacted, the number of categories it's impacted, the levels of increases we've seen. We're on our second or third rounds of price increases from some of our suppliers. And the road forward, I think, looks a lot like the road behind from that standpoint. So I do think this is something that will be here for a while. When I look at our competitors and our own habits, they look pretty similar. all investing where we think it makes sense. You know, we called out some of those areas like meat and produce and beverages. Those are things that are on everybody's shopping list every time they show up in our clubs. And so, serves to reason those would be the places that we would invest. We see others doing that as well. And we, you know, are raising prices in other areas that are less visible to members and and mixing the margin accordingly. And certainly that's what we see our competitors doing as well. So look, I think we are in the same place as our competitors from this inflationary standpoint and how we're dealing with it. The levers that we're pulling, the way that we think about it, as I said earlier, we are in charge of selling memberships. that's our most important product. The reason why people buy memberships is because of value. And so we will continue to invest as we go forward and, uh, and, you know, try our best to mitigate the impact of that.

Okay, great. And then I just wanted to follow up on the merchandising front. Um, you know, pre pandemic, um, you know, I think there was generally some investor concern that skews simplification, you know, could have some negative impact on sales. And we've seen that at other companies. And now you're accelerating simplification, it sounds like, but it doesn't seem to be impacting your results. I'm just kind of curious, sort of digging in, you know, what you're seeing there. And, you know, what's driving that success? And then big picture, you know, where are you with SKUs now? And where do you think you're going over the next few years?

Sure, yeah, I mean, this is something, as we talked about in the prepared remarks, we've kind of nibbled around the edges of for a while and tried to be pretty disciplined about how we did it. You know, really, we've wanted to push faster for quite a while. As we know, this is an important thing for our members, that clarity of offering that simplified curated assortment offers is a very powerful thing when you think about category conversion rates and frequency of shop. just the ease of shop as well. What changed for us during the quarter was our view of the overall playing field. The games changed a little bit given the inflationary pressures, given inventory availability pressures. That really caused us to think about it a little bit differently. Some of the incremental SKUs that we carry versus our wholesale club competitors make sense to me in terms of driving frequency of shop and category conversion rates and the overall health of the membership. Others don't. We just have too much unnecessary choice in some of the center store categories. We don't need to carry multiple brands worth of trash bags or deodorants or laundry soap or whatever. Uh, we have in many cases, uh, 10 times the assortment of some of our wholesale club competitors. And, uh, that's, that's really, uh, not helping the member understand the value very well. It's not helping our operators deal with our inventory efficiently and run our business efficiently. Uh, so we will, we will go quickly on the center store categories. We believe it will be powerful to get that better clarity of offering, not only in, in, in margin, but in sales, uh, overall too, there's, There may be some risk that a little bit of a sales headwind, but I do feel like even if there is one, it will provide more margin and it will provide more long-term growth once we get to the baseline in each category that we think is appropriate. Great. Thank you. Sure. Thanks, Ed.

Great. Thank you, Edward. We will now move on to Robbie Holmes from Bank of America. Please go ahead. Your line is open.

Oh, hey. Good morning, guys. Two questions. Just one, the two-year acceleration was, you know, somewhat significant here, and I was curious, was with the, did gas, you know, play a role in the support of traffic, and is that you know, that kind of gas traffic benefit. Do you see that supporting things into the first half of next year? And then, Laura, thanks for the, you know, commentary on, you know, SG&A carrying over into the first half of next year. Any kind of thoughts you can give us on how you're thinking about puts and takes to gross margin or merchandise margin for the first half of next year? Thanks.

Yeah, morning, Robbie. Maybe I'll do the first one, and then Laura can talk about SG&A. So you're absolutely right. The two-year accelerated quite nicely. That was evident across the business. All of our categories did well. Traffic was up. Ticket was up. Digital was up. Brick and mortar was up. It was very, very much broad-based. Gas did very, very well as well in spite of quite considerable price inflation from a gas perspective. You know, we're growing share by leaps and bounds in gasoline, and we're growing it across the club as well. We offer considerably better pricing than average gasoline retailers. We layer 10 cents more, 10 cents better pricing on top of that if you're a holder of our BJ's MasterCard. We let you stack even more discounts on top of that if you buy certain things in our clubs. And we do that because gasoline is probably the most visible commodity out there, right, because everybody puts the price on their sign on every street corner in America. It's a great way for us to show value, and it's an important part of our business. What happens when gasoline prices go up is really two things. One, margins tend to compress, which certainly happened during the quarter. And two, members love us. and they channel their purchases toward us from a gas perspective, but since they're in our parking lots, they're also getting in the buildings more often. This is seen more as you get up over $3 a gallon than anything, sort of the factor by which people care increases as the price increases, and so certainly that, we believe, drove some some share our way and we'll continue to do that as well. So margins were a little bit down in gas in the quarter, but the increased gallons covered it up from a dollars perspective. So our gas resistance is great and healthy and driving great price image and great share into our business.

Yeah. Morning, Robbie. I'll jump in on your second question about puts and takes for next year.

So you'll know we haven't given any guidance for next year yet. We'll certainly be in a position to give that in Q4 when we talk about our full year results.

But, you know, what I leave you with is that we think and we're thinking about the company in a much better light than we have in the past. Certainly we've talked about our membership trends.

and all the great transformational things that have happened over the course of the last two years to the business. So on the back of that, we feel really good about the business currently, where it's taking us into the fourth quarter, and we'll look to give you some guidance on next year when we announce the fourth quarter results.

Got it. Thanks. Congrats on the great quarter.

Thanks, Robbie.

Thanks. Great. Thank you. And our next question comes from Mark Carden from UBS. Please go ahead. Your line is open.

Good morning. Thanks a lot for taking my questions. So after implementing a pretty considerable, hey, guys, after implementing a pretty considerable increase in base pay, are you satisfied with where your staffing levels are today, keeping in mind, of course, some of the broader challenges that we're seeing across the economy? Or is the tight labor market just making it really tough to fully get to where you want to from a staffing perspective? Thanks.

Yeah, no worries. Good question. So as we talked about in our second quarter call, we made pretty considerable investments, the largest ones we've ever made from a starting rate perspective, getting our average hourly rate well over $15 an hour. And we did that because it was such a tough labor market throughout the first and second quarter for us. We are in pretty good shape as we sit here today. Those investments have paid dividends. The market has arguably gotten a little bit easier, although probably not a lot easier in my estimation. And I think we're in pretty good shape to service our members through the fourth quarter. We'll continue to keep an eye on it because it's been such a dynamic market in the past few quarters. I've sort of stopped trying to predict how it'll work out. We're just focused on doing the right thing for our team members. They are out there every day trying to do the right thing for our members, and we do our best to take care of both of those important populations. Got it. That's helpful.

And then my follow-up is related to your new partnership with DoorDash. Are you going to have much overlap in markets with Instacart? will both operate in certain markets, and will there be any noticeable differences in the customer experience? Thanks.

Sure. We're pretty thrilled with our digital business at this point. It was once very small. It's now big and growing, and our members clearly want more. As we talked about earlier, what we're after is adding convenience to the value proposition that we offer. Wholesale clubs have always been great at offering value, They've never been very convenient shops. If we can make them more convenient for our members through digital means, that's a winning proposition in our estimation. So whether it's products like Express Pay that saves people time standing in line or whether it's products like same-day delivery where we can get products delivered right to your home and save you some time and some money that way too, that's a powerful thing for us. We're thrilled to partner with Tony and his team at DoorDash. Literally just came to be in the last couple of days, so it's a bit early to fully describe what we're after, but we do think it will complement what we're doing with our partners at Instacart. Our products will be available on both marketplaces. We estimate that the DoorDash marketplace will be up in January, and then both partners will also help us execute transactions on bjs.com. And as you might imagine, we're pretty focused on how well we execute those transactions given much more of those transactions come from our members. In fact, 100% of them do. And that's probably not the case on Instacart, probably will not be the case from a DoorDash perspective. So what we're after is convenience. What we're after is a great experience. What we're after is greater value. We want to be present where our members want to shop and whether that's on a DoorDash marketplace or on BJS.com or on Instacart's marketplace, we want to be there. We want to do it in a great quality fashion. So combining the power of these companies with our team members is powerful because we can take control of much of that experience. We can have our team members pick Typically, in our measurement, our team members pick a little bit better than any of our partners just because they're in our clubs every day and they know where things are a little bit better than an average Instacart or perhaps DoorDash team member. So anytime we can present a better quality to our members, we're after that. We can brand the experience. It can come in BJ's packaging, for instance. and be delivered that way rather than in whatever packaging an Instacart team member or a DoorDash team member might give it to you in. We can drive better economics to our members. Competition tends to do that. We can pick a little bit more efficiently than either of these folks can pick, and so we can potentially change our pricing to members as we go forward. So there's a lot of benefits with a partnership. It's just a little bit... a little bit too early to tell you exactly how it's going to operate given we just struck the deal in the last couple of days. Fair enough. Sounds good. Thanks so much and good luck. No worries. Thanks, Mark.

Great. Thank you, Mark. And we will now move on to Mike Baker from DA Davidson. Please go ahead.

Thanks. So it hasn't really come up too much yet, so I figured I'd ask, can you just talk about some of your clubs in the newer markets, Michigan in particular, and what you've learned there that could help in areas like Pittsburgh and Nashville and other areas you're moving into. I know Pittsburgh hasn't opened yet, but I think you do some pre-selling and memberships and the like, so how the uptake has been in Pittsburgh would be helpful as well. Thanks.

Sure. Morning, Mike. Why don't I let Bill talk about real estate? Hey, Mike.

Yeah, we're very excited about the Pittsburgh market entry, and the response there from the membership base has been strong as it had planned at this point. So we're very excited to get the first club in Pittsburgh to open here in December, and then – the second club in Pittsburgh to follow shortly after year end. Yeah, as we think back about the new club story, right, it goes all the way back to, you know, how we opened up our clubs in 2016 in Kearney and then Somerville and then followed with the performance in Michigan where those clubs continue to perform ahead of expectations. So as we think about the plan for 10 clubs next year and then the plans that we're working on today that go even beyond that, you know, we're very confident in the ability to execute and execute successfully in new markets.

That last comment, let me just pick up on that, and more beyond that. So 10 clubs next year, when you say, and more beyond that, so you sort of getting to in 2023 and beyond, that 10 could even be more, and I guess bigger picture, you know, one of the interesting parts about BJ's is that you guys are still really regional and maybe super regional, but not a national chain. You know, any color on, can this be a national chain over time?

Yeah, so Mike, I tell you, we've talked about our desire to ramp the new unit growth to, you know, from what was a 1% to 2% unit grower at the IPO to close to a 4% to 5% unit growth per year, you know, now. As we look at contiguous markets, we've talked about the ability to hit those as well as continue to infill in areas where we see growth within our existing geographies. So, know that we're working on the future and that we have plans to continue to expand the chain westward. But no other specific comments on that expansion as we sit here today yet. We've tried to be pretty disciplined in announcing those new markets once they're locked up and ready to go. So I would say stay tuned on that.

Sure enough. One more if I could. Just a little bit more on the first-year spending. So we know that the guys who are families that signed up during the pandemic spent more in their first year than a typical first-year customer. What are you seeing in the second year? In other words, the idea was we knew they're starting higher. Does that mean over time they spend more each year, or does it just sort of become more of a flat ramp to what a normal mature customer is? So now maybe six months after cycling the beginning of the pandemic, any incremental color on how that's shaping up? Thanks.

Yeah, maybe I'll take that one, Mike. So we've seen great membership results, as we talked about on the call. We've seen pretty healthy spending across our membership cohorts as well, including the first-year cohorts. You know, the jury's still out on where they land. I guess what I would say is the curve is a bit flatter, but it's not flat. So in other words, they are increasing their spending as they go. So we're very pleased with that. As you know, our worry was they would come in at an elevated rate and kind of sit there in year two and not grow to an ultimately higher rate. It seems like they're growing, but again, we've got plenty of runway to go to see where they actually land.

Right. Very helpful. Appreciate that. Thank you. You bet.

Great. Thank you so much. And our next question comes from Rupesh Parikh from Oppenheimer. Please go ahead. Your line is open.

Good morning. Thanks for taking my question, and congrats on a nice quarter. So I wanted to touch just on the inventory line. So inventory is down year over year, and I think it's even down versus 2019. So do you expect the, you know, I guess less inventory to represent a bigger headwind to top line growth sequentially? And I guess if you guys could get all the inventory economy, where would growth be right now for your inventory balance, do you think, on a year-on-year basis?

Good morning, Rupesh. So, you know, this is an interesting topic because it's such a dynamic part of the business at this point. You know, certainly, as I said earlier, it's challenging out there. We've been successful throughout the pandemic at staying in stock and meeting our members' needs. we're doing everything we can to try and continue that streak of remaining in stock as well as we can. You know, and part of the reason why inventories are sort of flat year on year is we've just gotten used to running the inventory leaner than we did pre-pandemic. You know, you remember, some of you might remember that we put in a new enterprise planning system a couple of years ago. That's been helpful. The The way that our logistics and planning and assortment team is working with the inventory has been helpful. We've just been doing a lot of things differently to try and run the building a little bit leaner because it's been such a crazy environment out there. If there's more inventory out there, I'll definitely take it across the building. I would love to not be playing whack-a-mole every day. But as we sit here today, we feel okay about our prospects for Q4 and beyond. We'll continue to work hard at staying in stock and try and deliver everything that our members want to see from us.

Okay, great. And maybe just one follow-up question just on the food inflation front. I don't believe you guys quantified the level of food inflation you saw in Q3, so I'm curious if you can provide any specificity there. And as you look to Q4, do you expect accelerating food inflation versus what you saw in Q3?

Yeah, you know, you're right. We didn't quantify it. It's a couple points worth of comp. You know, cost inflation definitely exceeded retail price inflation, as we talked about as we invested in price. You know, my lookout out of the windshield says it will accelerate a little bit. You know, we've probably got a couple of months forward view of what's coming. We don't really have much more than that. And so it's hard to really forecast more than Q4. from an inflation standpoint, and we've given you the comp guidance that we expected. So that's what I would say on that. I do think the ingredients are out there for a longer-term bout of inflation as we get into next year, but we'll see what happens as we go through Q4.

Great. Thank you for all the color.

Great. Thank you, Rupesh, for your question, and thank you, everybody, for your questions. We will now pass over to Bob Eddy for final remarks.

Great. Thank you all for your attention and your interest this morning and for your support of our company. We are very pleased to report these results to you and to get into our fourth quarter here in a year that's been accelerating all year and exceeding our expectations. We've got a great company transformed from what it was a couple of years ago, a great team leading it, and we're pleased to talk to you all. I wish you all great holidays and we will talk soon. Thank you.

Great. Thank you everybody for joining today's call.