BJ's Wholesale Club Holdings, Inc.

Hello everyone and welcome to the BJ's Wholesale Club Holdings Inc second quarter 2023 earnings conference call. My name is Carla and I will be coordinating your call today. After the speaker's remarks there will be a question and answer session. To register your question please press star followed by one on your telephone keypad. When asking your question please ensure your telephone is unmuted locally. To revoke a question you can press star followed by two. I now pass the conference over to your host, Kathy Park. Please go ahead.

Good morning, and thank you for joining BJA Wholesale Club's second quarter fiscal 2023 earnings conference call. On the call today are Bob Eddy, Chairman and Chief Executive Officer, Laura Felice, Chief Financial Officer, and Bill Werner, Executive Vice President, Strategy and Development. 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 factor sections of our most recent Form 10-K and Form 10-Q files 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 in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release and latest investor presentation posted on our investor relations 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 Bob.

Good morning, and thanks for joining us to discuss our second quarter results. Our team managed the business well during the second quarter, leaning into our structurally advantaged operating model to deliver great value. This was validated by our members who voted with their feet and wallets as we gained traffic and accelerated our market share gains in the second quarter. By staying focused on executing our long-term strategic priorities and taking care of our members, we delivered strong profitability during the quarter. Our membership is strong. We are making progress on our merchandising improvements. Our digital conveniences continue to save our members time, and we're successfully growing our footprint. Our second quarter merchandise comparable club sales, which exclude gas sales, were up 1.1%. This increase was driven entirely by traffic. Further, our focus on delivering great value to our members once again resulted in sales growth across each of our income cohorts, driven by increases in trips and spend per member. We were pleased with this result considering continued grocery disinflation, a tough lap in traffic provided by last year's elevated gasoline prices, and a tight discretionary spending environment. Our grocery and consumables business continues to be very strong. In fact, according to Sercana, we gained market share once again in the second quarter, with sales growing nearly two times faster than our key competition across the markets in which we operate. We have grown in the quarter and year-to-date periods, as well as in each of the last three years. Our 52-week share is nearly 60 basis points above pre-COVID levels. The structural advantages provided by our model Most notably, the value we provide serve as an even more important reason for our members to visit our stores. We know that in uncertain times like these, consumers search for value. Therefore, it is even more important that we continue to invest in value every day. That will not change. While these categories experienced sustained disinflation during the quarter, our member participation and transactions grew nicely, stacking upon last year's gains. As a result, we delivered robust food and sundries performance with comp sales in this division up over 4%. Success with our own brands, Wellesley Farms and Berkley Jensen, has contributed nicely to our share gains. Having access to high quality products at compelling values has deeply resonated with our members. A great example is in our paper category, which is up nearly 10 percentage points year to date in unit penetration. In fact, during early August, sales of our Berkley Jensen paper towels eclipsed the bounty in both units and dollars for the first time ever. It's a great product at an outstanding value. I encourage all of you to try it. We have consistently strengthened our own brand offering each quarter and are confident in our goal of ultimately reaching 30% penetration. Members who engage in our own brand spend more, visit us more often, and are therefore better members. Our general merchandise and services comp was down 13% year over year in the second quarter, reflecting three realities. First, we made an intentional and considered effort to re-baseline certain categories to get our general merchandise business to a healthier profile. That meant less inventory and considerably higher margin rates than last year. This is an important step as we begin to set new on-trend assortments for the future. With that said, we continue to be optimistic about our ability to inflect our general merchandise business and grow it for the long term. Bright spots during the second quarter included our small appliances category, which was supported by better presentation and an improving assortment. Our back to school set, which runs from late Q2 into Labor Day, has historically been small relative to the rest of our GM business, but we're encouraged by our performance season to date. Next, after years of stimulus-fueled purchasing, the discretionary dollar is harder for our members to part with, and buying habits are returning towards normal. This has affected sizable general merchandise categories such as consumer electronics, along with more seasonal categories like patio and outdoor furniture. The reality is that if you needed something in these categories over the last couple of years, you likely already bought it, and purchase cycles are long. Finally, weather in our core Northeast markets during the second quarter was notably cold and rainy. Just one data point, July was the second wettest month in history in Boston. That was after a very wet May and June. Seasonal goods comprised a considerable amount of overall general merchandise sales in the second quarter, and sales in these categories were certainly impacted. Moving on to merchandise gross margins, we drove significant improvement in the second quarter as last year's supply chain challenges dissipated. We also managed our general merchandise inventory better this year, resulting in a healthier sales mix and more margin dollars and rate. In our gasoline business, while retail gas prices were approximately 25% lower year over year, we were pleased to maintain our significant share gains from the last several years. Volumes for the broader industry remained down double digits versus pre-pandemic levels, And we are outperforming this trend with year-to-date comp gallons up over 30% versus 2019. Following tough compares in May and June, July comp gallons were meaningfully positive. Profitability continues to normalize when compared to last year. Our second quarter profit per gallon landed near Q1 levels, which was slightly ahead of our expectations. Overall gas profits, while in line with our expectations, were significantly lower when compared to last year's record Q2 gas profits. All in, we reported second quarter adjusted EBITDA of approximately $269 million and adjusted earnings per share of 97 cents. The combination of positive traffic, market share gains, and margin improvement contributed to stronger than expected bottom line results in the quarter. While our teams are focused on optimizing our performance in the near term, we have not lost sight of advancing our strategic priorities, which remain crucial to our long-term growth. They are improving member loyalty, driving an unbeatable shopping experience, delivering value conveniently through digital, and growing our footprint. Let me briefly highlight each. Our members are at the heart of everything we do, and I'm pleased with the progress our teams continue to make in strengthening the size and quality of our membership. In the second quarter, we grew both membership fee income and member count by 5% year over year, leveraging both our new and existing clubs, as well as growing digital acquisition. In addition to overall member growth, we are improving the quality of our membership with investments like our new co-brand credit card program, where a new account growth is exceeding our plan. Higher tier members are especially benefiting from our new program through greater awards and the increase in our gas discount program. In the first half of this year, the total rewards delivered to our higher tier members were over 20% higher than last year. We expect our continued investment into our membership value prop will increase higher tier penetration and strengthen lifetime value going forward. As I reflect on the past five years, we have made significant strides in membership, growing our base by more than 30% to over 7 million members today. While doing so, we remain focused on maximizing member lifetime value through improvements in higher tier penetration and renewal rates. Our higher tier penetration has grown by nearly 15 points to 38% today. We grew our tenured renewal rate to a record 90% last year, up three points from fiscal 2018, and we expect to sustain that 90% this year. Further, the meaningful expansion of our member base has not diluted member behavior, with our members continuing to shop over 20 times a year on average. Membership-free income has grown every year over the past 25 years. and we believe our commitment to value will help us drive sustainable MFI growth in the future. Strong loyalty is a direct outcome of great customer experiences. Our second strategic priority is delivering an unbeatable member experience, which for us is centered around value. Last year, we demonstrated our ability to strengthen our competitive advantage in periods of rampant inflation as we improved our pricing position by 130 basis points across our competitive set. As we face disinflation this year, we have continued to invest in key value items in order to drive trips and maintain our strong pricing position. Last quarter, we highlighted our investments in our Wellesley Farms bottled water. In the second quarter, we invested in our USDA-certified Choice Strip Stakes, offering them at up to a 38% discount against our competitors. This grew average number baskets and trips, as well as new engagement into the category. About 20% of our members who took advantage of this promotion were completely new to the fresh beef category. And many have already returned to the category after the promotion ended. Pricing is a crucial way we deliver value to our members, but we are also working to offer meaningful value in other ways, including through merchandising improvements and digital convenience. On the former, we are especially excited about our general merchandise transformation, which comes to life starting in the back half of this year. General merchandise is an area where we can make a profound impact in showcasing value to our members, yet it is currently less than 15% of our business. We believe we have significant opportunity to profitably grow this division over the next few years. While about 80% of our members shop in general merchandise today, engagement is low. The majority of our members shop in only one or maybe two categories in GM, whether that is apparel, consumer electronics, home, or seasonal. We know that members who shop GM derive more value out of their BJs membership and spend about four times more per year at BJs than members who do not engage in GM. We're working to reignite our treasure hunt experience by elevating the quality of our merchandise, while preserving the great value that our members expect at BJ's. Better assortments should allow us to grow member penetration and get members shopping across multiple GM categories, which we believe will expand our share of members' wallets and deepen loyalty over time. It is important to note that this is a long-term build. It will take a while to grow our credibility in certain GM categories. And while the current operating environment may mute our efforts somewhat, Our general merchandise transformation is a crucial part of our long-term growth strategy. We will continue to invest and innovate until we're there. Digital convenience is our third strategic priority, and it's especially pertinent to our space where shopping in 100,000 square foot boxes can at times be a high friction experience. Through our app and website, we have improved upon the ways in which members engage with us over the years and members' preferences for these platforms are growing. Our digitally enabled comp sales grew by 15% in the second quarter to approximately 10% of our net merchandise sales. Our bull pick and curbside services are popular convenience options, contributing to the majority of our digital growth. In fact, this quarter we've made several enhancements, including functionality to allow members to add or replace items after completing their order. We're also working to leverage technology to make BOPEC and Curbside more efficient for our team members with a goal of cutting down member wait times for their orders. Our digitally enabled members are more loyal, as indicated by higher spending and renewal rates. We will continue to lean into convenience initiatives that we believe will deliver outsized value to our members. Finally, we remain pleased with the performance of our newer clubs and continue to grow our footprint through new openings. In fact, the 27 clubs we've opened since reinventing our new club opening model in 2016 contributed nearly $100 million in EBITDA over the last 12 months, more than double their original projection. In mid-June, we took another step westward with the opening of our first club in the Nashville, Tennessee market, our 19th state. Feedback from our new members has been incredibly supportive, and the club is off to a great start. Our team will be busy with anticipated openings later this year as we enter our 20th state in Madison, Alabama. Open two additional Tennessee clubs in Mount Juliet and Goodwitsville, as well as a few others. I'd like to close my remarks with my sincere gratitude for our team members. They show up every day for our members, our communities, and each other. united in our purpose of taking care of the families that depend on us. To our team members who are listening in today, thank you for your dedication and hard work. I'm proud to be working alongside all of you. I'll now turn it over to Laura to provide more details on our results and outlook for the rest of the year.

Thank you, Bob. Before I get to the numbers, I'd like to echo Bob's gratitude for our team members across our clubs, club support center, and distribution centers who remain critical to the success of our company. Now let's discuss our results. Net sales in the second quarter were approximately $4.9 billion, a 2.9% decrease over the prior year. Total comparable club sales, including gas sales, decreased by 5.3% year-over-year with merchandise sales growth offsetting the decline in our gas sales, primarily driven by sharply lower retail prices at the pump. Merchandise comp sales, which exclude gas sales, increased by 1.1% year over year and almost 9% on a two-year stack. Our second quarter comp was driven entirely by traffic, which grew year over year on top of the strong traffic aided by high gas prices in the second quarter of last year. The impact of inflation on our sales moderated through the quarter and at a slower pace than the first quarter. As Bob mentioned earlier, our second quarter comp in our grocery, perishables, and sundries division grew by 4% year over year and was up 12% on a two-year stack. We are especially pleased to have delivered strong gains in market share in the quarter, which substantiates our belief in a healthy and growing loyal member base that relies on BJ's for their shopping needs. Our general merchandise and services comp decreased by 13% in the second quarter and was down 9% on a two year stack. As we called out last quarter, an increasingly discerning consumer dynamic has resulted in our members shopping closer to need. We also estimate that roughly a third of our general merchandise and services comp was driven by unfavorable impact of weather sensitive categories. We believe our digital offerings have made our members shopping experience more convenient than ever. Digitally-enabled comp sales for the second quarter grew 15% year-over-year, and approximately 90% of our digitally-enabled sales are now fulfilled by our clubs with services like Bopick and same-day delivery. We remain committed to improving convenience by increasing our level of digital engagement for our members over time. Our gas business performed broadly in line with our expectations. Comp gallons in the second quarter were down slightly year over year and about flat year to date as we sustained our significant share gains from recent quarters. As Bob mentioned, comp gallons are growing again in July and August as we have come off last year's pricing peaks. Our gas profits were lower year over year as profit per gallon continued to normalize from last year's levels. Membership fee income, or MFI, grew approximately 5% to $103.7 million in the second quarter, and we remain pleased with our membership trends, including in higher tier penetration, easy renewal, and first year and tenured renewal rates. Moving on to gross margins, Excluding the gasoline business, our merchandise gross margin rate improved by 90 basis points year over year. Much like the first quarter, this improvement was primarily due to the unwinding of supply chain costs that challenged our business last year. Better inventory management also worked in our favor, skewing our mix to more margin accretive sales, particularly in general merchandise, where we had less markdown activity versus prior year. Speaking of inventory, our merchandising, finance, and planning and allocation teams remain diligent in optimizing our inventory for the current environment, and we feel very good about our position today. We ended the second quarter with inventory up about $164 million year over year, which was mostly driven by inflation and elements that are strategic in nature, including supporting new clubs and in-stock improvements in our consumable categories. Coming back to the P&L, SG&A expenses for the quarter were $695 million. The year over year increase was primarily attributable to our new unit expansion and other investments to drive our strategic priorities. We reported second quarter adjusted EBITDA of $268.8 million and adjusted EPS of 97 cents, which reflects our merchandise sales and margin growth, as well as our membership strength offset by the lack in our gas business, as well as higher interest and tax expense year over year. Turning to our capital structure, we ended the quarter with $859.1 million of debt and 0.8 turns of net leverage, consistent with the prior two quarters. We expect to maintain this strength in the future. Our capital allocation strategy is consistent with the framework we set forth on our investor day. We believe that the best use of our cash is applying it towards profitably growing the business. As such, investments to support membership, merchandising, digital, and real estate initiatives will continue to be funded by our cash flows and enabled by our strong balance sheet. We also recognize that when valuation levels seem appropriate, investing in our business through share repurchases is a prudent way to drive long-term value as well. In light of this view and our confidence in the long-term trajectory of our business, we accelerated our buybacks to over 715,000 shares in the second quarter for approximately $45 million. Year to date, we have executed approximately $60 million of share repurchases which compares to approximately $61 million of free cash flow we generated over the same period. We have $259 million remaining under our current authorization. Let me now address our outlook for the rest of the year. Our business, as well as the broader industry, continues to navigate shifts in consumer behavior, resulting from lapping stimulus dwindling savings, disinflation and rising interest rates. Disinflation or waning year over year inflation continued into the second quarter with the pace showing signs of moderation as grocery and sundries categories cycled through elevated levels from last year and fresh categories are bottoming out to more normal levels. While members have become more resourceful On tighter budgets, they are clearly still spending with us for their household essentials, and we feel great about our ability to maintain the momentum in our market share gains. We are confident in our plans for general merchandise as well and believe that we can leverage our traffic to engage members with our new assortment and strategies. Furthermore, a favorable shift in GM category mix and year-over-year GM sales comparisons should aid a recovery beginning in the back half of the year. We also acknowledge the considerations of macro-driven pressures on broader consumer demand. As a result, we have refined our sales outlook for the rest of the year to address the uncertainty in discretionary spend. We now expect comparable club sales excluding gas to grow by approximately 2% for fiscal 2023. We continue to expect a robust consumable business as value continues to resonate with our members. We remain confident in the assortment improvement we're making in our general merchandise business, but are taking a more conservative view on the near term discretionary spend given the macro backdrop. We expect year-over-year inflation to ease through the back half. To be clear, we still believe we will exit the year with year-over-year inflation, not deflation. We expect MSI growth for the full fiscal 2023 to be approximately 5% aided by member growth and sustained strength in higher tier penetration. Moving down the P&L, we maintain our view that year-over-year improvements in merchandise gross margin rate will be front-half weighted this year. That being said, our year-to-date performance has exceeded our expectations. As a result, we are raising our fiscal 2023 guidance to an increase of approximately 50 basis points year-over-year. In our gas business, we continue to expect slight comp growth in gallons for the full year. Our profitability assumptions also have not changed. As we've seen year to date, we believe that we will settle into more normalized gas margins as compared to prior years. As a reminder, when breaking down our gas business by quarters, We are lapping our toughest comparisons in gas margin in the second and third quarters this year. Some additional comments on our below the line items. While our debt levels have remained stable year over year, the average rate that we pay on debt has nearly doubled from last year, resulting in higher net interest expense in the quarter. We are reflecting similar assumptions on rate for the rest of the year. On our tax rate, we anticipate a tax rate of approximately 28% in the back half of the year due to lower tax benefits as we saw in the second quarter. In summary, we expect in-club sales growth and merchandising gross margin improvements to partially offset normalizing gas profitability. As sales moderate into ongoing disinflation, We are also laser focused on maintaining cost discipline to maximize our operating leverage. Putting all this together, we expect to deliver fiscal 2023 gap and adjusted EPS of $3.80 to $3.92, with EPS in the third quarter once again facing a tougher gas lap and the fourth quarter benefiting from a 53rd week. Before turning it back to Bob, I'd like to reiterate our confidence in the strength of our business and the transformation we continue to make in our company. We believe we are positioned to deliver sustainable growth longer term. With that, I will turn it back to Bob for closing remarks.

Thanks, Laura, and thanks to everyone listening for their attention and support. We spend a lot of time on these calls discussing short term, up to the minute trends. So I'd like to close with some comments on the long term view of our business. We participate in a segment of retail that reliably gather share in good times and bad. We have considerably improved our membership, operations, digital business, and many other things. But one thing matters most, and that is value. Wholesale clubs have the best value. and we invest every day to make our offering to our members even better. It is the largest reason why our membership is up 30% since 2018. It's why our co-brand credit card continues to grow above our expectations. It's why people flock to our gasoline business. It's why we continue to grow transactions when other forms of retail don't. The fundamentals of our business are strong and favorably positioned to win in the broader retail landscape. We will continue to play the long game. We will grow the size and quality of our membership. We will improve our general merchandise business to match the value and credibility we have in our food and consumables business. We will grow our digital business and our store footprint, all while bringing more value to more members. I'm proud of our entire team, and I'm excited for the future they're creating for our great company. With that, I will now turn it back over to the operator to take your questions.

Thank you. We will now start the Q&A session.

In fairness to all participants, please limit your question to one question and one follow-up. Our first question comes from the line of Peter Benedict from Bird. Your line is open.

Oh, hey, guys. Good morning. Thank you for taking the question. I guess the first one, maybe talk about the member trends in 2Q. Sounds like you ended a little over 7 million. Just maybe talk a little bit about what you're seeing from signups, from renewals. And then on the MFI related to that, expecting 5% growth this year. I think previously you were 5% to 6%. Just curious why focusing on the lower end of that range for this year. That's my first question.

Hey, Peter. Good morning. It's Bob. Listen, we're very happy with our performance in growing our membership in both size and quality from a number of different angles. As you noted, we gained 5% in the number of members and dollars in the second quarter. Pretty great year-on-year and sequential growth for us. And it's important to note that we're stacking those gains on top of gains from prior years as well. in both bodies and dollars, right? And we're focused on finding the right members for us and engaging them with fantastic products and great value across our building. We've also grown premium tier members. Our co-brand program is growing very well. And as we mentioned in the prepared remarks, we're well on track to another 90% renewal rate for the year. So we're proud of where we are. And, you know, I have the luxury of having been around this business for a long time when growing members and MFI dollars sequentially and year over year wasn't a given like it is now. We are doing quite a fine job consistently growing on the size and quality of our membership over the past several years. You know, with that said, we're not satisfied. It's why we continue to invest in value every day. That's why we're trying to reinvent our general merchandise business. to engage our members even further in our platform. That's why we continually try and pass value back to our members through pricing, through promotions, through our co-brand product, through our gas discount program, and tons of other different ways. So we're happy with what we've done. We're excited for what we can do in the future and confident we can build on the gains that we've made today.

Okay. Thanks for that, Bob. And then I just, my follow-up would just be around the general merchandise outlook for the back half of the year. Obviously you guys have taken that down a little bit. The inventory. I think Laura had mentioned a lot of consumables in there, new club growth, et cetera, but just maybe talk a little bit about how you've got your inventory planned in general merchandise for the back half of the year and if kind of the moderating demand outlook on that front leaves you exposed in any way or if you feel good about where you are in general merchandise inventory. Thank you.

Sure. So let's talk a little bit about GM. You know, as we talked about in the prepared remarks, a bunch of stuff impacting the second quarter, a lot of it having to do, more frankly, with last year than the current year. But first and foremost, we've taken the opportunity to rebalance how we think about the sales and margin trade in general merchandise. And, you know, that's really an integral part of building the business for the long term as we see it. You know, we've talked a little bit about changing assortments. Think about that as the what to buy aspect. But this quarter, we took a little bit of a look at how we buy as well in terms of building the resilience of the general merchandise processes and procedures around how much to buy, how much inventory to have, how to market down, how to exit seasons clean. We are really building all those processes and procedures as we go with an eye towards a sustainable, growing, profitable general merchandise business going forward. So our team's really doing the right things. You know, we had tough compares against last year with all of the low to no margin liquidations of seasonal goods and certainly had some tough weather in the northeast to deal with, which really depressed the sales of those seasonal goods in a pretty significant way. But as we look forward, we are bullish because we are putting more relevant assortments in front of our members. And where we've seen that so far, we've seen good results. That should come to life a little bit more in the back half as we get through reinventing more assortments in general merchandise. And as we continue to do that quarter in, quarter out, we should gain a lot more credibility with our members as we put better brands, better products, more value in front of our members on a repeated fashion. That will allow us, obviously, to capitalize on the tremendous traffic and market share we have on the other side of our business and add more value to our membership going forward. In the prepared remarks, we talked a little bit about our inventory balance. It is up year over year. That is all in our grocery and consumables business. In fact, our general merchandise inventory is considerably lower this year than it was last year. Again, we had a lot of seasonal goods last year to liquidate still at this point in time. And most of the increase in our inventory is really structural things that we are – we're making choices to do. Certainly part of it is inflation, right? As we sit here today, there's still a few points of inflation in our, our groceries and sundries business that's driving some inventory balance. Uh, but, but most of it is choices we are making, uh, and investing in growth. So think about, uh, inventory to support new clubs. Think about a three or 400 basis point increase in in-stock levels in our consumable business year over year. really things that we're doing to drive the health of the overall business and be the best version of what we can be when our members show up every day in our business. So GM Inventory is doing just fine, and we are not concerned about the level of consumables inventory. We are intentionally making investments there to better serve our members.

Great. Thanks for that, Bob. Good luck.

Thanks, Peter.

Thanks, Peter. Our next question comes from the line of Robert Olms from Bank of America. Your line is open.

Oh, hi. Thanks for taking my questions. A follow-up on, you know, and maybe for Laura, just in terms of the cadence of merchandise gross margin you're expecting for 3Q and 4Q, and maybe weave in there, you know, is the freight impact or benefit year-over-year, I guess I should say, is expected to be similar in 3Q versus 2Q and then maybe less so in 4Q, maybe some color on that. And then just another follow up on the same store sales expectation for the back half. Is there any cadence between the quarters? Should the general merchandise changes you're making show up more in the fourth quarter than the third quarter or any other color you guys could give?

Yeah. Hey, Robbie. Thanks for the questions. You know, as we think about March margin for the remainder of the year, you know, certainly in the second quarter, it was healthier than what we anticipated. You know, in our prepared remarks, I talked about supply chain unwind. And part of that was also how we managed our general merchandise business. We're really proud of the second quarter March margin growth. As it relates to the back half, I think what we are anticipating is that the levels of March margin growth year over year will moderate. So Q3 coming off of Q2 and Q4 being the lowest growth year over year. So I think the only other thing I would add in there is freight costs are certainly embedded in our assumptions, but I think it will moderate. Part of that moderation is your second question on same-store sales growth. I think it will be relatively balanced in Q3 and Q4. As you dig under that, I think there are two things that we are considering. You know, disinflation will continue in our core consumable business. So I think the rate of inflation will come off and trail off through Q3 and be the lowest in Q4. And that will be balanced off general merchandise growth. So we think Q4 will be the strongest of the two quarters.

That's really helpful. Thank you.

Thanks, Robert. Our next question comes from the line of Edward Kelly from Wells Fargo. Your line is open.

Hi, guys. Good morning. I do provide a bit more color on the cadence of the traffic that you saw in Q2. You know, you had that deceleration from, I think, close to a four in Q1 to around a one in Q2, but obviously, you know, difficult gallon compares. So I'm curious, you know, how that traffic changed, if it was similar to what you saw in the gallons. And then, you know, what are you seeing, you know, traffic-wise so far? this quarter, given that gas prices are going to go up again? I'm just curious if you've seen any reacceleration in traffic.

It's a good question. Certainly, our gas business was interesting to watch during the second quarter. As we talked about, May and June had tough compares. That was the peak of last year's elevated gas prices, and we certainly gained traffic last year that really resulted from our members caring a lot about saving money on gasoline at $5 a gallon last year. We're still at pretty considerably elevated levels today at around $4 a gallon, and so our members are certainly cognizant of that, and we maintained our gallon share during Q1. But the context underneath that is we lost some gallon growth and some traffic in May and June, and then July was back to considerably positive growth. That has continued in August here. So it feels like after lapping that peak last year, we are back to the gallon traffic market share growth that we've seen over the past couple of years within our gas business. As you know, that tends to drive performance inside the club as well as those clubs with, uh, with gas stations are nearly always performed better than those, those without in terms of comp in terms of membership, uh, and, um, and most notably membership renewal. Uh, you know, gas was, was a little bit interesting from a profitability perspective in the quarter as well. Uh, as we talked about cents per gallon profit was about where we landed on Q1, uh, And that seems to be settling in as kind of the new normal in cents per gallon. With that said, we were lapping huge profitability from last quarter. And so total number of dollars was down pretty considerably, profit dollars down pretty considerably from last year. But it's a great place for us to illustrate value to our members. We invest in the price every day. We talked about our co-brand card and the premium tier getting increased gas discounts this year versus previous years. And that has been a great way for us to grow the co-brand card program and pass more value on to our members. So we'll continue to try and use the gas business to really source traffic and membership for the rest of the business.

Okay, great. And just a quick follow-up one on MFI. Can you just talk about, you know, the cadence of any discounting, you know, that you might be doing to try to, you know, continue to bring in members? And then the other question related to MFI is you have a 53rd week. Does that help in MFI? It's actually unclear if you go back to the, you know, the last year that you had this.

And maybe I'll take the first part of that question, and Laura can can handle the 53rd week part of it. Again, we're very happy with our membership performance during the quarter and the year. We continue to grow the size and the quality. I think there's not really a ton of cadence to think about in there within the quarter or within the rest of the year as we see it. The market out there has been pretty rational. get this question of whether membership is more competitive. We just think it's a mark of the relevance of the membership model. Our founders kind of knew this before anybody did. It allows members to exchange their loyalty for lower prices or convenience or cheaper content or all the things that people have built membership models around. past several years. We've kind of had that since our beginning, obviously. So we're proud of what we've been able to do within that model. We continue to attract the right members for us. We continue to engage them with fantastic prices and promotions. That has yielded continued traffic growth year over year, as we've talked about, and is obviously underpinning of the market share growth that we've seen over such a long period of time as well. You know, I think all is well in the membership world, and we're looking forward to continuing to grow the number of bodies as well as the dollars. But that, maybe Laura can talk about the 53rd week.

Yep. Yeah, so, Ed, you're right on this year benefits from a 53rd week. As you think about that related to MFI, there is a slight benefit from the 53rd week, but... you know, not much. Most of what is embedded in the benefit of the 53rd week to this year is sales, margin, and all of the relevant variable operating costs that flow with that. So I wouldn't embed any MFI growth in the 53rd week.

Thank you.

Thanks, Edward. Our next question comes from Kate Machain from Goldman Sachs. Your line is open.

Hi, good morning. Thanks for taking our question. We wondered if you could talk a little bit more about what happened with Ticket during the quarter and if you've seen any change in units as inflation has dissipated here and just how you're thinking about the back half composition between Ticket and traffic.

Okay, maybe I'll take a shot at it. Thanks for the question. And Laura can fill in anything that I missed. You know, in the second quarter, we didn't see a tremendous change in any of the components of comp relative to Q1 or maybe Q4 last year. So certainly continued traffic growth, as we've talked about many times already today. And As you know, within the consumables business, the grocery business, we are continuing to see strong comp, but some of that is obviously the continued inflation, which implies lesser units. That certainly was true in Q2, but again, the trend was pretty similar to what it was in Q1. Importantly, What we continue to see in our member spending is really good data. We track, obviously, a lot of information. We always talk to you all about income cohorts of high, medium, and low shoppers. In the second quarter, that trend was a lot like what we saw in Q1 and the quarters before that, where each cohort that we track grew in terms of total spending and then trips per member and spend per member. As you know, the TRIPS growth is incredibly important to us because TRIPS are the biggest predictor of membership renewal, and so we're very happy with that data and happy with that trend, and we see that continuing into the future.

Our follow-up question is just on the credit card transition. I know you mentioned that the new account growth exceeded your plan, but has this impacted your outlook for the second half in any way?

Well, look, maybe I'll just introduce it and maybe Bill Werner can take it since he runs that program for us. We're incredibly proud of our new co-brand credit card program. Certainly a wonderful way to engage our members and provide even more value to them. We talked about it and I talked about it in the prepared remarks that our awards are up 20% year on year. That's a mark in the growth of the program, but also the tremendous increase in value to each of those members as we go. So we're very happy with where we are, and maybe I'll let Bill give some context underneath that.

Yeah, okay. The only comment I would add is that the credit card is all about stacking for the future. So at this point, we've added close to 250,000 new accounts with Cap One. It's well ahead of the sign-up run rate that we had previously. So we're really excited about what we're seeing on the acquisition side. The other thing we're seeing underneath the data is we're seeing members trade up into the highest tier credit card. So as we sit here today, about 42% of our cards are in the highest tier versus about 37% this time last year. So within that credit card growth, we've seen trade up from people who had the lower end credit card, so at the $55 level up to the $110 level. And we've also seen members transition from the $110 level rewards membership or Club Plus membership into the credit card as well. So they're staying within the higher tiers, but they're upgrading within that. And that higher tier credit card comes with about double the lifetime value compared to the lower tier credit card. So this is all about structural long-term growth. And it's all about what the credit card program has been about all along is growing the quality of the membership for the long term. So it's not going to have a meaningful change over the next two, three, six months, but Over the long term, the lifetime value we're generating will play dividends for a long time to come.

Thank you. Thanks, Kate.

Our next question comes from the line of Michael Baker from DA Davidson. Your line is open.

Okay, great. Thanks, guys. I wanted to ask you about what you're seeing competitively in terms of price. With some disinflation, it sounds like you're Investing in price and flowing that disinflation through to customers. I've seen that from competitors. Can you talk about price gaps? Didn't seem to drive much incremental traffic, I guess. So I presume your competitors are doing the same, but just curious what you're seeing there. Thanks.

Hey, Mike. Thanks for the question. Our pricing metrics remain very strong. As we've told you, we've made considerable investments last year. as we felt there was an opportunity to meaningfully press our advantage against some of our competitors. We've continued to make investments this year in pricing, and we've highlighted some of those in our prepared remarks. It's also important to note that shelf prices are not the sole determinant of value in a member's mind. Shelf prices are one thing, promotion is another. And we've continued to invest in new and innovative promotions, one of which we highlighted in our prepared remarks today. Talked a lot about the co-brand credit card and the increase in value provided to our members there. So we feel like we're in a great place from an overall metrics perspective. And all of that is translating to the gains in traffic and market share that we've talked about. Our competitors, I think, are acting pretty rationally at this point in time, and I don't I don't see that as a change. I think that's been happening for a while now, and I would expect that to be the base case going forward. So we're pretty proud of where we are, and we will continue to invest in ways to keep that value flowing to our members because that underpins our entire business.

Got it. Okay, that makes sense. If I could ask one more follow-up. I think it was past. I didn't know if I quite got the answer, but can you talk about the pace of comps throughout the quarter?

please yeah hey Mike it's Laura so as we traveled through q2 the front half of the quarter was certainly more challenging than where we exited from a comp cadence you know and that's no different than the storyline out there from everybody else. You know, weather was certainly an impact. We talked about that in the prepared remarks. So May and June kind of performed similarly, and July was the strongest.

Even with the weather, you know, I'm up here in Boston. It was the wettest, you know, July in a long time, even with that. poor weather in July, July was still better.

Yeah, that's right. Yeah, that's right. And to some degree, go back to what I talked about in the gas business, Mike, it's, you know, certainly that's a great way that we source traffic. And last year we were definitely getting extra traffic in May and June. That was, that was difficult to lapse. So we, we estimate that had an impact on, on, on those months as well. Yeah.

Understood. Okay. Thank you. Thanks, Mike.

Thanks, Michael. Our next question comes from the line of Mark Harden from UBS. Your line is open.

Good morning. Thanks so much for taking the questions. So to start, what are you seeing in terms of initial renewals from some of your customers that signed up at discounted rates last year? Have they shifted at all from what you've historically seen? And how is your member growth trending from new club contributions versus existing club contributions? Thanks.

Hey, Mark, thanks for your question. As we've talked about a couple of times, we're very happy with where we are from a membership perspective in growing the membership and the context beneath there with growing our higher tiers and growing engagement and growing our renewal rates. As we said, we expect to maintain our 90% renewal rate. That is a great thing for us to do. As you know, that's an all-time high for us. sort of 800 or 900 basis points above where we were several years ago. And over that same period of time, not only have we grown the tenured renewal rate, but we've grown the first year renewal rate from something around 50% to something around 70%. And we haven't really seen a change in that trend either. We're doing a wonderful job engaging all of our membership, both new and tenured. Our new clubs are an integral part of what we're trying to do here at BJ's in growing our overall chain. We gave you a little bit of context around the importance of those new clubs and the growth that they're providing with nearly $100 million of EBITDA for those clubs that have been open since 2016. That really is because we are doing a wonderful job attracting, engaging, and retaining the members in those clubs. We're showing them great assortments. We are integrating the digital experience much better in our new clubs. We're operating those clubs very, very effectively from the day that they opened through today. You know, we're proud of our real estate strategy and our execution of that strategy. We're hopeful we can do even better. And we know that it's powering our business going forward.

Great. That's helpful. And then as a follow-up, just from a wage standpoint, do you see much risk for the environment requiring another round of investments on that front?

Yeah, it's a good question. You know, I don't know what the future holds for for us, Mark, but our team members, first and foremost, are excellent. For those listening today, thank you for being with us and thank you for doing what you do every day to take care of our members. We've made considerable investments over the past several years, as you know, Mark, from following our story. We will continue to invest in our team members, both in the field and our distribution centers and our club support center. But as we sit here today, the dynamics are a bit different than they were a couple of years ago, right? We are fully staffed. We're finding great talented folks to come and work for us. And our churn has decreased over the past couple of years as well. So we feel like we're well positioned. We'll continue to execute. But we know that the wage environment is dynamic and wages aren't going to go down. So I would expect some continued pressure as we go forward. We'll figure out our way to manage that in the context of our overall P&L. I think we've shown a good track record of being able to manage through up cycles and down cycles and still hit our numbers. So I'm very proud of what our team has been able to do this quarter. And again, thanks to those listening.

Thanks so much and good luck. Thanks, Mark.

Thanks, Mark. We have no further questions at this time. So with that, I will hand back to Bobby Eddy, Chairman and CEO, for final remarks.

Well, thank you, everybody, for your attention and support. Again, thanks to the team members on the phone. We are very proud of our second quarter results, our year-to-date results, and the results over the past few years, growing our chain, growing our traffic, growing our market share, and most of all, growing our membership. Thanks for your attention. We'll talk to you when we report our next quarter.

Thank you this concludes today's conference call you may now disconnect.