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.