BJ's Wholesale Club Holdings, Inc.

Q1 2024 Earnings Conference Call

5/23/2024

spk07: fiscal 2024 earnings conference call. My name is Candice and I will be coordinating your call today. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press start followed by one on your telephone keypad. I would now like to hand the conference call over to your host, Cathy Park. Please go ahead.
spk08: Good morning and welcome to BJ's first quarter fiscal 2024 earnings call. Joining me 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 filed with the SEC for a description of those risks and uncertainties. Finally, please note that on today's call, we'll 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. And now I'll turn the call over to Bob.
spk05: Good morning, everyone. Thanks for joining us today to discuss our first quarter results. The first quarter was marked by continued strong growth in membership fees and market share. We are also proud of the continued growth in comp sales. We expected the first quarter to be a tough lap given last year's inflation dynamics, so we are particularly proud of our continued momentum underpinned by strong traffic and unit growth. Our team continues to manage the day-to-day well, while staying laser-focused on executing our long-term strategic priorities. Comparable club sales, excluding gas sales, grew by 0.6% in the first quarter. Our compelling value proposition both in the club and at our gas stations drove strong traffic, contributing three percentage points in the quarter, similar to our traffic trend in the fourth quarter of last year. Inflation was about flat, and we continued to grow unit volumes with our perishables, grocery, and sundries division increasing comp units in the first quarter. Our members are rewarding us for our merchandising improvements and our amazing value. Consequently, we gained market share in both units and dollars in the quarter. Comp growth for our perishables, growth, grocery, and sundries division was up over 1% in the first quarter. We experienced the strongest growth in perishables, particularly in unit volumes, led by our fresh produce and dairy categories. Comp unit growth in grocery and sundries was equally impressive, especially when compared with declines in the broader marketplace. Our general merchandise business delivered a slightly negative comp in the first quarter as a handful of weather-sensitive categories weighed on the overall division. We saw about a 10-point variance in GM comp performance across markets that experienced better weather versus markets with cooler and wetter weather compared to the prior year. Consumers remain discerning in their purchasing, and we have also found that members are increasingly waiting to shop higher ticket seasonal categories such as patio sets and air conditioners exactly when the weather turns, not in anticipation of it. When presented with great quality of value, members are spending. General merchandise is critical to our model, and we continue to make outstanding progress on our transformation efforts. We are intensely focused on delivering a new and exciting assortment that is presented and marketed in the right way at the right time and at the right price. Successful execution quarter after quarter is crucial to shifting member perception, and we believe we are delivering on this front. In fact, the categories that drove our general merchandise growth in last year's fourth quarter continued to showcase strength in the first quarter. with consumer electronics and apparel both comping meaningfully positive. We're especially pleased with the performance of our home categories, which turned positive for the first time in a long time, with the segment comping nearly 7% in the first quarter. Home textiles led much of this growth. Higher quality products such as our bath towels and sheets are resonating with our members. We've also elevated and enhanced the assortment in our kitchen and cleaning appliances, leaning into trend right items in higher growth categories designed to drive greater member demand. Members who engage in general merchandise exhibit trip and spend behaviors that highly correlate to membership renewal. Strengthening the treasure hunt and inspiring the general merchandise shop is a significant opportunity for the long-term growth of this company. I'm proud of the progress we're making and remain confident in our ability to realize the significant potential we see in this division. Our four strategic priorities remain critical to our long-term success. These priorities are improving member loyalty, giving our members an unbeatable shopping experience, delivering value conveniently, and growing our footprint. We are making significant progress in each of these areas. Our membership momentum continues to build, demonstrating the power of our growing value proposition and our 90% renewal rate. Member counts increased both year over year and sequentially. We are expanding membership in both new and existing markets with our digital platforms powering nearly half of this growth. We're improving membership quality as well. Our highest tier member base consists of our one plus members who pay $110 fee and hold our co-brand credit card, which we believe is the best offering in retail today. As you know, these are our most loyal and highest spending members, exhibiting the greatest lifetime value. This tier continues to grow double digits year over year, helping our higher tier membership penetration surpass 38% in the first quarter. As a testament to our ongoing success, in the first quarter we reported membership fee income growth of 8.6% year over year. We will remain focused on maintaining our strength in membership to drive long-term value for both our members and shareholders. A great shopping experience keeps our members coming back to shop with us, deepening their loyalty and driving higher renewals. This is why we continually strive to improve the member experience through merchandising, digital, and in-club conveniences, and of course, amazing value. We know our members choose where they do their weekly grocery shopping based on produce and meat. Members already love our assortment, as well as the differentiated amenities such as our full-service deli. While we know they value the selection and quality of our meat, we knew we could do better in produce. Having full control over our perishable supply chain has been an enormous benefit, and we launched our Fresh 2.0 initiative last April, bringing even more freshness and excitement to our produce offering. Fresh 2.0 was built directly on insights and feedback from our members. We reassessed every step of our process, from sourcing to packaging to marketing. We then implemented robust training, giving our team members the knowledge and tools to maintain maximum freshness and quality of our produce. We invested in speeding up the supply chain in areas such as berries, resulting in faster and fresher arrivals at our clubs and ultimately into members' homes. We strengthened existing vendor relationships and also forged new ones to improve in-stocks and introduce newer, seasonally relevant products. We've already received great feedback on new offerings such as Sumo mandarins and dragon fruit. Our comprehensive fresh 2.0 pilot, which ran through much of last year, drove incremental member engagement in the category and yielded 6% more produce trips than our control clubs. In light of this success, we are scaling the program chain wide this year with compelling displays and signage in club that help improve navigation and showcase our freshness, quality, and value. This month, we began installing coolers at the front of our clubs so that our members are drawn in by this high-quality, low-priced produce in the first moments of their visit. We're amplifying this effort in our marketing with featured content and enticing promotions across all our channels. We believe the improvements we've made in our fresh offering the last year have delivered significant value to our members. contributing to our perishables performance and supporting our consistently strong traffic trends. In fact, our fresh produce categories delivered eight points of comp unit growth in the first quarter, outperforming the market. As we advance our fresh 2.0 rollout this year, we will continue to work to win the shop, aiming to further solidify BJ's as our members destination. We're innovating with our own brands, Wellesley Farms and Berkley Jensen, to provide members with high quality products at substantial value. Our own brand sales penetration continues to grow each quarter. Our sundries categories lead the way in areas such as paper and trash. In the first quarter, we launched our own food storage bags. This offering is a strong illustration of our capabilities and approach to own brands. Our research suggests that our members were seeking greater value than the national brands offer. We underwent extensive benchmarking and analysis and identified a partner to help develop high quality products that were comparable to the leading national brand while offering a value of more than 30%. Our members' response has exceeded our expectations, improving the category sales trend with more than half of the sales coming from new members to the category. Own brand sales make up over a quarter of our business, and we're confident in our goal of reaching 30% in the future. Finally, gas is a traffic driver for us and a meaningful way in which we deliver value to our members. We gained share once again in the first quarter with comp gallons growing by approximately 6% year over year. This compares to the broader U.S. market, which was down mid-single digits in the same period. Our philosophy on gas, like the rest of our business, is grounded in delivering value. This mindset allows us to proactively offer extra savings to our members through gas promotions and our co-brand credit card, which we believe deepens member loyalty. We work hard to save our members time and money. For members, taking advantage of our value proposition is easier than ever, as our digital conveniences allow them to shop our clubs how they want. Our convenience initiatives include buy online pickup and club, curbside pickup, and same day delivery. In-club shoppers can also leverage our digital coupon gallery and skip the lines with express pay checkout. Our digitally enabled sales have posted double-digit growth in every quarter in the past two years. This is on top of meaningful growth through the pandemic. In fact, our digitally enabled comp sales in the first quarter were up 21% year over year. We're continuously refining and improving our user experience. In fact, this month we are rolling out the ability to locate products through our app, making shopping in our 100,000 square foot clubs a whole lot easier. This is one of the numerous enhancements enabled by our autonomous inventory robots, which is also driving labor efficiencies in our digital order fulfillment process. We will continue to lean into our digital capabilities to deliver even more value and convenience to our members in the future. Finally, we continue to make great progress on our real estate strategy. We opened our third club in the Nashville market in Goodlettsville earlier this year. We expect to open 11 more clubs in the back half of our fiscal year, including openings in new markets like Louisville, Knoxville, Southern Pines, and Myrtle Beach, while also expanding in our core markets with two openings in the New York Metro market and four openings in Florida. In addition to our new unit expansion, we are investing into our existing footprint with upgraded signage as well as remodels as part of Fresh 2.0. We continue to move at an accelerated pace with our real estate initiatives and are building on our future pipeline, which remains at the highest levels in our company's history. As we assess the health of the consumer, members remain selective and incredibly value-focused, which we believe bodes well for our business model. In a limited skew environment, members rely on us to deliver a highly curated assortment that maximizes quality, value, and convenience. In doing so, we are driving great member engagement as exhibited by growth in trips, units, and market share in the first quarter, an achievement in today's challenging retail backdrop. We're driving greater trip frequency across all income levels that we track, high, mid, and low. Spend per shopper remains consistently strong with our mid to higher income members. While our low-income members remain under pressure, particularly due to waning government aid, they continue to supplement their purchases with additional forms of tender, meaning they're spending more of their limited budget with us and not elsewhere. In fact, in the first quarter, overall sales from this member base started to grow again year over year after two consecutive quarters of declines. Looking ahead, we remain confident in our ability to grow the business, reinforced by healthy membership, traffic, and market share. These are key markers of the underlying strength of our company. Furthermore, we believe our operating model, deep focus on our strategic priorities, and unwavering dedication to delivering value keep us well positioned for long-term success. I'd like to close with my gratitude for our 34,000 team members. I'm impressed and inspired by their dedication to taking care of the families who depend on us every single day. To our team members listening in today, thank you for all of your hard work. I'll now turn it over to Laura to provide more details on our results and outlook for the year.
spk06: Thank you, Bob. I'd like to join Bob in thanking our team members across our clubs, support center, and distribution centers whose efforts contributed to another quarter of strong financial results. Let's dig into our results. Net sales in the quarter were approximately $4.8 billion, growing 4% over the prior year. Total comparable club sales in the first quarter, including gas sales, were up 1.6% year over year, led by gallons sold. Merchandise comp sales, which exclude gas sales, increased by 0.6% year-over-year and by 6.3% on a two-year stack. We are pleased to maintain traffic and unit growth in the quarter, which demonstrates our strong value prop, which continues to resonate with our members. As Bob mentioned, inflation was about flat for the quarter, with April inflecting slightly positive following several months of slight deflation. Our first quarter comp in our grocery, perishables, and sundries division grew by more than 1% year over year. We drove market share gains once again in this quarter, which supports our belief in a growing and loyal member base that relies on BJ's for its shopping needs. Our general merchandise and services division comp decreased by just under 5% for the first quarter, with general merchandise outperforming the rest of the divisions in this calculation. Digitally enabled comp sales for the first quarter grew 21% year-over-year and 40% on a two-year stack. About 90% of our digital sales are fulfilled by our clubs with services like buy online, pick up in club, and same-day delivery, which remain meaningful drivers of our digital growth. Members who leverage our digital conveniences save time in their shopping and become more loyal members. This is a major win-win, and we will continue leaning into these mutually beneficial enhancements in the future. Membership fee income, or MFI, grew 8.6% to approximately $111.4 million in the first quarter. driven by broad-based strength in membership acquisition and retention across both new and existing clubs. In addition to our Goodlettsville club opening in the first quarter, we also continued to add new members from the five clubs that mostly opened late in the fourth quarter. We are pleased with our momentum in growing membership size and quality. Moving on to gross margins, Excluding the gasoline business, our merchandise gross margin rate decreased by approximately 50 basis points year over year. As expected, we experienced some unfavorable lapping of our co-brand financial flows as we anniversary last year's launch, which led to the quarter year over year decline. Our first quarter merchandise gross margin rate remains higher than historical levels. SG&A expenses for the quarter were approximately $721.8 million. The year-over-year increase was primarily attributable to our new unit growth and other investments to drive our strategic priorities. As Bob mentioned earlier, we continue to gain share in our gas business with comp gallons growing by approximately 6% year-over-year. From a profitability perspective, the broader industry faced margin headwinds in the quarter, resulting in profits that fell below our expectations. We reported first quarter adjusted EBITDA of $236.4 million, which, as a reminder, no longer includes pre-opening and non-cash rent expense add-backs. Our effective tax rate of 24.4% was primarily driven by higher than expected tax windfall. All in, our first quarter adjusted earnings per share of 85 cents were flat year over year and in line with our expectations. Moving on to our balance sheet, we feel good about our inventory position. Our team is working hard improving our ability to have the right amount of product in the right clubs at the right time. We ended the first quarter with inventory about flat year over year, despite seven new clubs and approximately 180 basis points of improvement in our in-stock levels over the same period. Our capital allocation strategy is consistent with the framework we set forth a year ago at our investor day. We continue to believe that the best use of our cash is applying it towards profitably growing our 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 ended the first quarter with 0.6 terms of net leverage, which aligns with our long-term target of sub-1 terms. Returning excess cash to shareholders remains an important part of our capital allocation strategy as well. We repurchased approximately 405,000 shares for $30.2 million, and as of the quarter end, we have approximately $159 million remaining under our current authorization. We will continue to take a disciplined and balanced approach to deploying our capital to maximize shareholder value. Turning to our outlook for the year, our guidance for the fiscal year remains unchanged. We continue to expect our fiscal 2024 comp sales, excluding gas, to range from 1% to 2%, getting closer to our long-term algorithm towards the back half of the year. We are still assuming a slightly inflationary year and a strong consumable business led by traffic units and market share despite external pressures beyond our control we are pleased with our continued progress in general merchandise we are proud of our achievements in membership as we consider all of the elements that drive membership fee income including the aforementioned timing of new club openings last year and the cadence of openings this year We believe the year-over-year MFI increase of 8.6% in the first quarter will be the highest growth rate of the year. We continue to expect to deliver merchandise gross margin rate improvement of approximately 20 basis points for fiscal 2024, driven by strong cost management and continued growth in our own brands. We are planning for continued SG&AD leverage in fiscal 2024 as we invest in our growth initiatives, particularly in unit growth as new club sales continue to ramp over a multi-year period. A reminder that we are also lapping variable compensation tailwinds from fiscal 2023. Our expectations for gas remain unchanged. We are planning for an effective tax rate of approximately 28% for the remaining three quarters of the fiscal year. Putting all of this together, we continue to expect to deliver adjusted EPS in the 375 to $4 range. Longer term, we remain confident of the underlying strength of our business and believe we are well positioned to deliver sustainable growth to maximize shareholder value. With that, I'll turn it back to Bob for closing remarks.
spk05: Thanks, Laura. We are celebrating the company's 40th anniversary this year. As I reflect on our history, we've taken a great business model and transformed it to be even better, particularly over the past five years. Our purpose is clear and simple. We take care of the families who depend on us. This, combined with our strategic priorities, has built a strong foundation in the way we operate leading to sustainable growth and value creation. We will grow the size and quality of our membership. We will offer unbeatable member experience through our merchandising improvements. We will elevate our digital conveniences to save our members money and time. And we will profitably grow our footprint and strengthen our brand. Above all, we will always deliver compelling value to our members. I'm proud of our entire team, and I'm excited for our future. Thanks again for joining us today and for your support of BJ Solisaw Club. I'll now turn it back over to the operator to take your questions.
spk07: Thank you. We will now start our Q&A session. If you'd like to register a question, please press star followed by one on your telephone keypad, ensuring you are unmuted locally. If you'd like to withdraw your question, you can do so at any time by pressing star followed by two. In the fairness to all participants, please limit your questions to one question and one follow-up. The first question comes from the line of Peter Benedict of Baird. Your line is open. Please go ahead.
spk04: Oh, hey, guys. Good morning. Thanks for taking the question. First, just on the MFI growth, obviously very impressive there. I recognize that 8.6 is probably the fastest growth rate, but as we look out through the balance of the year, just any reason why the dollar number would step down sequentially or should we expect it to continue to grow a little bit? and curious kind of how the robust performance influences your willingness to consider a fee increase at some point this year. That's my first question.
spk05: Thanks, Pete. Morning. Took the first question to get to the fee increase, huh? Look, I think we had a great quarter from a membership perspective. The team's doing pretty impressive things. Signing up new members and... Renewing members, getting them up through the premium tiers. Our field folks have been doing a fantastic job at interacting with our members. We're engaging them nicely as well. So I think we've got a lot to be proud of there. As we said in the prepared remarks, 8.6 was pretty high, and we don't expect that to recur. Most of that increment over our previous trend was just the way the spacing of the clubs last year fell. and how that falls into this year. But with that said, we are slightly ahead of last year's trend, X that, and then slightly ahead of our own plan. So we're pretty pleased with what we're doing and where we're going from a membership fee perspective. As to the fee increase, we haven't really given a whole bunch of thought to it at this point. And so when there's news to share, we'll definitely share it.
spk04: Gosh, fair enough. So my follow-up is on kind of on inventory and merch margins. Inventory looked really clean. I'm just curious kind of your progress there, what maybe you've done to kind of get that in line. And what does that mean for kind of the merch margin path from here, down 50 basis points in the first quarter? You're saying plus 20 for the year. Maybe just help us understand maybe the cadence in 2-2 and then versus the second half. Thank you.
spk05: Sure. Yeah, look, we're pretty happy with where our inventories are at this point. The team's been doing a bunch of work. We frankly weren't happy with our inventory levels last year, particularly from an in-stock perspective. And so the team's done a bunch of work to raise our in-stocks, which are significantly higher today than they were a year ago today, and to find ways to offset those increases in inventory levels. by reducing inventory that, frankly, we don't need. Not inventory that's going to go bad, but just a more efficient way to present and move inventory around. So I think we've got continued upside there. We should be able to raise the in-stocks even further and continue to rationalize the inventory base as well. Obviously, we've got new clubs coming into the portfolio. That drives inventory up a little bit. We're pretty pleased with where we landed for the end of the quarter. And maybe I'll let Laura tackle the margin question.
spk06: Yeah. Hey, good morning. On merch margins, you know, it is as we expected when we guided for Q1, when we gave a little bit of color on it. Largely what happened in Q1 was the transition of our co-brand portfolio last year and lapping that. So we continue to expect that that was a Q1 event only and will not drive margins down as we progress through the remainder of the year.
spk04: Got it. Thanks so much, guys. Good luck.
spk05: Thanks, Pete.
spk07: The next question comes from the line of Kate McShane of Goldman Sachs. Your line is now open. Please go ahead.
spk01: Hi, good morning. Thanks for taking our question. Last quarter we had asked you about the promotional environment and pricing, and I think the answer at the time was maybe the environment was a little bit more promotional, but how are you thinking about it now, especially in the context of pricing actions taken by a competitor and rollbacks from another market? I know you have your competitive price gap, but how are you thinking about that right now?
spk05: Hey, Kate. Good morning. Thanks for the question. Certainly a relevant one. I guess what I would say is others are searching for value, and that's what we in the Club Channel provide every day of the week. There's a lot of space between us and some of our competitors out there, so I'm not sure that We spend a lot of time thinking about what's been in the newslet. We spend a lot of time, obviously, thinking about how we can provide better value to our members every single day, whether that's through pricing, whether it's through promotions, whether it's through the co-brand credit card, all sorts of different things rolling into, I think, a pretty fantastic value proposition for our members. And so we'll just keep sticking to our knitting and making sure we're providing the right day-to-day shelf value and promotional values as we go.
spk01: Thank you.
spk07: The next question comes from the line of Simeon Gutzman of Morgan Stanley. Your line is now open. Please go ahead.
spk09: Good morning, everyone. I want to follow up on the MFI. The spread in MFI growth versus club growth. I think it's been the highest in quite some time. So can you talk about why it was so good in the quarter and then why should it step down from here? And I guess, you know, you'll be opening more clubs, I guess, throughout the year. So just thinking about the timing and why that was so strong. Yeah, good morning, Simeon.
spk05: Thanks for the question. You know, it really has to do with the fact that we opened several clubs last right around the end of the fiscal year. And so we, we didn't, we had signed up a bunch of members in those clubs and didn't recognize any membership fees, uh, really until the first quarter here. And so there, there is that artificial bump. You're absolutely right. That as we, uh, open more clubs in the end of this year, we've got a bunch in Q3 and a lot in Q4 that should serve as a, uh, as an upward force on, on membership fees. Uh, But really, the Q1 number should be the highest. As I said earlier, we're very proud of what we're doing. We are definitely ahead of our plans. But as we sit here and look at the rest of the year, our plan doesn't start with an eight. We'll put it that way. And it's sort of slightly ahead of where we ended last year from a full-year MFI perspective. But, you know, with all that said, we're very pleased. You know, members continue to come in, prospective members continue to come in. They're reacting to our communications and promotions for membership. And, you know, team's doing a fantastic job engaging them when they do interact with us and selling them the appropriate membership for them and, you know, turning them into good members over time. So we're very, very pleased with the progress we're making there.
spk09: And can you share any insight if you take new members that had never been to BJ's before and look across the spend, what they're spending on across categories, and you compare it to an existing member, are you able to see the traction you're making in some of, I guess, the non-food items in that spend, or they typically start with the grocery food and then you get them into the other categories?
spk05: Look, I think there are... two different trip missions when you come to BJ's. One's a grocery trip and one's a general merchandise trip. And we've talked a lot about the fact that we run a fantastic grocery business. That's, I think, in dispute of what we are doing a great job meeting our members' needs for their day-to-day grocery purchases. And we have a tremendous opportunity in expanding general merchandise. I think we've done it in We've had great credibility in general merchandise in certain categories like consumer electronics for a long time. And our aim is really to expand that credibility into other categories. And we talked about the fantastic Q4 results in CE and apparel, really apparel all year long last year. The momentum there has continued in those two categories. We talked about our home business coming alive for the first time in a long time. That's three out of the The four big ones, we've got to get the seasonal business going. I think that's largely weather-related at this point, and we're finally getting some warm weather here in the Northeast, so we should have a good read on that very soon. With that said, we're pleased with the progress we're making in GM to sort of build on the success of the food business. As we look at member spending levels, as we talked about in the prepared remarks, they are increasing, and we're So it looks like we're going in the right direction as we continue to attract new members and bring them into the fold.
spk09: Okay. Thank you very much.
spk07: The next question comes from the line of Robbie Omez of Bank of America. Your line is now open. Please go ahead.
spk03: Oh, hey, Bob. Hey, Laura. I'll give my two questions up front. The, uh, can you, Bob, can you talk about the new market clubs and, uh, you know, how those are doing, you know, versus your expectations. And if there are differences between the more recently open clubs, you know, some better than others, what, what the reason, uh, you're finding, you know, that is, uh, and then the second question is just the, um, the coolers in front of clubs. Um, I probably had missed that, you know, you talking about that before, can you just remind me, you know, what, um, you know, what you're doing there and what kind of driver that is, you know, to COPS?
spk05: Yeah, sure. Why don't we take them in reverse order? The coolers are a part of our fresh 2.0 effort. We talked a lot about that in our prepared remarks today. We spent, you know, most of last year testing in Florida how to make our produce assortment better and how to make members react to it better. And, you know, we learned a lot. We were, I think, good at produce, but not great. And Fresh 2.0 really has put a light on ways to improve. And, you know, it was all across the board, as we talked about. We have really changed our sourcing methodology a bit. We've changed our assortment. We've changed the way that product flows through our system to get it here faster. We've changed our marketing. We've changed signage in the clubs. And then we put these coolers in really as sort of a signpost to get people thinking about it, get people to understand that they should be buying produce from us. We tend to put things in that cooler that are right from a timing perspective. They are priced right. They're fresh. They are at the right time of year. It's been a big win. I wouldn't say it's been a tremendous driver to comps, but it is certainly raising the visibility of our produce to our members. We've seen gains across the produce business as a result of not just the coolers, but the entire Fresh 2.0 effort. We need to make sure that we're giving our members the freshest produce because they're buying it in bigger quantities than they would at a grocery store. we need to give them more days of freshness, give it to them in the right pack sizes, give it to them at the right price. And, you know, Fresh 2.0 is really aimed at all of that. And the early returns are pretty favorable. So we've got a lot of room to run. We haven't rolled it out through the entire chain yet. We need to keep pushing on it. But our members are telling us they like what they see, and they're certainly buying more produce in the clubs that, have undergone this transformation. So we'll keep pushing there. From a real estate perspective, Bill and the team have been doing a great job getting more clubs into the pipeline. We said it's the biggest pipeline we've ever had. That's true by a long shot. We've got a fantastic slate for this year. Back end weighted, as I said earlier. Good slate for next year as well. I guess I would tell you all of our new clubs really since we started opening new clubs again, several years ago have done well and, uh, they've met or exceeded their, their underwriting. Uh, you know, we are, uh, learning how to interact with new members in these new clubs, learning how to tell our story and new markets, uh, learning how to really run a new club in an efficient and effective fashion. Uh, but the, the returns across the portfolio have been, have been great. And, uh, That's why we've got our foot hard on the gas pedal at this point. Do you want to add anything, Bill?
spk10: No, I would just add, Robbie, that last year was a big year for us with entry into the Nashville market, entry into our 20th state in Alabama and in Madison. And we've seen a really good response to our membership in those markets. And as we look forward to this year, It's continued expansion. We'll continue our growth in Tennessee, moving into the Knoxville market with a new club in Maryville that we just announced. And then also great expansion throughout our core. A lot of growth down in Florida. We talked about a couple of clubs in our key New York metro market, including our first club on Staten Island. So as we look out, Bob mentioned our pipeline. We talked about it being the most robust in the company's history at Q4. We've grown it by the pipeline by a bunch of units here in Q1. So it's now even deeper, and we continue to see great results, and we're going to continue to lean in.
spk06: That sounds great.
spk03: Thank you. Oh, yeah. Sorry, Laura.
spk06: That's okay. I was just going to jump onto the cooler comments. And just a reminder, all of that work that we're doing on FRESH 2.0, including the coolers and the comments Bob already made, started with our acquisition of Burris. And so this is something we've been working on for a while. And so we're just starting to see it all kind of coming to the market and really showing our members what that supply chain and acquiring that did for the company.
spk03: Sounds great. Thank you.
spk07: The next question comes from the line of Chuck Grom of Gordon Husket. Your line is now open. Please go ahead.
spk05: Hey, thanks a lot. Good morning. Bob, can you talk a little bit more about general merchandise? You sound really good on CE apparel, but there's obviously other parts of the business that need to pick up the slack a little bit. And I noticed that the overall category, including services, was down 5%. So I guess what's going on in services that's weighing on the category? Thanks. Look, Chuck, good morning. You've got a few things in there. You've got sort of core GM, you've got services and you've got what we call ancillary or other, that's where the co-brand accounting flies through. So that's sort of the biggest drag to make the division negative. Services was slightly negative. We're still pleased with the way the business is working. There's some timing going on through there. We would expect services to be fine in Q2. And GM was very slightly negative for GM. as we talked about really strong results in CE and apparel, continuing that trend, the home business doing really well members reacting to a new assortment there. That's been really the key in, in a lot of these categories, right? Making sure we've talked about this, making sure we have the right stuff on the shelves, making sure it's on trend, making sure it's at the right quality, making sure the value is correct. And, and, and making sure it's simple, quite honestly, I'm part of the, the, The magic here in apparel is reducing the number of brands, reducing the number of colorways in a particular SKU so that the member can easily shop it and understand what we're doing. So we were delighted to see the home business come alive. That was one that we thought was going to be harder to fix, and we are by no means done, but certainly the stuff that we have developed done in that category so far have resonated with our members. And seasonal, this quarter is very highly weighted. As we get into this summer seasonal time of year, it becomes such a big part of our business that the cruddy weather in the Northeast really had a pretty ugly impact on that category and because it's so big on the overall calculation for a core GM. But as I talked about in the prepared remarks, in our southeast clubs, or actually all those clubs with warmer weather, we saw a 10-point differential positive comps from north to south. So we're pretty confident that as the weather starts to turn here that that stuff will turn on, and we'll get back to positive comps in GM in the second quarter. Okay, that's good to hear. And then, Laura, just on the core gross margins down 50, it sounds like that was all Capital One related. So as we look ahead to Q2 through the balance of the year, can you talk about the drivers of the upside on the gross margin line? And if you could tie in your CMP work, skew rationalization, and other efforts that help you get there. Thanks.
spk06: Yeah. Hey, good morning, Chuck. Look, I think you got... part of the answer there. So two things I would say, right, we think 20 BIPs for the full year is still a good number. How does that come? That comes from the work we started doing and talked about at year end with CMP. So that's really looking across categories at assortment and making sure we have the right value, the right assortment on the shelves to deliver that to our members. So a little bit from that. And then we continue to work on our own brand efforts. And so we're really happy with the progress we've made there. Longer term, we continue to think that 30% penetration is in sight. And so some of that gross margin expansion will come from the work we continue on that. In the prepared remarks, we talked a little bit about storage bags, trash, and paper that continues to do really well for us. And that's what gives us excitement about the remainder of the year and as we continue to progress on those efforts.
spk00: Great. Thank you.
spk07: The next question comes from the line of Greg Malish of Evercore ISI. Your line is now open. Please go ahead.
spk13: Hi, thanks. It sounds like gas profits came down in the quarter. Is that alleviated, or could you update us on where we are penny profit?
spk05: Yeah, good morning, Greg. Certainly it was a tougher quarter from a profitability perspective in gas. So despite pretty significant gallon growth and market share growth, we're very proud of our members continuing to react to our great value every day in that segment of our business. Being up six on top of a big number last year at the same time, we've been growing market share for a couple of years there now in leaps and bounds. So we'll take that all day long. As you know, we typically sell out of gas every day. And so in a rising cost environment, like we saw in Q1, we are constantly putting more and more expensive gas in the ground versus our sort of normal everyday competitors who sell far less volume than we do. So it compresses margin in rising cost environments. That's exactly what we saw in the first quarter as oil and gasoline costs rose pretty significantly. precipitously given what's going on in the world. That has gotten a bit better here in Q2 so far. While Q1 was below our plan by, call it a couple million dollars, a few million dollars, Q2 so far is better. Gas is impossible to predict. We don't try and do it quarter by quarter. We can tell you with reasonable certainty a year And as we sit here today, our plan for the year is still a good one. We have not changed it. We're still confident we can continue to grow the business. We're still confident we can continue to grow the interaction of our gas business with our core business and get folks from the pumps into our clubs. And we're still confident that it's a profitable part of our business and will drive our bottom line as well.
spk13: That's great, Bob. I guess my follow-up would be back on margins. I think, Laura, you said the gross merge margin from the credit card changeover was mostly but not all down because of that. Could you help unpack the rest of the credit card changeover and how that's impacting the top line margin SG&A?
spk06: Yeah. Good morning. So you're right. depression of the Q1 March margin rate was largely driven by lapping of co-brand. There is a component of it that is dragging down comp in the first quarter slightly. As I said before, that dissipates as we go into the remainder of the year. As we look at Q2, Q3, and Q4, we expect that there won't be any disruption from the lapping of co-brand, and it will be really core business marked margins. Again, like I already talked about, we expect that those will grow over the course of the year, about 20 bps, largely from our CMP efforts. and own brand penetration and all the great work that our merchants are doing, thinking about value and assortment that we offer to our members every day.
spk13: And just as a reminder, last year that switch was, the impact this year I think is roughly a third of what it was last year, at least on the top line. I have that in my notes somewhere, but I want to make sure I got it right.
spk06: So the transition was last year, first quarter. I don't know that we've quantified the number, but again, we'll kind of lap it and it's a non-event for the remainder of the year.
spk13: It laps and then it comes down. All right, that's great. Thanks and good luck. Thanks, Mike.
spk07: The next question comes from the line of Mike Baker of DA Davidson. Your line is now open. Please go ahead. Hi, Mike. Your line is open. Please check you're not on mute.
spk11: My bad. I'll ask the sort of monthly cadence question. Can you talk about your trends throughout the quarter as the weather gets better here in the Northeast? Do you lose that business when the weather was bad or does that business come back? And then follow up, I'll ask up front, the dumb message is comps get better as we go through the year because comparisons are easier. And you talked about some things like that co-branded credit card pressure going away. Is that a correct assumption that comps should get better throughout the year? Thanks.
spk05: Good morning, Mike. You're pretty correct. Comps will get better throughout the year. That's the way we planned it. Part of it is the core brand rolling away. Part of it is easier lapse. Part of it is progress, frankly, as we build a better business through things like Fresh 2.0 and general merchandise and signing up more members. As we talked about, we should get towards our long-term algo at the end of the year where We knew this quarter would be a dogfight lapping 10 points of inflation, and that's certainly true. Our 0.6 comp was a bit better than our plan, so we were happy with that. And I would imagine we see some progress from here as the year plays out. I forget the follow-up. Monthly cadence. There weren't huge differences. I will tell you March was lower than February and April. I think that's no surprise given what we've all heard from everybody else who's reported. Ours was definitely in that same place. As we look at the GM business, I don't want to belabor it, but we do think it's weather-sensitive categories that have I've driven it down. It's still very early in the summer seasonal year, so I don't think we've really lost any sales. I just think people wait until it's not 50 and raining. There's no need to buy a patio set when it's raining outside. I do expect we'll see that business pick up in the second quarter. This week's been nice in Boston, so hopefully May is a
spk02: end it on a strong note yeah i appreciate that thank you all right mike thanks the next question comes from the line of edward kelly of wells margo your lines are open please go ahead yeah hi good morning guys um i wanted to start uh just first the clarification um around around membership see growth this year? Bob, I think you mentioned that you expected maybe be a little bit above, you know, sort of last year when all is sort of said and done. But is that the exit rate that you're talking about? Is that full year? I'm just trying to get a better gauge of like the step down from Q1 there.
spk05: Yeah. Good morning, Ed. Thanks for the question. I was giving you commentary on the full year rate. So, you know, we were We were six and change for the full year last year. We are slightly north of that in our current version of the plan, you know, but below the Q1 number.
spk02: Got it. Okay. And then second question for you around income cohorts. I think I heard you say on the call that your lower income cohort was positive better than it's been, you know, kind of in a while. That's not something I think we're hearing sort of elsewhere. Can you just talk a bit more about what you're seeing from that customer? Is that lapping a SNAP? Are you seeing incremental share gain? Just curious as to what you're seeing there. Thank you.
spk05: Yeah, look, I think we're seeing share gain there. You know, we've talked about a couple things over time. Those folks have always been very sensitive to the direction of government benefits. When they got more, their spending would go up. When they got less, their spending would go down. That's largely not been the case with us in the last year or so. They have been spending more of their non-government benefit wallet with us, which we've frankly had never seen before last year. So that tells me we've convinced them that we are a destination for them. We can provide them the right value. And they need the value more than anybody else. So we're particularly pleased after a couple of quarters of total spending in that cohort going down that that spending has turned back around to be slightly positive. I don't think it's a huge source of growth given the number of dollars in their wallet, just to be fair about it. But we're very pleased that they continue to come to see us. Their trips are holding in there nicely. They're putting the right stuff in their basket, and hopefully they continue to do that. We're very pleased with their behavior so far.
spk02: Okay, thank you.
spk05: Good.
spk07: The next question comes from the line of Chuck Cheranovsky of North Coast Research. Your lines are open. Please go ahead.
spk12: Good morning, everyone. Bob and Laura, if you go back to the gross margin line again, you talked about units improvement. Does that reflect an increased number of clubs as well as average lower retail per item purchased?
spk05: Hi, Chuck. When we talk about units, it's comp units, right? So units in our comp base. So new clubs would be excluded. It's really a good measure of, you know, what our member base is thinking about. They're certainly, you know, looking for value at this point. And they're coming to see us. So I think it's a good mark of share of wallet, you know, how much we're picking up there. You know, we certainly have a tough lap from an inflation perspective. And so if that continues, gain and share continues and the inflation lap wanes, I would expect comps to grow from here. So we're pleased with the unit behavior and, frankly, the traffic. I mean, running three points of traffic quarter on quarter is a fantastic look at the momentum we have in the business.
spk12: And when you're talking about own brands, business, can you quantify the pickup in that? What impact that had on the sales comps simply because the merchandise is priced lower?
spk05: Yeah, look, it's usually a drag on comps. Certainly, there are cases where members are getting into a new category for the first time. We talked about that in the prepared remarks with our food storage bags. But a lot of the own brand increase is just switching from brands, given they tend to be 30% cheaper. So just remember that calculus, right? 30% cheaper than the brand. And there are about 1,000 basis points more accretive to us from a margin perspective. you know, for every percentage point of growth tends to be a little bit of a comp headwind, but it tends to give us 10 bips of margin rate growth as well. So, you know, you're not going to see the own brand business really in the comp all that much. You're going to see it in margin. You're going to see it in repeat shopping, renewal rate, member satisfaction, that kind of thing.
spk12: Thank you. Good luck for the rest of the year.
spk05: Thanks, Chuck.
spk07: This now concludes our Q&A session, so I'd like to hand the conference back over to Bob Eddy, Chairman and CEO, for closing remarks.
spk05: Great. Thank you. Thanks for your time this morning, everybody. We are very proud of the results we reported to you this morning, and we've got tremendous confidence in our business going forward. I wish you all a great summer, and we will talk to you at the end of the second quarter. Thanks so much.
spk07: This concludes today's conference. You may now disconnect your lines.
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