BJ's Wholesale Club Holdings, Inc.

Good morning, all, and thank you for joining us for the BJ Wholesale Club Holdings Inc. Fourth Quarter Fiscal 2024 Earnings Conference Call. My name is Carly, and I'll be coordinating the call today. After the company's remarks, there'll be a question and answer session. In fairness to all participants today, we ask you to limit yourself to one question and return any additional questions to the queue. I'd like to hand over to your host, Cathy Park, VP of Investor Relations. The floor is yours.

Good morning, and welcome to BJ's Fourth Quarter Fiscal 2024 Earnings Call. With 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 we may make forward-looking statements on this call that are based on our current expectations. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from what we say on this call. Please see the risk factor sections of our most recent SEC filings for a description of these risks and uncertainties. Please also refer to today's press release and latest investor presentation posted on our investor relations website for our cautionary statement regarding forward-looking statements and non-GAAP reconciliations. With that, I'll turn the call over to Bob.

Good morning, everyone. Thank you for joining us. This morning, we are proud to report terrific results with fourth quarter comps and profits that were higher than anticipated. Fiscal 2024 was another milestone year for us, marked by record net sales, membership, and adjusted earnings per share. We consistently drove robust traffic and market share gains both in our clubs and at our gas pumps. These results are a testament to our team's dedication to delivering exceptional value to our members, as well as outstanding execution of our strategic priorities. Membership is at an all time high above seven and a half million members with another impressive renewal rate performance of 90%. Our merchandising initiatives and digital conveniences are driving greater member engagement. And our new club performance is proof of the power of our accelerating expansion strategy. Our investments in the business are bearing fruit and we are confident in our ability to grow long term. In the fourth quarter, Our comparable club sales, excluding gas sales, grew by 4.6%. We are pleased with the continued strength in traffic, which contributed over three percentage points to our comp in the quarter. This was our 12th consecutive quarter of traffic growth. Growth in units also drove increased basket size. Our perishables, grocery, and sundries division delivered over 4% comp growth in the fourth quarter, with perishables leading the way. Our strength and perishables has been a recurring theme all year as more members make us their weekly destination for quality essentials, such as produce, dairy, and meat. Our general merchandise and services division comps grew by more than 5% in the fourth quarter, outpacing our consumables business for the first time since the pandemic. Our refined and expanded assortment in our gifting categories built on last year's success. This approach amplified our broader GM offering and drove strong member engagement, especially during the holiday season. Notably, consumer electronics produced high single-digit comps in the quarter, led by video games, tablets, and audio. We're proud of this performance in light of the industry's soft performance. Toys led our seasonal sales with low double-digit comp growth in the quarter. As you know, we significantly improved our toy assortment last year, offering top brands at great value. And we further leaned into that strategy this year. In apparel, our fantastic children's assortment drove the growth, supported by the cold winter weather. We know there's still more to do in general merchandise, but I'm proud of the team's continued progress in differentiating ourselves and growing this important part of our business. Our four strategic priorities are critical to our long-term growth. As a reminder, these priorities are improving member loyalty, giving our members an unbeatable shopping experience, delivering value conveniently, and growing our footprint. Let me touch on our progress in each. Membership is the cornerstone of our business. We reported another record membership year with full-year membership fee income increasing by 8.5%, and our renewal rate remaining strong at 90%. Over the past couple of years, we enhanced our credit card program, invested in a gas discount for our Club Plus members, and most recently, added benefits for Plus members by giving them two free same-day deliveries every year. As a result, we are growing overall member counts and upgrading more members into our higher tiers. Higher tier membership penetration is now nearly 40%. We have much to be excited about in membership, but perhaps our greatest achievement in recent memory is the ability to consistently grow members in comp clubs. This has been years in the making. We enhanced our tools and strategies around member acquisition to open new avenues for growth. Our focus on post acquisition engagement and member retention has been critical to maximizing lifetime value, alleviating the pressure of replenishing churn. Our strength in membership is what gives us confidence in our ability to sustainably grow the business long term. We're focused on maintaining this strength in the future. Our thriving membership is also a direct reflection of the unbeatable shopping experience we aim to deliver at BJ's. Simply put, satisfied members are more likely to renew. That's why our merchandising strategy is deeply rooted in providing the best value for our members. A strong pricing position is fundamental to our value-driven model. Our advantage structure allows us to consistently offer up to 25% better pricing than our grocery competitors, and we are relentless in maintaining this edge. While pricing is crucial to delivering great member experiences, the value we provide extends beyond cost, encompassing a highly curated assortment and digital convenience. We're enhancing our assortment across the entire box. As I mentioned earlier, we're making significant strides in improving our general merchandise business and strengthening the treasure hunt at BJ's. Our category management process introduced a more rigorous member-centric mindset to our assortment planning strategy. We also continue to innovate our own brands, offering high-quality products at significant savings to help members stretch their budgets. Our own brands comprise 26% of our merchandise sales in fiscal 2024. and we remain on track to ultimately reach our goal of 30%. Finally, our fresh initiatives have sparked meaningful produce demand since the full rollout in the second quarter. We launched Fresh 2.0 based on a simple yet powerful observation. Members who rely on BJ's as their primary fresh destination are among our most loyal members. As a result, we believe that winning more members fresh produce shop would lead to greater trip frequency and larger overall baskets. Our fresh 2.0 journey started with gaining full control of our perishable supply chain several years ago. From there, we enhanced every aspect of our produce business, from logistics and team member training to in-club presentation and marketing. Our efforts have boosted our credibility in fresh, exhibited by our double-digit produce comps in each of the past three quarters. In fiscal 2024, our fresh business grew at a rate that was 10 percentage points greater than the rest of the market. While our performance in produce alone validates our work, we are especially encouraged by the positive ripple effects on overall member behavior. Early indications since launching Fresh 2.0 show that tenured members who are completely new to buying fresh produce at BJ's are making more trips and, on average, shopping across four more categories than they have in the past. said differently, our members who are new to fresh produce are beginning to trend toward the same strong behaviors as our most loyal members. It's still early, but we're pleased with the initial results and inspired to broaden our efforts beyond produce to bring even greater value to our members. We are also winning in digital conveniences. These have fueled double digit digitally enabled comp sales growth each year for the past four years. In the fourth quarter, digitally enabled comp sales grew by 26% year-over-year and 53% on a two-year stack. Today, our members have multiple ways to save time in addition to money with BJs, such as Bopick, curbside, pickup, and same-day delivery. Our mobile app supplements the shopping experience when members are in our clubs, allowing them to clip and use coupons digitally, identify the location of products they need, and skip the lines with Express Pay Checkout. We enhanced the app experience to foster member engagement in between trips as well, incorporating personalized messaging, product returns functionality, an AI-powered search engine to facilitate shopping list creation, and other touch points to prompt the next BJ's visit. Today, about 60% of members engage with us digitally in some shape or form. And while Bopick has historically been the largest contributor of our digital growth, member adoption rates for express pay and same day delivery have also been growing nicely to add more profitable growth to the business. As members increasingly embrace our digital conveniences and reward us with their spending and loyalty, we will continue investing to drive lifetime value. Finally, we are making meaningful progress on our real estate strategy, having opened seven new clubs and 12 gas stations in fiscal 2024. We opened our 250th club in Louisville, Kentucky at the end of the fourth quarter, marking entry into our 21st state. Since the end of our fiscal year, we have opened two additional clubs in Brooksville, Florida and Myrtle Beach, South Carolina. We expect to open our new club in Southern Pines, North Carolina this Friday, and clubs in Whippany, New Jersey and Staten Island, New York will follow in the coming weeks. While some of our plans 2024 openings slipped into the early days of fiscal 2025, our growth agenda remains robust, and we ended the year with the largest pipeline of approved new clubs in the company's history. Inclusive of our five new units in the first quarter, we expect to open 25 to 30 clubs across the next two fiscal years. The performance of our new clubs continues to be strong. with clubs opened since 2020 contributing to comp sales at a rate of over two times the chain. This performance continues to give us confidence in our growth plans and our strategy of bringing the value of a BJ Solso club to communities in our existing and adjacent geographies in order to serve new members who are tired of paying high grocery store prices. We recently announced our plans to build a fourth ambient distribution center. We've grown meaningfully over the years, both organically and with new club openings. Our new DC is strategically placed to drive efficiencies in our current footprint while supporting our continued expansion. Over the past two years, we've expanded into Tennessee, Alabama, and Kentucky. In 2026, we have plans to enter Texas in the Dallas-Fort Worth region. DFW is a high-growth market with favorable demographics. There's intense competition as well, but we're confident that our strong offering and value focus will resonate with the broader community. We are eager to serve the families in this exciting market soon. As we assess the health of the consumer today, members remain highly value conscious and especially discerning in any discretionary purchases, as we've seen all year. In these times, members are relying on BJ's as their one-stop shopping destination. as exhibited by the growth in spend and trips across all income levels in the fourth quarter. We expect these dynamics to continue into fiscal 2025, and our teams remain vigilant and ready to navigate the uncertainties that the year will certainly bring. We have an enduring business model that wins in both good times and in times of uncertainty. I'm confident that the advantages inherent in our business combined with our focus on our long-term priorities, continue to position us well for the future. Above all, I'm grateful for our team members who bring our purpose to life every day, taking care of the families who depend on us. I look forward to continuing this journey with you as we grow the company together. I'll now turn it over to Laura to provide more details on our results and outlook for fiscal year 2025.

Thanks, Bob. Net sales in the quarter were $5.1 billion, increasing 5.4% year over year on a comparable 13-week basis. Merchandise comp sales, which exclude gas sales, increased by 4.6% year over year, led by traffic. We delivered strong traffic and comp unit growth all year, which we believe serve as a testament to members finding significant value in their BJS membership. Total comparable club sales for the fourth quarter, including gas sales, grew 4% year-over-year. Lower retail gas price per gallon was partially offset by our market share gains, with our comp gallons growing 3% year-over-year in the quarter. This compares to continued year-over-year volume declines across the broader industry in the U.S. Digitally enabled comp sales for the fourth quarter grew 26% year-over-year, contributing significantly to our overall growth. Over 90% of our digital sales are fulfilled by our clubs with services like Bopick, Express Pay, and Same Day Delivery, which remain meaningful drivers of our digital growth. Over 60% of our members are now engaging with us through our app today, which we have grown steadily over the past several years. We will continue to leverage our digital conveniences to drive member loyalty in the future. Membership fee income, or MFI, grew 7.9% to approximately $117 million in the fourth quarter, led by strong membership acquisition and retention across the chain. Our MFI in the quarter included minimal impact from our fee increase that went into effect January 1st, 2025. Fourth quarter merchandise gross margins decreased by approximately 10 basis points year over year. Our members trust us to deliver outstanding value and we continue to manage our margins prudently to maintain that trust in a dynamic cost environment. While our category management process is yielding profitable growth across broader assortment, our continued strong fresh produce performance and rising costs in products with outsized impacts to our members, like eggs, contributed to our margin rate for the quarter. Our top line growth affords us the flexibility to invest in our position of strength, and we will continue to manage the business for long-term success. SG&A expenses for the fourth quarter were approximately $758.2 million, The year over year increase was primarily due to our new unit growth and other investments to drive our strategic priorities. As a result of the company's performance this year, incentive compensation was also higher on a year over year basis. In our fuel business, fourth quarter profit per gallon normalized from last year's higher levels. This resulted in lower year over year gas profits as expected, partially mitigated by strong gallon growth in the quarter. All in, we reported fourth quarter earnings per share of 92 cents. Adjusted earnings per share for the quarter was 93 cents, including an effective tax rate of 26.3% driven by unplanned tax windfall. Our fourth quarter performance reflects our strong membership and traffic merchandising improvements, and digital conveniences, all reinforced by our investments in the business to drive long-term growth. I'd like to remind you that last fiscal year's results included an extra week, which contributed approximately $350 million of net sales and approximately 10 cents of earnings per share. Let's move on to our balance sheet. We ended the fourth quarter with absolute inventory levels up 4% year over year and approximately flat on a per club basis. In stocks also improved year over year thanks to our team's great work in allocating the right amount of product to the right clubs at the right time. Our capital allocation strategy is consistent with our historical framework as we continue to take a disciplined approach to maximizing shareholder value. We believe the best use of cash is applying it towards profitably growing the business. As such, investments to support membership, merchandising, digital and real estate initiatives continue to be funded by our cash flows and enabled by our strong balance sheet. We ended the fourth quarter with the lowest levels of debt since our IPO, no near-term maturities and half a turn of net leverage. We also continued to return excess cash to shareholders. In the fourth quarter, we repurchased 645,000 shares for approximately $62 million. Capital expenditures were approximately $588 million in fiscal 2024, supporting our growing real estate pipeline. Approximately $16 million was related to our new highly automated ambient DC that will aid our footprint expansion strategy and drive efficiencies in our broader supply chain. We expect our new DC to cost approximately $200 million in aggregate over the next two years. Turning to our outlook for fiscal year 2025. Our business, like the broader industry, continues to face economic and geopolitical geopolitical uncertainty, and unpredictability in conditions that influence costs. Despite the pressure on consumers and operators alike, we remain confident in our drivers of growth that are within our control, keeping us cautiously optimistic about the year. We will leverage our model and remain focused on our long-term priorities to deliver great value to our members and drive continued traffic and market share gains. Starting at the top of our P&L, we expect to grow our fiscal 2025 comp sales, excluding gas, by 2% to 3.5%. Our guidance aligns with the long-term ALGO of our low to mid single-digit growth while acknowledging the macro uncertainties impacting consumer behavior. We are proud of our achievements in membership, which has performed better than ALGO last year. Our long-term framework for MFI has not changed at mid single digit growth, but we do anticipate MFI to outpace that goal in fiscal 2025 due to the fee increase. Please also remember the accounting considerations as the roughly $20 million of fee increase impact will build through fiscal 2025, benefiting Q1 the least and Q4 the most. From a margin perspective, we continue to exercise strong cost discipline and leverage merchandising strategies such as our own brands to drive improvement in our gross margin profile as we deliver exceptional value to our members. Moving on to SG&A, a few reminders. First, we expect to reinvest the fee increase related MFI into our value prop. Much of this will be in the form of team member wages and our new plus-tier benefit of free same-day deliveries, both of which will impact our SG&A line this year. Please also remember we are lapping the approximately $20 million benefit from the net impact of legal settlements in the third quarter of last year. Finally, we continue to expect slight deleverage in our SG&A Deryn Thomas, driven by our accelerated new club openings, particularly with continued outside growth in depreciation, as we opt to own more of our clubs that we open. Deryn Thomas, We are planning for an effective tax rate of approximately 27% for the year, with the lowest rate in the first quarter, which we typically see stock compensation related windfall. Putting all of this together, we expect to deliver adjusted EPS in the $4.10 to $4.30 range. Rebasing last year's SG&A to exclude the net legal settlements impact would imply us making considerable progress in getting closer to our long-term EPS ALGO this year. Given the evolving landscape, we are not contemplating the impact of tariffs on our current assumptions. Tariffs could shape the trajectory of inflation and broader consumer demand and ultimately influence our results for the year. As Bob mentioned earlier, we believe BJ's is better positioned than most retailers to weather times of uncertainty. This is due to our strong focus on delivering value to our members. In fiscal 2025, we expect capital expenditures of approximately $800 million the majority of which will deploy towards this year's new club and gas stations. This also includes investments in our pipelines for future years, including Texas and our new DC that we mentioned earlier. Longer term, we remain confident in the underlying strength of the company, as we believe we're well positioned to deliver sustainable growth to maximize shareholder value. Before I hand it back to Bob, I'd like to thank our team members for their continued dedication to our company, purpose, and communities, and their contributions to another great year. Bob, back over to you.

Thanks, Laura. We've transformed our business over the years, investing in the best talent to execute our strategic priorities and deliver increasing value and convenience to our members. Our membership is reaching new heights. We have a lot of exciting merchandising initiatives in motion to take our performance to the next level. Our digital business is contributing profoundly to our growth as we help members maximize both cost and time savings. We're applying our new playbook to successfully open new clubs and profitably grow our footprint. We are at a pivotal point where our efforts across each priority are coming together to deliver tangible results, and we're excited. Our phenomenal progress validates our ongoing investments in the business. We know we're on the right path for the future, and we're focused on keeping the momentum going. Thanks again for joining us today and for your support of BJ Solso Club. We will now take your questions.

Thank you very much. We now have to open the lines for Q&A. As a reminder, we ask all participants to limit themselves to one question and return any follow-ups to the queue. If you'd like to ask a question, please press star followed by one on your telephone keypad now. If you'd like to remove yourself at the line of questioning, it will be star followed by two. Our first question comes from Edward Kay of Wells Fargo. Edward, your line is now open.

Yeah, hi, good morning, everyone, and nice quarter. I wanted to start on the comp and the outlook. I guess, you know, first, maybe could you provide a little bit more color around, you know, the cadence of the comp throughout the fourth quarter, and then, you know, I think more importantly, you know, how you're looking at, you know, 2025, given the implied slowdown. I'm curious around what you're seeing so far in Q1, how you're thinking about, the cadence of the year and then how you factored in some of the variables that are out there that are obviously uncertain.

Hi, Ed. Thanks for your question. Before I get going, thanks for everybody's attention and for your support of our company. We had a great fourth quarter, as you see in the results. and uh couldn't be more proud of the team for uh pulling together and putting those results out there for for our members most particularly uh you know the the comp cadence through the quarter uh was strong throughout november december were very good months for us and january was our strongest month so uh you know really no uh no no concerning trends in the quarter and Very, very strong traffic, as we noted in the release and in our prepared remarks, finishing out our 12th consecutive quarter of traffic growth. I'll let Laura talk a little bit about any context she wants to give on 2025 quarters. But I guess what I would say about the performance thus far in Q1 is we've seen that traffic momentum continue in our business so far. It's obviously early. And we've seen a little bit more sensitivity to discretionary purchasing, and I think that just goes to the uncertainty out there that's coming from the news headlines. But we're very, very pleased with our membership trends, with the traffic coming out of that, and with the greater assortments being put on the shelves by our merchants and And I'm sure at some point in the call here, we'll talk about our digital business, but that was screaming hot in Q4 as well. So we're very pleased overall.

Yeah. Hey, Ed, maybe I'll give you a little bit of color on the cadence and how we're thinking about the year. So I think the first half will be a little bit stronger than the second half, how we're looking at it right now. Like Bob said, and we said in the prepared remarks, there's a bunch of variables out there. But the business right now is trending quite well from a traffic perspective. And so that's kind of how we're looking at it.

Thank you.

Thank you very much. Our next question comes from Robbie Ohms of Bank of America. Robbie, your line is now open.

Oh, hey, Bob. My first question, I know there's not a lot you're going to say about tariffs, but can you just sort of remind us how you managed it last time and why it could be similar or different this time? Can you just give us some context about how you're generally thinking about the tariff risk and then have a follow up?

Yeah, good morning, Robbie. Thanks for the question. Look, here's what I would say on tariffs. You know, we all participate and live in a consumer-led economy, and tariffs, while potentially useful in some regards, are likely to raise prices for Americans. In fact, costs of key commodities are already moving up. Tariffs also risk some supply chain disruption as the market moves production around to mitigate tariff exposures. Here at BJ's, we believe our purpose is to take care of the families that depend on us. We take that honor and responsibility seriously. We work very hard every day to present the best values to our members. And so tariffs and the resulting rise in prices run counter to our purpose and may disrupt consumer spending and the greater economy in general. After all, consumers have tolerated a lot in the last few years. With that said, periods of rising prices and supply chain disruption have often been good for our company. Uh, you know, when consumer wallets are stretched, those consumers search for value, they come to our channel and they come to BJ's. Uh, we also have lesser exposure to tariffs than many retailers out there. And to your point of your question, we have robust muscle around dealing with inflation in our cog space. It's one of the things our merchants do very, very well. Uh, so these structural benefits give us confidence that we can make our way through, uh, the uncertain times ahead. And we will focus on what we do best, and that's delivering outstanding value to our members every day.

Thank you. And then my follow-up is just on the strength of digital. What is primarily driving that? Is it expanded offerings online, or is it just people using their app more when they're shopping the store? How are you guys driving that strength?

Look, it's all the above and more. We start out with just trying to save our members time. They're saving money just by shopping, no matter what they do with us. But we love the idea of making the shop more convenient to our members. The club shop can be kind of a pain in the butt sometimes. You're roaming around a big club. You're lifting up big, heavy things. You're putting those in your car. It's a big basket sometimes. And so anything we can do to make that shop more convenient accrues back to us. Those members that shop with us digitally spend more. They are reinvesting that time with us and putting more things in their basket. And so, you know, the team continues to iterate on our digital business and adding capabilities. You know, the basic services are the same. with BOPIC and curbside pickup and same-day delivery and express pay and online coupons and those things that we've all talked about before. But the way in which we invest in those things continues to get better and better. So you think about our push into same-day delivery as part of the membership changes that we made earlier this year and giving people two free same-day deliveries. that's, again, founded in convenience, right? Trying to get people to save that time with their money. And it's, you know, a simple principle where we can deliver it to your house for cheaper than you can go to the grocery store and buy it. And, you know, then you think about, you know, just changing the way our app and our website work, you know, making sure that people can understand where a particular item is by looking at their app. They know which aisle and which bay in the store it's in. We've fully rebuilt the search functionality in the app so that it is intuitive. You can put in a term like Super Bowl and it will come up with all sorts of Super Bowl snacks and televisions and anything you might need for your Super Bowl party. So the team has done incredible work to just get more and more relevant in this regard to our members. And And our members love it. They tell us all the time that we should continue to invest here, and we will do that in the future.

I think, Robbie, the one thing I'd add on there is, you know, 90% of our digital business is fulfilled through our clubs. And so it's all coming out of our clubs through BOPIC and Curbside and Same Day and ExpressPay. um with which is really part of the structural advantage that we have um not shipping it to homes and and out of clubs it's really our members coming in to see us um and and using those conveniences every day great thanks so much thanks robin thank you very much our next question comes from peter benedict of bed peter your line is not open

Hi, guys. Good morning. Thanks for taking the question. One, just follow up on a previous question, then my real question. The follow up would just be, are you able to frame for us, maybe remind us the exposure you guys have to China, but then also to Mexico, given all what's going on there and around the food business? That would be just the follow up. But then my other question is really just around the new club performance. Obviously, you sound pleased with that. I don't know what else you could share in terms of performance metrics or anything that kind of gives you the confidence in accelerating this growth rate in new clubs over the next couple of years. Thank you.

Yeah, sure. Good morning, Pete. You know, good question on the new club performance. I will mostly take that to Bill if he drives that for us. But let me talk about our exposure to China in particular. It's it's a few percent of our business, right? Most of our business obviously is our grocery segment. And then, you know, about 15, 16% of our business is general merchandise. Only a couple of points of our business is imported directly from China. So that's, you know, markedly different than many other retailers of general merchandise products. And so overall, we believe we have lesser exposure than others who do what we do might have. You know, certainly the exposure to Canada and Mexico is greater given the variety of products that they bring in, and it does touch our grocery business for sure. We don't believe we're differentially affected negatively by any exposure in Canada or Mexico. at this point, and hopefully we're able to figure out our way through those tariffs as well. We'll use that same muscle that I talked about in negotiating with our suppliers, moving things around, doing all the things that we know how to do to buy things at the lowest cost so we can give that value to our members. Why don't we switch over to the new club performance? I'll let Bill talk about it. All I'll say is we're incredibly pleased with the size and quality of our pipeline with the new clubs that have opened so far and we're raring to go on the 25 to 30 that we expect to open in the next couple of years. So with that, I'll hand it over to Bill.

Thanks, Bob. Hey, Peter. Maybe I'll offer a couple points on the new clubs. First of all, for the clubs that we've opened not only this past year but the past couple of years, we're really happy with the performance as a whole. We're well above our plans, both on the top line and the bottom line. And that goes for both the new markets that we've entered as well as the infill market. So across the board, we've seen really great results. And it's really driven by the confidence we have in our model. Bob touched on this a little bit, whether it's the digital conveniences or the value that we're bringing to the members. People want a wholesale club in their community. And we've seen that across the board, again, both in the new markets that we've entered into as well as our existing markets. And it's a little bit, you know, as we think about the real estate game, and we've talked about this a little bit as we've been on the road, the models that we use to identify new markets are changing pretty rapidly as we gain share. And especially when you look at areas where population is expanding as well. Like the convergence of those two things continue to open up more and more opportunities where we see attractive communities for us to bring the value of a BDS wholesale club to those markets. And so, you know, as we look down the road, we highlight today 25 to 30 new clubs over the next two years. You know, we've talked a little bit about, too, you know, the investment that will come with that. The CapEx number that we've shown is a little bit higher than where it's been in the past. driven by both the new clubs and the DCs. But to put that in perspective, we now have probably about close to a billion dollars of real estate on our balance sheet. We've added 10 new clubs onto our balance sheet in the last three years. And over the next two years, we'll add another 16 clubs onto our balance sheet. And so we're using the flexibility we have on our balance sheet to help us be more aggressive on the real estate side. But as you think about that CapEx number, it's really an investment in the future and we'll continue to evaluate, you know, whether we want to continue to hold that level of real estate on our balance sheet or potentially look at opportunities to liquidate it through something like a sale lease back. Um, but the fact that we have the flexibility to go fast and use our balance sheet to grow the company is a, is a great asset that we have. So, um, you know, overall, as we sit here today, we're, we're really excited for the future and maybe the last point I'll make Peter, cause this is probably the most important is, um, The confidence in our growth comes from the culture that we've built. Everyone across the company wants to be involved in the new club process because they see the growth, they see the success, and they see the opportunity that creates for both the new members and the value that it brings, as well as the opportunities for our team members. So it's really that last point, the culture, that may be the most important in all this as we go forward, the muscle that we've built to really drive the success for the long term.

Thanks, guys. Good luck. Thanks, Peter. Thank you very much. As a reminder, if you would like to raise a question, please press star followed by one on your telephone keypad. Answering this upper line of questioning will be star followed by two. And as a further reminder, we do ask all participants limit themselves to one question and return any follow-ups to the queue. Our next question comes from Mike Baker of DA Davidson. Mike, your line is now open.

Thanks, guys. I'll follow up on Peter's question, if I could, for Bill. Have you talked about, and if not, could you point out... How many clubs do you think you can have over time? Is there any hindrance to this being a nationwide concept? You're in 21 states now. Is there any reason why it can't work everywhere? What happens when you're the third player? And you said markets want clubs. There's probably a Costco or a Sam's close there every place where you're opening. But just wondering what the long term can be. Thanks.

Mike, I referenced this in the last question a little bit. As we think about the market in total, our current success across our existing portfolio ultimately drives our models. And as we continue to gain share, we look at our models and we see more and more opportunities for BJs to be really successful in different markets. And so as you think about that opportunity set, whether it's in our existing markets or as we look to adjacent markets and talk about entering a major new market like the Dallas-Fort Worth area, we see opportunities across the board. And we've been really successful. And I think as a company, we've been pretty thoughtful in having measured growth both in our existing footprint as well as we've expanded into adjacent markets. And I think that's what you can continue to expect from us. And so, you know, as we look at long-term everything from, you know, the Bob and Laura, and we've talked about today from our, our share growth to, you know, our fresh business to our, our digital business, which is, um, really transforming how members in new markets think about the club business. Um, it all points towards the ability to be really successful with our growth over the long-term.

Yeah. Mike, I'll just add onto that. The SharePoint is really important and it's not just, it's not just us gaining share, but. the whole club industry is gaining share. And that's really because consumers are tired of paying high grocery store prices. And so we are trying to be prudent with how we allocate capital and not get out over our skis, despite the big CapEx number that we have in the budget for this year. We could try and grow even faster, but to do it all out of free cash flow is our goal. But we continue to see opportunities in almost every market that we look at. going forward. So we'll continue to do it in a reasonable and rational pace, but there's nothing that we see today that would tell us to slow down.

Thank you.

Thank you very much. Our next question comes from Oliver Chen of TD Cowan. Oliver, your line is now open.

Hi, Bob and Laura. As we think about the comp guidance, You had really nice general merchandise momentum. What's embedded in terms of the general merchandise as well as thoughts on fresh momentum and then overall pricing within the comp guidance? The new store commentary is very helpful as well. I would love your thoughts on how new store productivity is trending with the latest vintages relative to present and any strategies or learnings as I know you have initiatives around optimizing the new store openings as well. Thank you.

Sure. Good morning, Oliver. Listen, the comp was very strong in Q4. As we've talked about, we had traffic and unit growth for the year and lots of good participation in our fresh business. And then GM really shined in the fourth quarter on top of a good Q4 last year. I feel like across our business, we're seeing progress and momentum from a merchandising perspective, putting the right stuff on the shelves, making sure that our pricing is where it's supposed to be, communicating those things effectively to our members through great storytelling, great visual merchandising, great promotional efforts. And I don't see any of that changing. Certainly the outside world could change on us a little bit. I don't think that means really anything bad for our grocery business. It could soften consumer demand for discretionary items and maybe hold back our general merchandise growth a bit. But even there, we're not slowing down on the efforts to continue to modernize and brighten our general merchandise assortment. As you know, that's the emotional part of the shop. That's the treasure hunt part of the shop. Uh, people love to wander around and see things. And for years we, we, uh, we didn't give that opportunity to our members as well as we could have. And the team's doing a wonderful job today, putting things out on the floor that it's fun to look at. It's fun to shop. It's, it's, it's great stuff to put in your basket when you're there on your grocery shop. And, and we're trending towards, you know, becoming a general merchandise destination again. We saw that certainly in toys and gifting this year in Q4, uh, So I'd love to see that continue. We certainly have the effort and the expertise to allow it to continue. And we'll just continue to focus on what we can control and provide the best assortment at the best value to our members every day. On the new club performance, I feel like we've sort of answered that question. I think the incremental thing that I'll say that probably gets at the heart of your question on is there further room to optimize the new club model? The answer to that is absolutely yes. You know, we are in a great place relative to our not so distant past from a new club opening perspective. We have figured out how to do it effectively. We've figured out how to get new members in those clubs to build excitement in front of a launch, to get it open and looking great, to operate it effectively afterwards. But we operate it at a somewhat lesser efficiency than an established club. It builds its way into its cost base over time. That's what the team is working on now. Are there ways to grow membership and sales even faster? Are there ways to minimize payroll as it grows or to better match payroll to the sales trend? Are there ways to better match other expenses to the sales trend, importantly, without disrupting that growth of the sales trend over time? uh, we're, we're really pleased with where we are certainly opening. I don't even know how many we've opened since 2018, but it's gotta be a little bit more than 30, uh, to be able to open potentially another 30 in the next two years, uh, you know, should highlight our confidence, uh, in, in the program. Uh, but we're by no means done. We, we really, uh, want to continue to build the best BJ's clubs, uh, and the best chain, uh, for our members. And, And Bill and his team and teams across the company have really done a great job doing that, but we're, we're not done at all. Yeah.

I'll just add onto that. And Bob mentioned it. I touched on earlier, the team and the culture. And, um, I feel like that we've gotten really, really good about how we open the building and, um, and there are continued opportunities in terms of how we optimize it. So as a team, we talk about how do we drive the club to its mature run rate as soon as possible. And this is where, again, team and the culture, as we think about the lifetime value and the things that drive that for new members, especially in new markets. Something like digital, we spend an inordinate amount of time in the new markets trying to get people engaged in the app, engaged in express pay, engaged in digital coupons, engaged in curbside to drive those behaviors that we know will drive value over the long term. And even something like our partners at Cap One have been tremendous in helping us think about how to drive credit card adoption in new clubs. as we know that drives long-term lifetime value. So again, there are a ton of opportunities that the team are working on, but, um, you know, we're proud of what we've done, but more to go do.

And we can see it. We can see it in every new club getting a little bit better. I mean, the one that we opened, um, uh, we could go in, in, in Merrill beach, uh, I think was the best new club opening I've ever seen. Uh, you know, if Ryan and the team or anybody from the team are listening, you know, congratulations to you guys. It really. It looked special. And I noticed that 10 feet inside the door, there was just something a little extra about it. And that's this idea where we know we're not done. We know we can get better. We know we want to present a wonderful experience to our members. And we just keep grinding on it and getting better and better.

Congrats on the innovation. Best regards.

Thanks, Oliver. Thank you very much. Our next question comes from Chuck Grump of Gordon Husket. Chuck, your line is not open.

Hey, thanks very much. Good quarter. Bob, can you talk about the success of Fresh 2.0 and the maturation of that effort? And maybe talk about the basket size before and after, say, in the state of Florida, where I believe you first rolled it out. And then, Laura, you talked about the comp phasing throughout the year. Is there anything on the earnings side that we should be mindful of as we build out our models? Thank you.

Yeah, good question, Chuck. Why don't we just take them in order here? You know, look, Fresh 2.0 has been really sort of an unmitigated success so far based on a simple idea that, you know, our best members interact with our produce category. And if we can get more people into that category, we might get more of those best members. And Importantly, and probably not surprisingly, those best members visit us more often. They put more things in their basket. They renew at markedly higher rates. They interact with categories all over the building, not just our fresh categories. The idea behind Fresh 2.0 is really to take a good business and make it great. We feel like we ran a good produce business, but we could all spot opportunities as we walked around. The product selection and the execution, the way we promoted, the way we communicated, the way we displayed things, making sure that we get things as fresh as possible to the clubs. And it's been a long time in the making, right? It was part of the reason why we decided to buy our partial supply chain from our former partner, who was wonderful to us. But we knew we wanted to do it a little bit differently and tilt it more towards freshness. And we spent forever resourcing tons of produce products. We spent forever training our team across the building, not just in the back of the club, but across the building in what a great produce experience looks like and what it takes to get there. And again, we're not done. We continue to try and improve that offering, introducing new SKUs, making sure they're the right SKUs, making sure they're the right pack size, making sure we have the right price on things every day. Uh, and, and we started to, uh, we started to really see it pay off. You know, the, the, um, uh, the, the test clubs in Florida last year, uh, obviously showed, uh, you know, a great growth in the perishable business, but they started to show overall traffic growth in the box. And that's what pays the bill. Uh, the, the, the traffic growth and the increased purchasing in produce just, just pays for our, the supply chain and the training and all those types of things. We need to get traffic in the rest of the box to really get a return on all the investment we're putting in there. And that's what we saw in the test clubs, and that's what we're really beginning to see in the chain now. So we're looking forward to continued great momentum in our produce business and for it to drive traffic across the clubs. We're also going to take it a little wider and look at the rest of our fresh business, which are also good businesses, but they can likely get better as well. And if you want to talk about the tippity top of the best members in the company, they are folks that interact with all of our fresh businesses. And so if we can really get those folks that now have increased confidence and comfort with our produce business and get them into our meat business and our bakery business and our dairy business, they are going to become unstoppable members. And so we're really pleased about it. Those folks, like I said, come in more often, they put more stuff in their cart and they renew way better than the average member. So I really think we're onto something here. It's really fun to look at. It's certainly challenging for our operators and our merchants to keep up with the volume. Anytime volume spikes, you know, double digits in units, you've got a little running around to do to keep up with it. But, you know, all growth is good growth. And so we're really pleased with it. Laura, I want you to talk about the second question on earnings.

Yeah. Hey, Chuck. Look, I think we called out the two biggest things for consideration. So just as a reminder, You know, from a tax rate perspective, I would plan for the lowest rate in the first quarter, which would be consistent with kind of how the tax rate trends on a historical basis across the quarters.

And then the second thing in Q3, we are lapping the net legal settlements. So about, you know, 10 cents of earnings in there from last year. that we should think about from a cadence perspective.

Okay, great.

Thank you.

Yep.

Thank you very much. Our next question comes from Rupesh Farik of Oppenheimer. Rupesh, your line is now open.

Morning, and thanks for taking my question. I grew out on a really nice quarter. I just want to, I guess, just go back to the merchandise margins. Just want to get a sense of what your expectations are for the year and then any key puts and takes you highlight for us to think about. Thank you.

Yeah, good morning, Rupesh. I think we had a good year and a good Q4 from a merchandise margin perspective. Certainly showed up a touch short of our expectation. That was really due to taking care of our members in the face of some rising commodities. And like you've heard us say before, we will always invest in price. We will always do the right thing for our member. We knew we had the quarter in hand in doing that. But even if we didn't, we would always take that opportunity to take key commodities and keep the prices where they need to be for our membership. So we didn't really see anything in the fourth quarter that would be concerning. The crystal ball is a little unclear at the moment. We certainly have a ton of effort around raising our merchandise margins through better sourcing and co-brand and own brands and efficiencies in our supply chain, a bunch of different irons in the fire to allow us to not only make a little bit more money on each sale, but to continue to invest across the business, continue to invest in price. We've talked a little bit so far about the effect of tariffs. That's clouding. you know, sort of the near-term view of what merchandise margins might look like in terms of just the cost that will increase because of that, and then the anticipated consumer response. But I think we have that muscle, as we've talked about. We will do our damnedest to mitigate any cost increases and continue to provide outstanding value to our members every day. And over the long term, We're very bullish on our business and our ability to drive margin, but also to drive the right value for our members. Great.

Thank you. I'll pass it along. Thank you. Thank you very much. Our next question comes from Simeon Goodman of Morgan Stanley. Simeon, your line is now open.

Hey, good morning, team, and great job on the results. My question, it's a little follow-up on the real estate. So if you take the next few years of openings, Bill mentioned some infill versus new market. Can you give us a sense of what that 25 to 30 looks like for infill versus new markets? And related, you said there will be some deleverage because of store opening costs this year. It might be because also of ownership. Can you tell us, is there a point at which you get enough new stores that they're ramping, that the comp contribution is great enough such that you lever those expenses even as this new expansion rolls out?

Yeah, good morning, Simeon.

Let me hand it over to Bill. Yeah, sure, Simeon. I think, you know, as we think about the long-term leverage, you know, we think we'll hit that pace once we level out a consistent cadence of new store openings over a couple-year period. Right. So we're still in a period where we're ramping the growth. And as we're doing that, we will still have a touch of deleverage as we do that. Once we get a point to where we're at a steady state of openings. So whether that's 10 or 12 a year for three or four years in a row, that's the point where we feel like we'll have essentially a consistent basin. And then we should start to see some of that leverage come to life. In terms of the comp contribution, we've shared on previous calls that we continue to see the new clubs comp at a rate that's 2 to 3x the chain rate. And we certainly saw that in Q4. And so in terms of the new clubs starting to contribute to the bottom line comp, we're starting to see that. It's in there a little bit, but as we now ramp and increase the club base as we look forward out into the out years and how that contributes to the long-term algorithm that we presented at Investor Day last year. We think that that will continue to become a bigger piece of it.

Thank you.

Thank you very much. This is the time we have left for questions. I'd now like to turn it back to Bob Eddy for any closing remarks.

Thanks, Carly, and thanks, everybody, for your attention, your support of our company. As you heard today, we're very pleased with our fourth quarter results. We've got a lot of irons in the fire going forward for the long term, and we will do what's prudent for our members in the short term. So thank you so much for your attention, and we will talk to you in the first quarter.

As we conclude today's call, we'd like to thank everyone for joining. You may now disconnect your lines.