BJ’s Wholesale Club Holdings, Inc. (NYSE:BJ) Q3 2023 Earnings Call Transcript
BJ's Wholesale Club Holdings, Inc. (NYSE:BJ) Q3 2023 Earnings Call Transcript November 17, 2023
BJ's Wholesale Club Holdings, Inc. beats earnings expectations. Reported EPS is $0.98, expectations were $0.96.
Operator: Hello, everyone, and a warm welcome to BJ's Wholesale Club Q3 2023 Earnings Conference Call. My name is Emily, and I'll be coordinating your call today. [Operator Instructions] I will now turn the call over to Cathy Park. Please go ahead, Cathy.
Catherine Park: Good morning, and welcome to BJ's third quarter fiscal 2023 earnings call. On the 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 during this call, we may make forward-looking statements within the meaning of the federal securities laws. These statements are based on our current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectations described on this call. Please see the Risk Factors section of our most recent Form 10-K and Form 10-Q filed with the SEC for a description of those risks and uncertainties.
Finally, please note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release and the 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.
Bob Eddy: Good morning, everyone. Thanks for joining us today. As I reflect on our business this year, I am proud of how our team has remained focused on executing our long-term priorities, and serving our members in an extremely dynamic macro environment. During these times, our advantaged business model and strong value proposition continue to resonate with our members who know they will always get great value at BJ's. During the third quarter, we posted accelerating membership growth, robust traffic and continued increases in market share. These gains reinforce the underlying strength of our business, and we remain confident in the long-term prospects of the company. In the third quarter, we reported net sales growth of approximately 3%.
Our merchandise comparable sales, which exclude gas sales, were flat year-over-year. We were pleased with our traffic trends, which grew from last year and were consistent with our second quarter levels. Critically, we are consistently gaining market share. Third-party data shows that in the third quarter, we once again gained share over each of the prior 2 quarters as well as the last 3 years. This is an important marker of member value perception and loyalty. Our 52-week share is approximately 60 basis points above pre-COVID levels. We're taking share at the pump, too. In the third quarter, we grew comp gallons by nearly 3% at our gas stations on retail prices that were about flat year-over-year. Industry volumes are still down double digits versus pre-pandemic levels, and our share gains are a testament to the value that members gain from our low-priced gas offering.
Our consumables business remains very healthy, delivering a 2% comp in the third quarter as members continue to rely on BJ's as a valuable destination for their grocery shopping. We see this in our volume trends for key categories such as fresh produce, milk, paper and laundry, where units have trended up year-over-year for us in the third quarter, unlike the rest of the market. As expected, inflationary trends, while still present, were significantly lower than last year and second quarter levels. We experienced more disinflation during the quarter than we expected, particularly in our perishable food business. For example, take a category like eggs, which has been on a wild ride. In the first quarter of the year, prices were 50% above the prior year.
In the third quarter, we saw double-digit percentage deflation in eggs year-over-year. We sell a lot of eggs and we aim to offer the best value so that we can take the ups and the downs on the commodity and pass on the best value to our members. Lower inflation is a headwind to our reported comp, but it helps our members who have coped with higher prices for the better part of the last 2 years. We also regularly invest in our pricing to ensure that our members are getting amazing value. Our pricing index against our grocery competitors improved by about 100 basis points in the third quarter when compared against the same index a year ago. We continue to deliver best-in-market pricing every day and save our members' money and time. That's why they buy memberships and visit us so often, and our focus on value will not change.
Also as expected, our general merchandise and services comps improved as we saw a mix shift away from summer seasonal categories and the beginnings of gains associated with our new assortments. If you'll permit me, I will simplify the story a bit and just talk about our general merchandise business, leaving aside the other components of this division. Third quarter GM comps improved by almost 500 basis points over Q2 levels, getting better as the quarter progressed. October GM comps improved by nearly 800 basis points over Q2 levels. We're encouraged by the early wins in a handful of important categories such as toys, TVs and apparel. In apparel, we further refreshed our presentation, showcasing a curated collection of national brands, such as Carter's, Levi's, Skechers, Champion and Nautica, which contribute to our positive 5% comp in the third quarter.
Our TV sales also improved through the quarter, performing better than the industry with comp units growing in the third quarter by about 3%. With all of that said, members continue to be cautious in their discretionary spending and big ticket items. We are making tangible progress on our GM transformation, offering an elevated assortment at compelling price points. Our holiday gifting set is fantastic. This progress gives us confidence that we remain on the right path longer term to improve this segment of our business. While our overall consumer remains very healthy, growing macro challenges continue to pressure broader consumer sentiment. In the third quarter, our mid- and higher-income members continued to increase both spend and trips as they have likely been more insulated from these pressures.
Waning government aid has been a strain on our lower income members this year. These members continue to exhibit similar shopping behavior, maintaining trip frequency versus last year as well as using other forms of tender to supplement their purchases. However, despite these underlying good behaviors, third quarter sales from our lower income cohort dipped below last year levels. Overall, our bottom line results in the third quarter landed slightly better than our expectations, driven by continued margin improvement and strong gas performance. We reported third quarter adjusted EBITDA of approximately $275 million and adjusted earnings per share of $0.98. Laura will walk through more of the details on the quarter later. As I step back and think more strategically about our business, I remain confident in our growth longer term.
We continue to make meaningful progress on our key priorities. These 4 priorities are improving member loyalty, driving an unbeatable shopping experience, delivering value conveniently through digital and growing our footprint. Let me spend a few moments on each. I'm incredibly pleased with the progress that our teams are making in strengthening the size and quality of our membership. We currently serve over 7 million members with member counts growing nearly 6% year-over-year in the third quarter. In fact, new paid enrollments in the third quarter were the highest we've delivered since the height of the pandemic with successful acquisition efforts across our new and existing markets as well as our digital platforms, which now contribute to half of our acquisition.
Our co-brand credit card, which presents an outstanding way for members to get even more value is also attracting new members and incenting existing ones to upgrade into higher tiers. We're pleased to have maintained our higher tier penetration at 38% in the third quarter with pronounced growth in our One+ tier. Members in this highest tier have historically exhibited the greatest spend and strongest loyalty, which we believe will contribute to us holding our record 90% renewal rate this year. We will continue to invest into our membership value prop to further strengthen member loyalty and lifetime value going forward. Member loyalty is dictated by the quality of the experience we provide. As such, we are continually working to improve the member experience through our merchandising, digital and in-club conveniences and, of course, great value.
Getting these elements right is crucial to our success year round, and it's especially important as we head into the holidays. During our Investor Day earlier this year, you heard us talk about our member-centric approach to last year's Thanksgiving shop. We built our strategy around presenting seasonally relevant merchandise in our high-value space for an easier shopping experience, leveraging our data to identify the most compelling offers and marketing these offers in an impactful way. A great example is our turkey promotion. Members love the way that this program stretches their dollars, and we are continuing the tradition this year. Members who spend $150 or more in early November, receive a bounce-back offer to get a free turkey before the Thanksgiving holiday.
Between our usual 25% savings on their basket and the free turkey, they can save the equivalent of their entire membership fee with this one promotion alone. As you know, general merchandise transformation is what's especially new and exciting this holiday season. I previously mentioned that GM is an area where we can make a profound impact in showcasing value to our members, yet it's less than 15% of our business today. We believe we have significant opportunity to profitably grow this division over the next few years. We are early in this journey, but I believe we have the right talent, strategy and focus to drive this growth. I'd encourage you to walk our clubs this holiday season and see the changes. It's meaningfully different and a better experience from prior years.
Nearly 90% of our toy offering is completely new this year. This is a category that we typically set earlier than the rest of holiday and early reads have shown that 8% more members are shopping the toy category at BJ's this year. We're seeing great reactions to our featured brands, which include LEGO, Disney, Hot Wheels and Barbie. Approximately 80% of our holiday home assortment is also new, where we've invested in quality and enhance the value. We're making our treasure hunt stronger, too, with highly curated trend-driven giftable items such as retro video game station, Sur La Tab Kitchenware and a home movie theater pop-up kit. Finally, we are enhancing the way our general merchandise is marketed and presented in our clubs for a better member experience.
We've taken the member mindset to deliver cohesive storytelling across our marketing platforms, cleaner pathways in our clubs and the right timing of offers throughout the holiday season. This holiday season marks an important step forward in building our credibility in this space. These efforts remain a crucial part of our long-term growth strategy, and we will continue to innovate to realize the significant potential we see in GM. Our own brands, Wellsley Farms and Berkley Jensen, provide our members with high-quality products at meaningful value. Members who engage in our own brands spend more, visit us more often and are better members. We are strengthening our offering and our members are taking notice. We've previously discussed the profound impact that it's had on our paper category.
In the third quarter, our own brand sales and sundries were up 20% year-over-year, led by Paper. Our own brand strategy is also playing a key role in our general merchandise transformation as well. In apparel, we cleaned up the assortment, upgraded the quality and expanded into children's and women's. We also put extra care into the presentation highlighting key features and making the items more appealing for our members. These efforts resulted in a 700 basis point increase in own brands apparel sales penetration in the third quarter. We believe our own brand sales penetration is on pace to grow to 25% for the full year and remain confident in our goal of reaching 30% over time. Our digital comp sales have grown double digits all year, up 16% in the third quarter alone.
And digital now comprises over 10% of our business. This holiday season, we've made it even more convenient than ever to shop with us, reducing friction and applying greater personalization in our approach. We're making progress on our automation efforts as well. By the end of this month, we will have our fully autonomous AI-powered robots in all of our clubs. The benefits of this automation include in-club inventory tracking, pricing precision, faster restocking and more efficient and accurate buy online, pick up in club and curbside orders. We will continue to lean into investments that make our business more efficient and convenient while delivering outsized value to our members. Finally, we remain pleased with the performance of our newer clubs, and we are further growing our footprint.
The clubs that we've opened in the last 12 months are ramping nicely with LTM sales collectively running over 30% ahead of our plan on the back of strong membership growth. Just last week, we entered our 20th state in Madison, Alabama. I love the energy and the enthusiasm both from the community and our team members. We expect to open 5 more clubs in the fourth quarter, bringing us to 9 new clubs for the fiscal year. I'd like to close my remarks with sincere gratitude for our team members who remain dedicated to our members and our communities, especially as we head into the busiest time of the year. I'm especially proud of the work our team has done to partner with local food banks and schools in both new and existing markets to help our communities thrive.
To our team members who are listening in today, thank you for your hard work. I'll now turn it over to Laura to provide more details on our results and outlook for the rest of the year.
Laura Felice: Thank you, Bob. I'd like to start by also thanking our team members across our clubs, club support center and distribution centers for their commitment to our members and to the company. Let's dig in to our third quarter results. Net sales in the third quarter were approximately $4.8 billion, growing nearly 3% over the prior year. Total comparable club sales in the third quarter, including gas sales, increased by 0.3% year-over-year. Merchandise comp sales, which exclude gas sales, decreased by 0.1% year-over-year, an increase by over 5% on a 2-year stack. As Bob mentioned, we delivered positive traffic gains year-over-year, which were offset by lower basket due to continued disinflation. Our third quarter comp in our grocery, perishables and sundry division grew by 2% year-over-year and 7% on a 2-year stack.
We drove strong gains in market share in the third quarter, which supports our belief in a healthy, growing and loyal member base that relies on BJ's for its shopping needs. Our general merchandise and services comp decreased by 11% in the third quarter. As Bob noted, GM performance strengthened over the second quarter as sales skewed away from weather-sensitive categories, and we made further progress on our GM improvement efforts. While members remain selective in their discretionary shopping, we believe we are well positioned to capture share this holiday season. Digitally enabled comp sales in the third quarter grew 16% year-over-year reaching over 10% of our net merchandise sales. Approximately 90% of our digitally enabled sales are fulfilled by our clubs with services like BOPIC and same-day delivery, which remain the primary drivers of our digital growth.
We believe that digital convenience is a key advantage for us, and we will continue to lean into driving better digital engagement over time. In our gasoline business, we delivered comp gallon growth of nearly 3% in the third quarter which compares to the industry running negative in the same period. Our third quarter profit per gallon, while lower than last year, came in above our expectations, resulting in upside to our bottom line. Membership fee income, or MFI, grew nearly 7% to approximately $106.1 million in the third quarter and we remain pleased with our membership trends, including an overall member counts, higher tier penetration as well as first year and tenured renewal rates. Moving on to gross margin. Excluding the gasoline business, our merchandise gross margin rate improved by 30 basis points year-over-year as we lap the tail end of last year's supply chain headwinds in the third quarter.
We also continue to manage our inventory well with our general merchandise mix skewing towards margin-accretive sales. SG&A expenses for the quarter were $697.1 million. The year-over-year increase was primarily attributable to our new unit growth and other investments to drive strategic priorities. Our net interest expense in the quarter was approximately $18 million and included $1.8 million of charges related to fees and the write-off of prior deferred fees, which have been adjusted for in our adjusted EBITDA. We reported third quarter adjusted EBITDA of $274.9 million and adjusted EPS of $0.98, which reflects our sales and margin growth bolstered by membership strength and healthy fuel profits. Moving on to our balance sheet. Our merchandising, finance and planning and allocation teams remain diligent in optimizing our inventory for the current environment, and we continue to feel good about our position today.
We ended the third quarter with inventory up about 10% year-over-year, which is driven by inflation and strategic investments in our business including supporting new clubs and in-stock improvements in our consumable categories. Turning to our capital structure. We ended the third quarter with $832.3 million of debt and 0.7 turns of net leverage, which remains consistent with our long-term target of sub 1 turn. In October, we amended our term loan opportunistically, repricing and reducing our interest spread by 75 basis points. We also simultaneously repaid $50 million through a partial drawdown on our ABL, resulting in approximately $3.5 million of collective annual interest savings. Our capital allocation strategy is consistent with the framework we set forth on our Investor Day.
We believe the best use of our cash is applying it towards profitably growing the business. As such, investments to support membership, merchandising, digital and real estate initiatives will continue to be funded by our cash flows and enabled by our strong balance sheet. We also continue to return excess cash to shareholders through our share repurchases. Year-to-date, we bought back nearly 1.2 million shares for approximately $77 million and we have approximately $242 million remaining under our current authorization. Let me now address our outlook for the rest of the year. Our business and the broader industry continue to navigate high levels of uncertainty in an environment influenced by disinflation, geopolitics and high interest rates as well as government aid and discretionary demand that is still normalizing from the pandemic.
As members become more resourceful on tighter budgets, they are increasingly turning to BJ's due to our strong value prop, and this continues to show in our traffic counts and market share. We don't see that changing. We are also confident in our long-term plans for general merchandise and are excited about our holiday strategy. While we continue to drive improvements in key categories, we also recognize that near-term trends are uncertain and are planning our business accordingly. Finally, year-over-year inflation moderated faster than anticipated in the third quarter. As we think about the fourth quarter, a reminder that the comparison is much easier. Last year, inflation remained flat between Q3 and Q4. And while we expect some continued disinflation, we are maintaining our expectation of net year-over-year inflation, not deflation in the fourth quarter of this year.
Starting at the top of the P&L, we now expect our fourth quarter comp sales, excluding gas, to range from down 2% to positive 1%, which equates to comp growth of approximately 1% to 1.8% for the full fiscal year 2023. Our expectations reflect a wider range of outcomes given the near-term retail environment and continued disinflation. Our expectations to deliver fiscal 2023 GAAP and adjusted EPS of $3.80 to $3.92 remain unchanged with the fourth quarter benefiting from a 53rd week. In our gas business, we continue to expect growth in comp gallons for the full year. We have embedded slightly higher profit per gallon expectations in the fourth quarter given current trends. Longer-term assumptions for normal gas profit per gallon remain in the low teens range.
Longer term, we remain confident in the underlying strength of our business and believe we are well positioned to deliver sustainable growth to maximize shareholder value. With that, I will turn it back over to Bob for closing remarks.
Bob Eddy: Thanks, Laura. In closing, our team executed well this quarter and our growth in membership traffic and market share caused me to continue to be optimistic about the long-term trajectory of our company. The operating environment continues to be incredibly dynamic and challenging to predict, but we will focus on controlling what we can control, investing in the long term and managing the short term. We've considerably improved our business over the years and we will keep that momentum going. We will not lose sight of our strategic growth priorities, which are inspired by our purpose of taking care of the family should depend on us. We will work to grow the size and quality of our membership. We will work to offer an unbeatable member experience through our merchandising improvements.
We will work to grow our digital business and profitably expand our footprint. Above all, we will not compromise delivering the best value for 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's Wholesale Club. I'll now turn it back over to the operator to take your questions.
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