BJ’s Wholesale Club Holdings, Inc. (NYSE:BJ) Q3 2022 Earnings Call Transcript November 17, 2022
BJ’s Wholesale Club Holdings, Inc. beats earnings expectations. Reported EPS is $0.99, expectations were $0.82.
Operator: Good morning everyone and welcome to the BJ’s Wholesale Club Holdings Inc. third quarter 2022 earnings conference call. My name is Adam and I’ll be coordinating your call today. After the speakers’ remarks, there will be a question and answer session. If you wish to ask a question at that time, please press star followed by one on your telephone keypad. I will now pass the call over to your host, Cathy Park to begin. Please go ahead when you are ready.
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Cathy Park: Good morning and thank you for joining BJ’s Wholesale Club’s third quarter fiscal 2022 earnings conference call. On the call today are Bob Eddy, President 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 posted on our Investor Relations website for a reconciliation of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. With that, I’ll turn the call over to Bob.
Bob Eddy: Good morning. Thank you for joining us today. This morning, we reported another quarter of strong results demonstrating the power of our business model. This was the most profitable third quarter in our history. Our consistent focus on delivering value to our members especially when they need it most has put us in a position of strength. Our member base is growing in both size and quality. We are improving our merchandising to deliver unbeatable value. We’re offering more convenience to our members through a great digital experience. We are expanding our footprint into new and existing markets and doing it successfully. We have a great team and a competitive strategy, and the investments we continue to make position us well for long term growth and sustainable value creation.
In the third quarter, our comp sales were up 9.7% overall and up 5.3% excluding gas. Our food categories continued to anchor our strength with comps increasing double digits over last year’s performance. When we entered the year, we expected Q3 to be our most challenging quarter from a comp sales perspective given the difficult compare. Our business has exceeded our expectations given the continued strong membership and shopping behaviors. As we have seen all year, traffic growth has been a positive driver of our comp and sales per member have been greater than last year in each of our income cohorts. I’d like to put Q3 in perspective relative to 2019. Our third quarter merchandise comp sales were nearly 30% on a three-year stack, which is a sequential acceleration from last quarter’s results.
The combination of membership growth, higher quality of membership and our club growth continues to highlight our company as a structural long term growth story. Adjusted EBITDA grew 19% to $272 million and adjusted EPS grew 9% to $0.99 per share. Finally, another strong gas quarter contributed nicely to our profits. Gas is an emotional purchase for many of our members, so we set our prices to showcase value and drive member loyalty. This led to comp gallon growth of 11% in the third quarter despite the broader market’s decline in gas consumption. Our 30% two-year stack in gas gallons highlights a tremendous gain in market share. In addition to the growth in gallons, our business has been more profitable. Gasoline is structurally more profitable than it was a few years ago, and the last several years and this year in particular have seen increased levels of volatility.
The resulting higher than normal profit per gallon has served as a significant tailwind to our business this quarter and this year. We are executing on our strategic priorities, which are growing and retaining members, bringing more value to our members through better merchandising, improving convenience with digital, and expanding our footprint. These priorities are key to driving long term sustainable growth in our business. Let me briefly touch on each. The long term success of our business is grounded in the strength of our membership. In the third quarter, our membership fee income grew 9% year-over-year to nearly $100 million. I’m proud of the progress we’ve made in growing and retaining our members over the past several years. We’ve evolved our membership acquisition campaigns to optimize our marketing, we’re utilizing digital capabilities to expand our reach, we’ve gotten smarter about how we leverage data to remain relevant with new and existing members, yielding better renewal rates, and as we enter new markets, we’re working to strategically build membership well ahead of our grand openings.
Our member count stands at over 6.5 million members, up 6% year-over-year in the third quarter. Effective acquisition efforts across new and existing clubs as well as growing digital acquisition has contributed to the increase. In addition to overall member growth, we are improving the quality of our membership. Our higher tier membership penetration in the third quarter was 38%, up roughly four points year-over-year. Our co-branded credit card program has meaningfully contributed to our higher tier membership base, and this quarter we formally announced our transition to Capital One. As we look back, the decision we made to invest in lifetime value by creating the best card value proposition in the club space has paid dividends with our cardholder base growing over 10 times since we launched the program in 2014.
As we look to the next leg of growth, I’m excited about our new partnership. Capital One’s market leading customer service and digital experience are widely recognized in the card space, and we’re especially thrilled to offer an enhanced value proposition to our members as part of this new program. Our data shows that members with our co-branded card have profoundly better lifetime values driven by renewal rates well above the chain average. As the penetration of these members increases, so does the quality of our membership. Ensuring a successful transition with Capital One will be one of our highest priorities over the next handful of quarters and we are confident that this is the right next step for the company as we continue to grow with the best partner in the business.
A final point on membership strength – our first year and tenured renewal rates are improving over last year’s levels, and I believe we will achieve another all-time high at year end. Persistently high levels of inflation are diminishing consumer purchasing power. In the U.S., food at home CPI has grown in the double digit territory year-over-year for most of this year and households with waning government aid have been further constrained. Overall energy costs, including gas have come down a touch since summer but are still running higher than last year’s levels. As sustained cost pressures continue to weigh on consumers’ pockets, we have remained focused on delivering great value to our members. Specifically, we have continued to invest in price, resulting in significant savings for our members.
In fact, our internal analysis shows that our pricing positions remain stronger against our competitors in the third quarter compared to the same time last year. Having the right value is especially important to us during the holidays. This year, our members who spent $150 or more at our clubs during the first 10 days of November are offered a turkey for free. Considering the savings from this one transaction alone, our members can save about 25% or more when they shop with us when compared to our supermarket competitors. That 25% savings from our member’s $150 basket combined with the free turkey basically covers a one-year BJ’s membership fee. This offer and the examples highlighted on our last two earnings calls, rotisserie chicken and our deli offering, are meant to highlight our outstanding value.
We aim to offer our members as many ways as possible to get a return on their membership fee. We are leveraging our competitive advantages to drive market share gains in the near term while investing in initiatives to further optimize assortment and deliver more value to our members in the long run. Our fresh business, for example, is a major reason why our members shop our clubs, and we aim to offer the freshest assortment at a compelling price. Bringing our perishable supply chain capabilities in-house was the natural first step in this process. We are now in the early stages of working through everything from sourcing to packaging to supply chain lead times, all the way to marketing and in-club presentation. In addition to our work in fresh, we are leaning into our own brand strategy as our members look to maximize their savings with quality products.
In the third quarter, our own brands penetration grew to 24% despite a difficult compare. Our third strategic pillar is driving convenience through digital, and we are generating robust growth in this area led by BOPIC and curbside. In fact, our digitally enabled sales are trending towards 9% of our overall net sales this year, up from 8% last year. Digitally-engaged members typically have higher average baskets and shop with us more frequently, which increases the likelihood of membership renewal. With the expansion of these offerings, our member experience is more convenient than ever and we will continue to invest in enhancing our digital efforts. Finally, as you know, we have dramatically accelerated our real estate plans. We’ve opened seven new clubs this year, including our entry into Indiana in September.
Last month, we opened in Greenburgh, New York, and we also opened in New Albany, Ohio a couple of weeks ago, expanding our presence in the state to the Columbus market. We’re almost set to open our doors in Wayne, New Jersey this weekend, and we have a few more clubs slated to open over the next few months. The clubs we’ve opened in the past several years continue to perform better than our initial plans, giving us the confidence to sustain 4% to 5% unit growth in the foreseeable future. Our commitment and ability to bring value to our members remains a powerful advantage in times like these. As a result, we have grown our top line and market share throughout the year while navigating a pressured margin environment. Gas has driven considerable upside to our results, granting us the ability to further invest in our members and our team members.
Our grocery business is strong and we feel good about how we’re managing our inventory through the holiday season. There is no doubt that inflation is impacting consumer decisions and it’s looking likely that inflation will continue into next year, albeit at a moderating pace. No matter how the macro ends up playing out, we will remain true to being there for our members and delivering unbeatable value, which I believe will deepen loyalty, reinforce our brand, and drive long term growth. Before I wrap, I’d like to acknowledge and thank our team members for their dedication in serving our members and the communities in which we operate. I’m especially heartened by the incredible support our team members have provided to those impacted by Hurricane Ian.
Our emergency response teams’ work in the days leading up to Ian’s landfall ensured inventory preparedness, asset security, and the safety of our team members and members. Our clubs were up and running so long as we deemed that safety was no compromised. Our teams worked with our partners to provide essentials such as water, snacks, baby formula, and cleaning supplies to local shelters. As they always do, our team members showed up for our members and communities through this crisis. To our team members who are listening in today, thank you for your hard work. Your efforts make a real difference in our company and in our communities. I’ll now turn it over to Laura to provide more details on our results and outlook for the rest of the year.
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Laura Felice: Thank you Bob. Before I begin, I’d like to reiterate Bob’s gratitude for our team members across our clubs, club support center and distribution centers. We are navigating a challenging operating environment and our continued strength is the result of our team members’ hard work. Now let’s dig into our results. Net sales in the third quarter were $4.7 billion, a 12% increase over the prior year. Third quarter comp sales were 9.7%. Merchandise comp sales, which excludes sales of gasoline, increased by 5.3% and was driven by about equal parts traffic and basket growth. Our two-year stack was up 11%, reflecting a three-year stack of up 29.5%. The Q3 effect of inflation was slightly more than last quarter as we passed on a portion of growing input costs while maintaining our strong pricing positions by strategically investing in our key value items.
Comps in our grocery, perishables and sundries division grew by approximately 6% in the third quarter, up 12% on a two-year stack and up 31% on a three-year stack. We grew market share during the quarter and our overall market share remains well above pre-COVID levels. Our general merchandise and services division comp grew by 3% in the third quarter. The growth was led by optical, home improvement and tires, where we’ve made tweaks to our offering to provide greater value. Comps in this division were up 7% and up 21% on a two-year and three-year stack respectively as discretionary spending continues to normalize toward a new higher base from the past two years. Our digital offerings have made the member shopping experience more convenient.
Digitally-enabled sales for the third quarter grew 43% year-over-year and over 280% on a three-year stack. Over 80% of our digitally enabled sales are fulfilled by our clubs with services like BOPIC and same day delivery. Our curbside delivery offering continues to resonate with our members, making up approximately 60% of our BOPIC business. In our gas business, our comp gallons grew by 11% in the third quarter, which performed in line with our expectations of continued market share gains. Our gas margins, on the other hand, trended higher than our expectations and resulted in gas profits that outperformed our internal plans. Membership fee income, or MFI grew 9% to $99.5 million in the third quarter and continues to underscore the progress we have made improving our business.
We are pleased with our membership trends, including higher tier penetration, easy renewal, and first year and tenured renewal rates. Moving onto gross margins excluding the gasoline business, our merchandise gross margin rate decreased by 30 basis points primarily due to a higher supply chain cost and inflation, a trend that has remained consistent with prior quarters this year. Let me touch briefly on inventory, where our teams have made significant progress. We ended the third quarter with $249 million more inventory on our balance sheet than last year. Excluding the impact of inventory on our books as part of the acquisition of our perishable distribution centers, our inventory increased by $152 million or 12% year-over-year, and the growth made up of inflation and new club growth.
SG&A expenses for the quarter were $674 million. The year-over-year increase was primarily attributable to increased labor and occupancy costs as a result of new club and gas station openings, as well as $6 million in costs associated with the transition to our new club support center. Our third quarter adjusted EBITDA grew by 19% to $272 million, reflecting our sales growth and outsized gas profits. Finally, adjusted net income for the third quarter was $136 million or $0.99 per share and reflected a 9% increase year-over-year growth on a per-share basis. Turning to our capital structure, the current rate environment has slightly altered our near term thinking around our debt, which is entirely floating rate today. In efforts to partially mitigate our interest expense risk, we paid down $154 million of debt during the quarter, including $100 million of our first lien term loan.
We ended the third quarter with less than one turn of net leverage and may further reduce our debt if rates continue to rise. We are generating robust free cash flow with $79 million in the third quarter and $333 million year-to-date. As we allocate our capital going forward, we will continue to be flexible in our approach, but our priority remains growing our business. Investments to support membership, digital and our real estate growth plans will be funded by these cash flows and enabled by our balance sheet, which remains strong. We continue to return excess cash to shareholders through share repurchases, and in the third quarter we bought back nearly 685,000 shares for approximately $50 million. Let me now touch on our current outlook for the year.
As we noted various times in our prepared remarks today, our grocery business remains strong and we believe we can continue gaining market share because of our intense focus on value. Inflation is still impacting many aspects of our business, although recently we have seen some relief in commodities such as chicken, milk and cheese, and as we head into the winter holidays, we will remain nimble in maintaining our competitive advantages to drive traffic into our clubs and online channels. Starting at the top of the P&L, we now expect our fiscal 2022 comparable club sales excluding gas to increase in the 5% to 5.5% range, which continues to imply about 4% to 5% of comp for the fourth quarter. In October, we officially announced our new co-brand partnership with Capital One, which we believe will bring an enhanced value proposition to our members and serve as another catalyst to grow and strengthen our membership base.
The ultimate benefits of these changes are crystal clear to us. At the same time, we also acknowledge that it will take us multiple quarters to complete the transition, which may temporarily impact our membership KPIs, including higher tier penetration. We will aim to be transparent as possible through this period. For our gas business in the fourth quarter, we continue to assume gas gallon comp growth in the low teens range with slightly higher than normal profit per gallon. Recall that our gas profitability was the strongest in the fourth quarter last year. Moving down the P&L, our outlook on margin also remains unchanged in that we still see ongoing but slightly easing merchandise margin pressure driven by investments in price and elevated supply chain costs.
As such, we expect the year-over-year change in merchandise margin rate to remain negative in the fourth quarter but better than the 30 basis point decrease we delivered in the third quarter. As it relates to interest expense, we expect continued pressure in the fourth quarter and will continue to monitor movements in the rate environment. Taking all of this into consideration, we now expect our full year EPS to be in the $3.70 to $3.80 range. Before turning it back to Bob, I’d like to reiterate our confidence in the strength of our business and the transformation we have made. As a result of the improvements we’ve made in membership, footprint expansion and digital, further amplified by our advantages inherent in the warehouse club model, we believe we are positioned to deliver a solid long term growth profile.
With that, I’ll turn it back over to Bob for closing remarks.
Bob Eddy: Thanks Laura. We have made significant progress in strengthening our business and I believe we are well positioned today to drive long term growth by executing on our strategic initiatives and prioritizing value in everything we do. We will continue to allocate our capital towards investments to maximize shareholder value. Our warehouse club model remains a structural advantage with a growing annuity in the form of membership, lower operational costs, and a foundational focus on great value. When the consumer outlook is uncertain, our members find comfort in being able to stretch their dollars with us. I believe that the reliability and loyalty that we have worked hard to build with our members over the years will remain key to our success no matter the circumstances. With that, I will now turn it back over to the Operator to take your questions.
Q&A Session
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Operator: Our first question today comes from Mike Baker from DA Davidson. Mike, please go ahead, your line is open.
Mike Baker: Thanks guys. Great quarter. I just wanted to ask you about your overall view on the consumer heading into the holidays. I guess you’ve given us guidance, so that helps us, but maybe one way to flesh it out is the pace of sales throughout the third quarter. A lot of retailers saw a big drop-off in October. Did you see anything like that, or maybe another way to think about it is are you seeing consumers just really focus on promotional activity or trade-down, or anything like that, that would give another opinion on what’s going on with the consumer as we head into the holidays? Thanks.
Bob Eddy: Hey Mike, good morning. Thanks for your questions. I think it’s a good one. Overall, I think our consumer is in very healthy shape, as we’ve seen through the entire year. As we talked about in the prepared remarks, our membership statistics are doing great, we’re gaining market share through the year. The thing I’m most excited about is we continue to gain trips as well as we show our members incredible value. The refrain that we’ve been talking about all year is really throughout the income cohorts that we look at, we’ve seen more sales and more trips per member as well, so I think our consumer is very healthy at this point. If you think about the pace through 3Q, certainly October was lower for us than the preceding two months.
A lot of that, I think though, is really the compare that we had last year. We had an incredibly strong October last year, and so if you look at it on a two-year stack, the months were very equal for us, so I don’t see that October performance this year running into November or 4Q. We’re very pleased with where our consumer is. They’re really reacting to the value that we put out there, and hopefully that continues.
Mike Baker: Great, thanks. One more quick follow-up, just wondering how that turkey offer went. Did it actually drive new membership growth?
Bob Eddy: It certainly had a good reaction. We’re still in the period where people are redeeming the offer, so you didn’t get the free turkey on the day that you spent the $150, you have to come back – it’s sort of a bounce back free turkey offer, so we’re still in the redemption period. We’ve got a little ways to go to see how it actually works out, but certainly the number of people that took advantage of the offer, I think is looking higher than our expectations and it certainly drove some traffic into our buildings, too.
Mike Baker: Yes, thanks. It was a great idea and great offer for consumers. Thanks for the time.
Bob Eddy: You bet, thanks.
Operator: The next question comes from Edward Kelly from Wells Fargo. Edward, please go ahead, your line is open.
Edward Kelly: Hi, good morning everyone, and nice quarter once again. Bob, you’ve been, I think, very optimistic around the new co-branded credit card and what that could mean for you over time. Could you maybe just give us a little more color on how we should think about that, both the upfront benefit that you could see, which I would imagine there are some better economics here, but also what it does to the member? Then Laura mentioned a potential impact to member KPIs. Could you just maybe give a little bit more color there in terms of how you are mitigating that risk?
