Laura Felice: Fee increase, yes. So next year, you rightfully called out, next year does not consider a fee increase in the guidance we gave. So it is ex a fee increase. As we sit here today, we don’t think we’re going to do one or we would have put it in the guidance, but we will continue to evaluate it over the course of the year.
Bob Eddy: Yes, I think that’s right. And we’ve got a few things to consider. Number one, just the incredible membership results we shared with you all today. They’re built on value, built on attracting the right quality of our members, engaging them and getting them to renew. And as we like to say, we’ve sort of had a fee increase, without a fee increase over the past five years. So getting over $60 in average MFI per member was a big hurdle for us, and we’re thrilled to have done it. and getting to 90%, obviously, we’ve talked about that a million times today, given it’s important. We have that in our mind as we think about this issue, too. But the overwhelming thing we think about is the competitive impact of doing it, the impact on our members of doing it in the face of the inflation that they’ve seen it and most importantly, getting our co-brand credit card transition done and set and going forward in our members’ eyes.
We are off to an incredible start on that, and we don’t want to do anything to disrupt it. It’s very, very important to us. It should power our growth going forward. And that is the thing we think about first from a membership perspective for this year. So we’re going to go next. I want to go to Baker. Mr. Baker.
Mike Baker: Mike Baker from D.A. Davidson. Yes, hometown, exactly. So people sometimes compare you guys to that company out in Seattle. One thing that I’ve always been interested in is that your margin is actually a lot higher than theirs on a trailing 12-month basis on EBITDA, you’re like five, four. They’re like four, three or something like that right now. Why is that? And what opportunity does that give you? Can you invest more back? Is that opening more clubs, investing more back in pricing? And I think as part of that, your guidance suggests that your margins are going to even go up from here, I think, with the — what is high single digit, low double-digit earnings versus mid-single-digit comps. I assume that’s EBITDA margin improvement in there. So if you could just talk about that.
Bob Eddy: Yes. So certainly, we’re very happy with our performance, right? We’ve shared some great statistics with you today. We’ve been able to figure out how to leverage our business in a much more effective way than we have in the — at least in the early part of my tenure. And I don’t think that goes away. I do think you point out a great luxury that we have, and that is one of flexibility, right? Our business is all about lifetime value. We invest every single day to do that, come back to that 130 basis points of pricing improvement that we made this year in the face of the crazy inflation that we all experienced. That is due to that flexibility and due to our commitment to providing value to our members. And so we will look to satisfy all of our constituents as we go forward.
First and foremost, our members because they take care of us and they take care of our shareholders for us. And then we’ll look to optimize any particular number on the P&L. But if we do the first thing right, the second thing takes care of itself.
Peter Benedict: Peter Benedict, Baird. Following up on that, so 130 basis points of pricing or price gap improvement, I guess, in ’22, inflationary environment. How do you see that in ’23? And then in the event that we move to an absence of inflation or the deflation, how do you manage that? Or how do you think about that?
Bob Eddy: Yes. I mean Laura talked a little bit about how we see the building blocks of comp, and we certainly see less inflation in this new fiscal year than we saw last year. Obviously, that wanes throughout the year as we start to lap the big numbers in the front part of last year. I would say what we’re seeing today is consistent with that. We’re still seeing net inflation. Some categories are up, some categories are down, but generally a tick lower today than we were seeing a quarter ago or two quarters ago or so on. That may pressure comps, right? And it may pressure margins as we go. We will hold our value sacrosanct, right? But the thing that I’d point out to you is managing margins is a muscle that we have developed very well over the past five years.
And think about last year as one side of that trade in the face of massive inflation, right, huge cost increases coming from our suppliers. We managed to figure out how to solve that problem and invest in price, very, very cool thing to do. I couldn’t be more proud of our merchandising team and our analytics team and everybody else for getting that done. But those of you who have been following our story for a while, remember the CPI projects, right, where that CPI stands for category profitability improvement. That is probably the single biggest enabler of our longer-term transformation over the past six or seven years. When we started that project, we were not buying for resale very effectively. And now we are. We’re buying very, very well in relation to our competitors’ buy.
That has enabled us to drop some margin to the bottom line but also to invest in all sorts of things all over the building. And it starts with the analytical capability of our analytics team and our merchandising team. We now do — have embedded this as part of our core competencies of our merchandising team. It was once outside the team, now It’s all together. This is something we do very, very well in analyzing a category, what should be on the shelf, what can we do to grow sales, what can we do to balance margin trade-off, so how do we deal with pricing issues, what do we think will happen from a member perspective when things move in and out of our assortment. Seven or eight years ago, we were kind of just a bunch of math geeks trying to apply some data to a problem.
Now we have a very robust capability of managing our assortment, managing our pricing, managing our margins. And so I do think it will be something we have to work on and focus on as we go forward, but we are very good at this, and it doesn’t scare us what we’re seeing today. Let’s go to Simeon over here — at the right side of the room.
Simeon Gutman: Simeon Gutman, Morgan Stanley in respect to the Godfather. So two questions. Maybe first on merchandising. I don’t know if it’s appropriate for Rachael. We talked about SKU deep proliferation at one point today. It was — I guess, having more SKUs was talked about as a strength. So was that strategy not working? Where does it stand? The second question is, if you look at this business’ sales run rate versus IPO or previous, there’s not many that it’s profoundly changed the way this has. So what wasn’t working then which working now? I’m sure there’s a lot of things, but I wanted to ask it in what wasn’t working as opposed to all the things that are.
Bob Eddy: Yes. Maybe I’ll take the second question first and try to hand it off to Rachael to talk about simplification a little bit. So I’m the Company historian on the team, I think, other than Jeff. Jeff’s been here a little longer than I have. I would tell you, strategically, we have come an incredible distance in focusing on finding the right member, engaging that member through great pricing, great value, great promotions, great digital offerings and convenience there. And when we engage in the right way through all those things, they come back to see us over and over again, right? You can take any one of those things 7, 8, 10 years ago, and we weren’t doing it as effectively as we were doing today. We just talked about not buying as effectively.
That meant our pricing wasn’t as sharp as it is today. We didn’t have a digital business to speak of. So we weren’t all that convenient. We didn’t have personalized offers. We weren’t really — we were focusing on getting the absolute highest number of members, not the right members, the ones that like us, the ones that we know how to engage. We have come so far on all of those points and more, but it all comes back to member value, right? We want to be as efficient as possible, provide as much value as possible — and that has worked, and we’ll continue to focus on all of those things going forward. One of those ways that we’ve done it is simplification, right? We carry more SKUs than our club competitors do. And in some places, that makes a heck of a lot of sense, right?
You’ve heard about the strength of our food business and our grocery business. Our perishable food business has many more SKUs than our club competitors do. That drives trips. They can do their weekly grocery shop with us. When you can’t, in my opinion, and our club competitors, as good as they are, we’re just trying to do it a little differently than they do it. But in some places, that extra choice doesn’t make sense, right? We showed pictures of oral care out there. You don’t — there are only so many mint toothpastes you need. And so we can save some space, save some labor, and we can present a much more clean assortment to our members. They shop it better. It creates sort of winners and losers from a SKU perspective, so we can use it to negotiate better.
There are a lot of benefits to it. But the thing that I like is we can take the resulting white space and allocate it back to general merchandise as well and get into different growthier categories, too. So why don’t I hand it over to Rachael? She can sort of fill in the gaps there? That’s the overarching story.
Rachael Vegas: Yes. I think Bob said it extremely well, actually. Our initiative in simplification is about creating more opportunity for categories or categories to grow or new categories to come into the business. And so we’re constantly evaluating that experience of how you shop our aisles, you shop in a given category to make sure we have a highly curated assortment that’s relevant for that category. We don’t have SKU count goals. We’re just really focused on bringing what matters most to our members in every category. And then to Bob’s point, like we constantly are evaluating the productivity of every category to say, “Oh, does a category need more space, does a category need less space and what other categories might — might our members want to shop from us.” So it is a balance that is a constant part of the merchandising cycle, but we are proud of the breadth of our assortment for the reasons Bob referenced and Paul referenced earlier, it drives the trip.
We have a very relevant shop. And the more frequently our members come, the more likely they are to renew, and it’s a virtuous cycle. So we will continue to build upon that.
Bob Eddy: Great. We go to Paul.
Paul Lejuez: Paul Lejuez, Citi. Curious, if you look back relative to when you first gave your guidance for F ’22, how much of the upside this year would you attribute to the core business versus just excess profit from gas. So that’s kind of one. And then second, looking forward at the merch margin guidance for next year up 40 basis points, how much of that is coming from just general merchandise not having the markdowns on general merchandise versus any change that you’re expecting on the consumables side?
Laura Felice: Yes. Thanks Paul, for your question. I’ll take it. And maybe, Bob, if you’ve got anything to fill in, you certainly can. On the question about gas, right, and as we look back to the guide we gave last year, so we said for the full year from an EPS perspective, we showed up at . I would say it’s tilted towards gas profitability. That kind of contributed to that excess. There was a piece of it that was our core merchandising, so what happens in the box. But I would say what happened in our core business was a little bit differently than we set out at the beginning of last fiscal year, right? So more sales, less margin, SG&A largely how we thought it would play out. But as you think about that delta, from the 3.25 to the 3.92 .
I would weight it more towards gas. And then your second question, Paul, about merch margin improvement for the coming year, that 40 bps of improvement year-over-year, I would say less of it is GM. GM is certainly part of the story, but there are a lot of things underneath it as you start ripping it apart. So there are things like own brands. Rachael talked a lot about own brands. We will continue to lean into that. We — you’d know that that’s margin-accretive. So that will be some of the story. GM is some of the stories as we lap markdowns particularly in the first half of last year. But there’s also a big piece of it that’s supply chain unwind, which I tried to talk to in my prepared remarks. So think about import containers, right? Those prices went straight up.
They came straight back down. That’s a small piece of our business, we import a very small piece, but it’s something diesel costs, all of the supply chain costs, kind of the backlog of inventory, we think that will unwind this coming year.
Bob Eddy: The only thing I’d add on to that, Paul, we’re not trying to be coy and not giving you a number on how much the gas business beat by, it certainly was, I call it, 2/3 of the difference. The thing that makes it hard to give you a really precise number is we consistently and constantly spend into the beat, right? So last year, it was probably the biggest year we’ve ever done that. Those of you who have covered us for a long time, have heard us say that 100 times. Any time we have a quarter that’s going really well or a year that’s going really well, we are reinvesting value into the member all over the place. And so — we don’t necessarily keep track of all those investments. And so when we beat in the gas business, for instance, we are spending on our members.
We’re spending on our team members. We had a wonderful time giving our team members discounts on fuel last year and — we’ll probably continue to do things like that in spite of what happens in profitability in the gas business. But we will take every bit of opportunity that we get to reinvest into our membership because our members give us back their lifetime value for that.
Chuck Grom: Chuck Grom from Gordon Haskett. A question for Bill. About 15 years ago, BJ has embarked on a pretty aggressive store growth plan that didn’t go so well. So I’m curious, as you embarked on this part of the journey, how are you going to monitor that progress, particularly as you go into markets that you’ve never been before, Tennessee, Alabama? I think that’s an important part of the story here.
Bill Werner: Yes. I think this comes back a little bit to Simeon’s question in terms of the difference of the Company, in terms of back in the IPO, like what are we doing — what are we not doing then that we have today? And I would say it comes back to three things. It’s kind of talent, data and culture. So in terms of the team, there is an army of folks now that we have behind the scenes working on everything about new clubs. So we’ve invested in a new club success team. So as we’ve expanded, one of the things — I talked about earlier, too, how we’ve built on every new club opening to make the next club opening the best one we’ve ever done. One learnings early on when we went to a club like Roanoke in Virginia, it was like 200 miles from our nearest club.
And even though we’re still in our — technically maybe our footprint in Virginia, it was kind of out an island by itself. And when we went to open that club, there were a lot of learnings from a training perspective because it didn’t have that safety net nearby, right? So one of the things that we’ve kind of invested in is like is as we expand into new markets, it’s really important that we export our culture in terms of how we open up clubs the right way, how we take in a new market, what will be many team members who don’t really know us or haven’t known us before. And given the experience that a team member joining in New York or Boston or Weber, our corporate footprint would be to have that same type of experience. So we’ve invested in a new club success team.
So we’ve effectively replicated an entire club leadership structure, and their single job is to work with all the new clubs to coach, train, import the talent to make sure that they can execute exactly how we execute everywhere else in the chain. So that’s kind of the talent side of the house. I wouldn’t underestimate the culture side of the house either in terms of — around this building, new clubs used to be managed as one of 200. Now they’re managed as the most important club we have. And we have an entire team — whether it’s the operations team, whether it’s a logistics team, whether it’s a merchandising team, we have talent throughout the organization specifically dedicated to make sure these new clubs are getting the attention they need.
And again, it’s — we talk about the first year member, right? One of the headwinds you have in a new club in a new market is every single member there is a first year member. So that comes with a different renewal rate. It comes with a different spend rate. So the singular focus there is to get that cohort of member we sign up to their renewals, so we can get them on the path to maturity. And then the last piece is the data. We have more data available to us today than we’ve ever had before around trips, household attributes and demographics, shopping patterns with some of the cellular data out there that we can use. So I think as we’ve gone into markets like Detroit, like Pittsburgh, like — now Columbus, we’ll go to Nashville. We feel very confident in terms of putting the clubs in the right place, making sure we have the right people monitoring it and then giving the members the right experience to make it really successful.
