Hello, everyone, and welcome to the BJ's Wholesale Club Holdings, Inc. Second Quarter 2023 Earnings Conference Call. My name is Carla and I'll be coordinating your call today. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I'll now pass the conference over to your host, Cathy Park. Please go ahead.

Good morning, and thank you for joining BJ Wholesale Club second quarter fiscal 2023 earnings conference call. On the call 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 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. With that, I'll turn the call over to Bob.

Good morning, and thanks for joining us to discuss our second quarter results. Our team managed the business well during the second quarter, leaning into our structurally advantaged operating model to deliver great value. This was validated by our members who voted with their feet and wallets as we gained traffic and accelerated our market share gains in the second quarter. By staying focused on executing our long-term strategic priorities and taking care of our members, we delivered strong profitability during the quarter. Our membership is strong, we are making progress on our merchandising improvements, our digital conveniences continue to save our members' time, and we're successfully growing our footprint. Our second quarter merchandise comparable club sales, which exclude gas sales, were up 1.1%. This increase was driven entirely by traffic. Further, our focus on delivering great value to our members once again resulted in sales growth across each of our income cohorts, driven by increases in trips and spend per member. We were pleased with this result considering continued grocery disinflation, a tough lap in traffic provided by last year's elevated gasoline prices and a tight discretionary spending environment. Our grocery and consumables business continues to be very strong. In fact, according to [indiscernible], we gained market share once again in the second quarter, with sales growing nearly two times faster than our key competition across the markets in which we operate. We have grown in the quarter and year-to-date periods, as well as in each of the last three years. Our 52-week share is nearly 60 basis points above pre-COVID levels. The structural advantages provided by our model, most notably the value we provide, serve as an even more important reason for our members to visit our stores. We know that in uncertain times like these consumers search…

Thank you, Bob. Before I get to the numbers, I'd like to echo Bob's gratitude for our team members across our clubs, club support center and distribution centers who remain critical to the success of our company. Now, let's discuss our results. Net sales in the second quarter were approximately $4.9 billion, a 2.9% decrease over the prior year. Total comparable club sales, including gas sales decreased by 5.3% year-over-year, with merchandise sales growth offsetting the decline in our gas sales, primarily driven by sharply lower retail prices at the pump. Merchandise comp sales, which exclude gas sales, increased by 1.1% year-over-year and almost 9% on a two-year stack. Our second quarter comp was driven entirely by traffic, which grew year-over-year on top of the strong traffic aided by high gas prices in the second quarter of last year. The impact of inflation on our sales moderated through the quarter and at a slower pace than the first quarter. As Bob mentioned earlier, our second quarter comp in our grocery, perishables and sundries division grew by 4% year-over-year and was up 12% on a two-year stack. We are especially pleased to have delivered strong gains in market share in the quarter, which substantiates our belief in a healthy and growing loyal member base that relies on BJ's for their shopping needs. Our general merchandise and services comp decreased by 13% in the second quarter and was down 9% on a two-year stack. As we called out last quarter, an increasingly discerning consumer dynamic has resulted in our members' shopping closer to need. We also estimate that roughly a third of our general merchandise and services comp was driven by unfavorable impact of weather-sensitive categories. We believe our digital offerings have made our members' shopping experience more convenient than ever. Digitally-enabled…

Thanks, Laura, and thanks to everyone listening for their attention and support. We spend a lot of time on these calls discussing short-term up-to-the-minute trends. So I'd like to close with some comments on the long-term view of our business. We participate in a segment of retail that reliably gather share in good times and bad. We have considerably improved our membership, operations, digital business and many other things. But one thing matters most and that is value. Wholesale clubs have the best value and we invest every day to make our offering to our members even better. It is the largest reason why our membership is up 30% since 2018. It's why our co-brand credit card continues to grow above our expectations. It's why people flock to our gasoline business. It's why we continue to grow transactions when other forms of retail don't. The fundamentals of our business are strong and favorably positioned to win in the broader retail landscape. We will continue to play the long game. We will grow the size and quality of our membership. We will improve our general merchandise business to match the value and credibility we have in our food and consumables business. We will grow our digital business and our store footprint, all while bringing more value to more members. I'm proud of our entire team, and I'm excited for the future they're creating for our great company. With that, I will now turn it back over to the operator to take your questions.

Thank you. We will now start the Q&A session. [Operator Instructions] Our first question comes from the line of Peter Benedict from Baird. Your line is open.

Hi, guys. Good morning. Thank you for taking the questions. I guess the first one, maybe about the member trends in 2Q, sounds like you ended a little over 7 million. Just maybe talk a little bit about what you're seeing from sign-ups from renewals. And then on the MFI related to that, expecting 5% growth this year. I think previously, you were 5% to 6%. Just curious why focusing at the lower end of that range for this year. That's my first question.

Hey, Peter, good morning. It's Bob. Listen, we're very happy with our performance in growing our membership in both size and quality from a number of different angles. As you noted, we gained 5% in the number of members and dollars in the second quarter, pretty great year-on-year and sequential growth for us. And it's important to note that we're stacking those gains on top of gains from prior years as well in both bodies and dollars, right? And we're focused on finding the right members for us and engaging them with fantastic products and great value across our building. We've also grown premium-tier members. Our co-brand program is growing very well. And as we mentioned in the prepared remarks, we're well on track to another 90% renewal rate for the year. So, we're proud of where we are. I have the luxury, I've been around this business for a long time when growing members and MFI dollars sequentially and year-over-year wasn't a given like it is now, we are doing quite a fine job consistently growing in the size and quality of our membership over the past several years. With that said, we're not satisfied. That's why we continue to invest in value every day. That's why we're trying to reinvent our general merchandise business to engage our members even further in our platform. That's why we continually try and pass value back to our members through pricing, through promotions, through our co-brand product or our gas discount program and tons of other different ways. So, we're happy with what we've done. We're excited for what we can do in the future, and I'm confident we can build on the gains that we've made today.

Okay. Thanks for that, Bob. And then I just -- my follow-up would just be around the general merchandise outlook for the back half of the year. Obviously, you guys have taken that down a little bit. The inventory, I think Laura had mentioned a lot of consumables in there, new club growth, et cetera. But just maybe talk a little bit about how you've got your inventory planned in general merchandise for the back half of the year? And kind of the moderating demand outlook on that front, leaves you exposed in any way, or if you feel good about where you are in general merchandise inventory? Thank you.

Sure. So let's talk a little bit about GM. As we talked about in the prepared remarks, a bunch of stuff impacting the second quarter, a lot of it having to do more, frankly, with last year than the current year. But first and foremost, we've taken the opportunity to rebalance how we think about the sales and margin trade in general merchandise. And that's really an integral part of building the business for the long term as we see it. We've talked a little bit about changing assortments. I think about that as what to buy, but this quarter, we took a little bit of a look at how we buy as well in terms of building the resilience of the general merchandise processes and procedures around how much to buy, how much inventory to have, how to mark it down, how to exit seasons clean. We are really building all those processes and procedures as we go with an eye towards a sustainable, growing, profitable general merchandise business going forward. So, our team is really doing the right things. We had tough compares against last year with all of the low- to no-margin liquidations of seasonal goods and certainly had some tough weather in the Northeast to deal with, which really depressed the sales of those seasonal goods in a pretty significant way. But as we look forward, we are bullish because we are putting more relevant assortments in front of our members. And where we've seen that so far, we've seen good results. That should come to life a little bit more in the back half as we get through reinventing us more assortments in general merchandise. And as we continue to do that quarter in, quarter out, we should gain a lot more credibility with our…

Great. Thanks for that, Bob. Good luck.

Thanks, Peter.

Thanks, Peter. Our next question comes from the line of Robert Ohmes from Bank of America. Your line is open.

Hi. Thanks for taking my questions. A follow-up on -- maybe for Laura, just in terms of the cadence of merchandise gross margin you're expecting for 3Q and 4Q, and [indiscernible] is the freight impact or benefit year-over-year, I guess, I should say, is expected to be similar in 3Q versus 2Q and then maybe less so in 4Q, maybe some color on that? And then, just another follow-up on the same store sales expectation for the back half. Is there any cadence between the quarters? Should the general merchandise changes you're making show up over the fourth quarter than the third quarter? Or any other extra color you guys could give?

Yeah. Hey, Robbie, thanks for the questions. As we think about merch margin for the remainder of the year, certainly, in the second quarter, it was healthier than what we anticipated. In our prepared remarks, I talked about supply chain unwind. And part of that was also how we managed our general merchandise business. So, we're really proud of the second quarter merch margin growth. As it relates to the back half, I think what we're anticipating is that the levels of merch margin growth year-over-year will moderate. So, Q3 coming off of Q2 and Q4 being the lowest growth year-over-year. So, I think the only other thing I would add in there is freight costs are certainly embedded in our assumptions, but I think it will moderate. Part of that moderation is -- your second question on same store sales growth, I think it will be relatively balanced in Q3 and Q4. As you dig under that, I think there are two things that we are considering. Disinflation will continue in our core consumable business. So, I think the rate of inflation will come off and trail off through Q3 and be the lowest in Q4. And that will be balanced off by general merchandise growth. So, we think Q4 will be the strongest of the two quarters.

That's really helpful. Thank you.

Thanks, Robert. Our next question comes from the line of Edward Kelly from Wells Fargo. Your line is open.

Hi, guys. Good morning. Can you provide a bit more color on the cadence of the traffic that you saw in Q2? You had that deceleration from, I think, close to [4] (ph) in Q1 to around [1] (ph) in Q2, but obviously, a difficult gallon compares. So, I'm curious how that traffic changed, if it was similar to what you saw in the gallons? And then what are you seeing traffic-wise so far this quarter, given that gas prices are being -- and go up again? I'm just curious if you've seen any reacceleration in traffic.

Yes, it's a good question. Certainly, our gas business was interesting to watch during the second quarter. As we talked about May and June had tough compares, that was the peak of last year's elevated gas prices, and we certainly gained traffic last year that really resulted from our members caring a lot about saving money on gasoline at $5 a gallon last year. We're still at pretty considerably elevated levels today at around $4 a gallon. And so our members are certainly cognizant of that, and we are -- we maintained our gallon share during Q1. But the context underneath that is we lost some gallon growth and some traffic in May and June and then July was back to considerably positive growth. That has continued in August here. So, it feels like after lapping that peak last year, we were back to the gallon traffic market share growth that we've seen over the past couple of years within our gas business. As you know, that tends to drive performance inside the club as well as those close with gas stations are nearly always perform better than those without in terms of comp, in terms of membership, and most notably, membership renewal. Gas was a little bit interesting from a profitability perspective in the quarter as well. As we talked about cents per gallon profit was about where we landed on Q1, and that seems to be settling in as kind of the new normal in cents per gallon. With that said, we're lapping huge profitability from last quarter. And so, a total number of dollars was down pretty considerably -- profit dollars down pretty considerably from last year. But it is a great place for us to illustrate value to our members. We invest in the price every day. We talked about our co-brand card and the premium-tier getting increased gas discounts this year versus previous years. And that has been a great way for us to grow the co-brand card program and pass more value on to our members. So, we'll continue to try and use the gas business to really source traffic and membership for the rest of the business.

Okay. Great. And just a quick follow-up on MFI. Can you just talk about the cadence of any discounting that you might be doing to try to continue to bring in members? And then, the other question related to MFI is you have a 53rd week, does that help in MFI? It's actually unclear if you go back to the last year that you had this.

Maybe I'll take the first part of that question, and Laura can handle the 53rd week part of it. Again, we're very happy with our membership performance during the quarter and the year. We continue to grow the size and the quality. I think there's not really a ton of cadence to think about in there within the quarter or within the rest of the year as we see it. The market out there has been pretty rational. We always get this question of whether membership is more competitive. We just think it's a mark of the relevance of the [indiscernible] members to exchange their loyalty for lower prices or convenience or cheaper content or all the things that people have built membership models around in the past several years, we've kind of had that since our beginning, obviously. So, we're proud of what we've been able to do within that model. We continue to attract the right members for us. We continue to engage them with fantastic prices and promotions. That has yielded continued traffic growth year-over-year as we've talked about and is obviously underpinning of the market share growth that we've seen over such a long period of time as well. So, I think all is well in the membership world, and we're looking forward to continuing to grow the number of bodies as well as the dollars. With that, maybe Laura can talk about the 53rd week.

Yeah. So, Ed, you're right on this year benefits from 53rd week. As you think about that related to MFI, there is a slight benefit from the 53rd week, but not much. Most of what is embedded in the benefit of the 53rd week to this year is sales margin and all of the relevant variable operating costs that flow with that. So I wouldn't embed any MFI growth in the 53rd week.

Thank you.

Thanks, Edward. Our next question comes from Kate McShane from Goldman Sachs. Your line is open.

Hi. Good morning. Thanks for taking our question. We wondered if you could talk a little bit more about what happened with ticket during the quarter and if you've seen any change in units as inflation has dissipated here. And just how you're thinking about the back half composition between ticket and traffic?

Hi, Kate. Maybe I'll take a shot at it, thanks for the question, and Laura can fill in anything that I missed. In the second quarter, we didn't see a tremendous change in any of the components of comp relative to Q1 or maybe Q4 last year. So certainly, continued traffic growth, as we've talked about many times already today. And as you know, within the consumables business, the grocery business, we are continuing to see strong comp, but some of that is obviously the continued inflation, which implies lesser units. That certainly was true in Q2. But again, the trend was pretty similar to what it was in Q1. Importantly, what we continue to see in our member spending is really good data. We track, obviously, a lot of information. We always talk to you all about income cohorts of high, medium and low shoppers. And in the second quarter, that trend was a lot like what we saw in Q1 and in the quarters before that where each cohort that we track grew in terms of total spending and then trips per member and spend per member. So, as you know, the trips growth is incredibly important to us because trips are the biggest predictor of membership renewal. And so we're very happy with that data and happy with that trend, and we see that continuing into the future.

A follow-up question is just on the credit card transition. I know you mentioned that the new account growth exceeded your plan, but has this impacted your outlook for the second half in any way?

Well, look, maybe I'll just introduce it and maybe Bill Werner can take it since he runs that program for us. We're incredibly proud of our new co-brand credit card program. Certainly, a wonderful way to engage our members and provide even more value to them. We talked about it in the -- I talked about it in the prepared remarks that our awards are up 20% year-on-year, that's a mark in the growth of the program, but also the tremendous increase in value to each of those members as we go. So, we're very happy with where we are, and maybe I'll let Bill give some context underneath that.

Yeah. Hey, Kate. The only comment I would add is that the credit card is all about stacking for the future. So at this point, we've added close to 250,000 new accounts with Cap One. It's well ahead of the sign-up run rate that we had previously. So, we're really excited about what we're seeing on the acquisition side. The other thing we're seeing underneath the data is we're seeing members trade up into the highest tier credit card. So, as we sit here today, about 42% of our cards are in the highest tier versus about 37% this time last year. So, within that credit card growth, we've seen trade up from people who had the lower-end credit card, so at the $55 level up to the $110 level. And we've also seen members transition from the $110 Rewards membership, our Club Plus membership, into the credit card as well. So they're staying within the higher tiers, but they're upgrading within that. And that higher-tier credit card comes with double the lifetime value compared to the lower-tier credit card. So this is all about structural long-term growth, and it's all about what the credit card program has been about all along is growing the quality of the membership for the long term. So it's not going to have a meaningful change over the next two, three, six months. But over the long term, the lifetime value we're generating will pay dividends for a long time to come.

Thank you.

Thanks, Kate. Our next question comes from the line of Michael Baker from D.A. Davidson. Your line is open.

Okay. Great. Thanks, guys. I want to ask you about what you're seeing competitively in terms of price with some disinflation. It sounds like you're investing in price and flowing that disinflation through to customers. Are you seeing that from competitors? Can you talk about price gaps. Didn't seem to drive much incremental traffic, I guess. So, I presume your competitors are doing the same, but just curious what you're seeing there.

Hey, Mike, thanks for the question. Our pricing metrics remain very strong. As we've told you, we've made considerable investments last year as we felt there was an opportunity to meaningfully press our advantage against some of our competitors. We've continued to make investments this year in pricing, and we've highlighted some of those in our prepared remarks. It's also important to note that shelf prices are not the sole determinant of value in a member's minds, right? Shelf prices are one thing, promotion is another. And we've continued to invest in new and innovative promotions, one of which we highlighted in our prepared remarks today. Talked a lot about the co-brand credit card and the increase in value provided to our members there. So, we feel like we're in a great place from an overall metrics perspective. And all of that is translated into the gains in traffic and market share that we we've talked about. Our competitors, I think, are acting pretty rationally at this point in time, and I don't see that as a change. I think that's been happening for a while now, and I would expect that to be the base case going forward. So we're pretty proud of where we are, and we will continue to invest in ways to keep that value flowing to our members, because that underpins our entire business.

Got it. Okay. That makes sense. If I could ask one more follow-up? I think it was -- I didn't know if I quite got the answer, but the -- can you talk about the pace of comps throughout the quarter, please?

Yeah. Hey, Mike, it's Laura. So, as we travel through Q2, the front half of the quarter was certainly more challenging than where we exited from a comp cadence. And that's no different than the storyline out there from everybody else. Weather was certainly an impact. We talked about that in the prepared remarks. So, May and June kind of performed similarly and July was the strongest.

Even with the weather -- I'm up here in Boston, it was the wettest July in a long time. Even with that poor weather in July, July was still better?

Yes, that's right.

Yes, that's right. And to some degree, go back to what I talked about in the gas business, Mike, it's certainly that's a great way that we source traffic. And last year, we were definitely getting extra traffic in May and June, that was difficult to lap. So we estimate that had an impact on those months as well.

Yeah, understood. Okay. Thank you.

Thanks, Mike.

Thanks, Michael. Our next question comes from the line of Mark Carden from UBS. Your line is open.

Good morning. Thanks so much for taking the questions. So to start, what are you seeing in terms of initial renewals from some of your customers that signed up at discounted rates last year? Have they shifted at all from what you've historically seen? And how is your member growth trending from new club contributions versus existing club contributions? Thanks.

Hey, Mark, thanks for your question. As we've talked about a couple of times, we're very happy with where we are from a membership perspective in growing the membership and the context beneath there with growing our higher tiers and growing engagement and growing our renewal rates. As we said, we expect to maintain our 90% renewal rate. That is a great thing for us to do. As you know, that's an all-time high for us. And sort of 800 or 900 basis points above where we were several years ago. And over that same period of time, not only have we grown the tendered renewal rate, but we've grown the first year renewal rate from something around 50% to something around 70%. And we haven't really seen a change in that trend either. We're doing a wonderful job engaging all of our membership, both new and tenured. Our new clubs are an integral part of what we're trying to do here at BJ's and growing our overall chain. We gave you a little bit of context around the importance of those new clubs and the growth that they're providing with nearly $100 million of EBITDA for those clubs that have been opened since 2016. That really is because we are doing a wonderful job attracting, engaging and retaining the members in those clubs. We're showing them great assortments. We are integrating the digital experience much better in our new clubs. And we're operating those clubs very, very effectively from the day that they opened through today. So, we're proud of our real estate strategy and our execution of that strategy. We're hopeful we can do even better, and we know that it's powering our business going forward.

Great. That's helpful. And then as a follow-up, just from a wage standpoint, do you see much risk for the environment requiring another round of investments on that front?

Yes, it's a good question. I don't know what the future holds for us, Mark, but our team members, first and foremost, are excellent. For those listening today, thank you for being with us, and thank you for doing what you do every day to take care of our members. We've made considerable investments over the past several years, as you know, Mark, from following our story. We will continue to invest in our team members, both in the field, in our distribution centers, in our club support center. But as we sit here today, the dynamics are a bit different than they were a couple of years ago, right? We are fully staffed. We're finding great talented folks that come and work for us. And our churn has decreased over the past couple of years as well. So, we feel like we're well positioned. We'll continue to execute. But we know that the wage environment is dynamic and wages aren't going to go down. So, I would expect some continued pressure as we go forward. We'll figure out our way to manage that in the context of our overall P&L. I think we've shown a good track record of being able to manage through up cycles and down cycles and still hit our numbers. So, I'm very proud of what our team has been able to do this quarter. And again, thanks to those listening.

Thanks so much, and good luck.

Thanks, Mark.

Thanks, Mark. We have no further questions at this time. So with that, I will hand back to Bob Eddy, Chairman and CEO, for final remarks.

Well, thank you, everybody for your attention and support. Again, thanks to the team members on the phone. We are very proud of our second quarter results, our year-to-date results and the results over the past few years, growing our chain, growing our traffic, growing our market share and most of all growing our membership. Thanks for your attention. We'll talk to you when we report our next quarter.

Thank you. This concludes today's conference call. You may now disconnect.