Ladies and gentlemen, thank you for standing by, and welcome to BJ’s Wholesale Club Q1 Fiscal 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please advised that today’s conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Faten Freiha, Vice President of Investor Relations. Thank you. Please go ahead, ma’am.

Good morning, everyone. Thank you for joining BJ’s Wholesale Club’s first quarter fiscal 2020 earnings conference call. Lee Delaney, President and CEO; Bob Eddy, Chief Financial and Administrative Officer; and Bill Werner, Senior Vice President, Strategic Planning and Investor Relations are on the call.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 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 Form 10-K filed with the SEC on March 19, 2020 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 of the financial information presented in accordance with GAAP.Please refer to today’s press release posted on the Investors section of our 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 Lee.

Good morning, everyone. I hope you and your families are safe and healthy during these unprecedented and challenging times. Our thoughts go out to everyone who has been affected by the coronavirus pandemic.So much has changed since we last spoke. This pandemic has presented us all with challenges. I’m proud of how we managed our business in this new environment and deeply thankful for the contributions of our club and distribution center team members who have tirelessly served a surge in demand for our essential products while embracing new safety conditions and protocols.I also want to thank our home office team members for working hard to innovate on safety and product supply, as well as their flexibility in adapting to different ways of working. And also, thank our vendor partners who have been incredibly supportive of our outsized demand.Our team members’ hard work and dedication has enabled us to safely serve our communities. We are humbled by our role in these difficult times and value the trust and confidence our members have in us to provide them with essential products and services.Our first and most important priority is the health and safety of our team members, members and community. Since the outbreak of the pandemic, we have taken aggressive actions and implemented extensive safety measures across all our facilities. We have put in place increased sanitization and social distancing protocols. We have limited capacity in our clubs, provided and required team members to wear protective equipment, shutdown our services businesses given the close contact that they require, and introduced temperature checks for all our team members reporting to work.We have limited travel and asked nearly all home office team members to work remotely. We have taken hundreds of other steps, too numerous to mention, and we’ll continue to work with…

Thank you, and good morning, everyone. Before I begin, I’d also like to take a moment to thank our team members for their incredible dedication and hard work during these challenging times.Our business is well situated to exceed expectations in an emergency such as the coronavirus pandemic that we all face. We are a one-stop shop capable of extremely high volumes, while providing great value to our members. COVID-19 has heightened demand for our products and services and our team members managed well through this environment, embracing their important role in serving our communities. As a result, our performance for the first quarter was extremely strong.Net sales for the quarter were $3.7 billion. Merchandise comp sales, which exclude gasoline, increased by 27%, significantly exceeding our expectations and were driven equally by ticket and traffic.Our digitally-enabled sales grew by approximately 350% and drove about 5 full percentage points of our 27% merchandise comp. About three quarters of the Q1 growth in digitally-enabled sales was driven by same-day delivery and buy online, pick up in-club or BOPIC.As we noted in the past, we have an economic advantage here compared to others. We operate in a limited SKU warehouse environment with significantly higher average tickets, which allows us to be much more efficient. As a reminder, BOPIC sales tend to skew towards higher ticket items. And through our partnership with Instacart, a same-day delivery sale has the same margins as a sale in our clubs.Before I turn to our divisional comps, let me give you a little color on our merchandise comp sales cadence for the quarter. For the first three weeks of February, comp sales were in line with our plan. In the fourth week of February, comps accelerated to the low-teens level. This acceleration continued to ramp in March, where we…

[Operator Instructions] Your first question comes from Chris Horvers with JPMorgan.

Thanks. Good morning, guys. So my first question is on the membership fee income growth. You talked about 16% cash in the quarter, but 40% new member growth. Does that suggests that the signups accelerated over the quarter, i.e., not picking up all the cash to get more in April versus March versus February?And as you think about the year, if you drew the line today, how would – what would be your expectations for overall MFI growth? And any comment on cadence over the rest of the quarters would be helpful, too?

Great. Good morning. This is Lee. As we begin, let me just note that Bob and I are in different locations, and so I’ll play a bit of a role of MC. I think on this specific question, Bob, you’re well situated to answer, jut the flow and the amortization of MFI. Do you want to take it?

Absolutely. Good morning, Chris. Thanks for the questions. So we certainly had robust membership growth during the quarter from a new member growth, as well as the renewal rate perspective. I think this is probably the first time we’ve talked about cash MFI in a call. The purpose of doing so was was just to give everyone a view at the – exactly what you’re pointing at, which is acceleration of membership growth during the quarter.Certainly, as the quarter progressed, we signed up a whole bunch of new members. And as we pointed out in the prepared remarks versus last Q1, 40% growth in new membership. So certainly, much higher than we had planned at the beginning of the year and much higher than the prior period.As far as membership going forward, we would expect more of the same. As we said in the prepared remarks, we believe that acquiring members will be a little bit easier to do. We certainly have a lot of cash to invest behind that idea. And the membership team now led by Paul Cichocki is poised and primed to really take advantage of this one-time opportunity to do so.

Great. Another color I have in terms of the MSI growth for the year?

Again, it’s difficult to predict, Chris, given all the different pieces of uncertainty out there. But certainly, heading into the second quarter, we would expect accelerated rate of growth there at least and then we’ll see how the rest of the year plays out.

Got it. And then my follow-up question is, it sounds like you’ve hit your debt target very, very quickly, probably a couple of years faster than what we thought you would. So as you think about capital allocation going forward, great to hear that you’re spending into the beat and also looking to reinvest to gain share.But in terms of the excess cash and considering sort of this, the ability to open stores at this point, as you think about the next 12 months, is share repurchase going to be the best, your number one option in terms of reinvesting that excess cash flow?

Yes. Let’s start with the fact that it’s the number one focus of our entire team to take this opportunity to turn one quarter’s fantastic performance into many years of growth in front of us. We’ve got earnings to invest. We’ve got a ton of cash to play with, and we will be aggressive in doing so, that will take many forms as we go. Real estate is just one of them. And as you point out a little bit of a bump in the road from a timing perspective, as construction in key markets was slowed down during the pandemic here.We have opened one club this year in Florida and we will open Chesterfield, Michigan in July, hopefully, and we have two other clubs under construction today. Both of those have experienced a little bit of a delay, given what’s going on in the external world. But they will open around the end of the year either late in this year or early into next year as we sit here today.Any real estate opportunities that come along and we are firm believers that there will be many as the pandemic fallout makes its way through retail. We will be very aggressive in trying to take advantage of those opportunities. Our real estate team is already out in the markets, beating the bushes, trying to get out in front of the opportunities.Bill Werner is on the call here today. He leads the new club identification team. That team is out there understanding and mapping where all of our retail competitors are, who are the ones that we think might be in trouble and have considerable real estate opportunities of a size that we could use. And so we will take every opportunity to be very aggressive. Even within our own portfolio, if we can restructure leases or buy properties, we have certainly enough cash to play with there.We will invest in growth in all other ways as well, whether that’s through membership or through any of the other growth factors like omni-channel that Lee talked about in his performance. As we get to the rest of cash, certainly, we would expect to have some leftover.We are a little bit behind our plans from a stock buyback perspective, given what went on in the markets and our pause on the buyback program. We would certainly consider going forward with that and also consider other forms of returns of capital. We have no firm plans at this point, because we need to see how the next couple of weeks and months play out and work together with our Board to figure these things out. But I do think this is almost a once in a lifetime opportunity for this company.

Understood. Best of luck. Thank you.

Your next question comes from Peter Benedict with Baird.

Hey, guys, thanks for the question and congrats on the good execution here. One membership question and then one pricing question. Just on the new members, can you give us a sense for maybe the percentage of those new customers – new members that signed up on auto renew? And how have their kind of repeat shopping patterns look like? I know it’s only a short timeframe, but any color on that would be helpful? That’s my first question.

Sure, Peter, thanks for the question. So today, when we sign up new members, all members are enrolled in auto renew and then need to make the choice to opt out of that. So the penetration of auto renew in the new member base would be considerably higher than the 65% that we see across the overall penetration. It’s really the members who have been in the franchise for a while and have chosen not to auto renew that represent the gap to 100%.And not surprisingly, the new members we’re seeing are shopping at rates that are elevated versus what we might normally see, that’s clearly driven by the increased consumption tied to the pandemic. But in terms of onboarding of those members, we feel good. They’re shopping at a faster rate and engaging in our omni-channel platforms as well. So good early momentum with that crop of members.

Good to hear. And so, and then with respect to, Bob, I think you mentioned the inflation in certain categories, but you guys were kind of holding price and delivering value. How of your price gaps versus some of your grocery competitors evolved over the last few months here? I’m just curious what you’re seeing on that front? Thank you.

Yes. When you step back and look at inflation across the business, it was a relatively minor impact on the business, measured in a tenth of a percentage point. Although across certain categories, there were quite considerable changes. So and as Bob mentioned, eggs saw a pretty meaningful increase in the price early in the quarter.We made the decision to drag the price on eggs simply because we felt like it would be kind of a large measure of sticker shock to our members. It was a high-frequency category with kind of good price impression and where we saw grocery and other competitors reflect a meaningfully higher price relatively quickly. So it felt like an opportunity for us to invest in our price impression.In other places more recently, like protein where the price of beef up, for example, has gone up pretty considerably. We are reflecting that in slightly higher retail to make sure that we are covering our cost, that is considerably below what we’ve seen some other players do, where their retails have floated higher than ours.And so overall, we feel good about our price impression and feel like large pack sizes, discounted grocery option and the really great value we have everyday is only being accentuated in this market where people need to buy more are building bigger baskets. We’ve become a more logical destination.

Okay, great. Thanks, Lee. Good luck.

Thank you.

Your next question comes from Edward Kelly with Wells Fargo.

Yes. Hi, guys, good morning. Just a quick follow-up on the membership trends. Could you give us a little bit of cadence on the member growth sort of like you did with sales, and I’m just kind of curious as to how the pace currently looks? And then as you look at these new members, what do they look like relative to their – to the base, the typical BJ’s member?

Sure. Thanks for the question, Ed. Let me start and maybe I’ll ask Bob to build a little bit on it. So the pace of membership growth looked relatively consistent with the comp. We became more on trend as people look to stock up and make bigger purchases and drive fewer trips.And so we saw kind of the shape of membership ride pretty consistently with the shape of the comp sales performance. And so we exited the quarter at a nice rate of membership growth and we’ve seen continued membership growth on an ongoing basis. So we’re excited by that.And then as I mentioned previously, the overall dynamics of that membership growth are pretty appealing. We’re seeing, on average, slightly younger members, slightly more digitally-enabled members where growth in online platforms has been quite strong. And then we’re seeing really good shopping behavior, clearly tied to the pandemic and changes there. But the overall crop of members are seeing is seemingly quite positive. Bob, anything you’d add to that.

No, I think you hit all the right topics, Lee.

And just as a follow-up to that, how do we think about incremental margins return? I don’t remember. I mean I do remember you guys talking historically about how your average 25,000 members per store, just getting to 26,000 is such a big deal, but that’s still only really scratches the surface on the gap to peers. How do we think about incremental margins on this business?

Yes. Ed, I think that’s one of the things that clearly benefited us throughout the quarter is the flow-through we’re seeing from the growth in members and from the growth in sales. As we’ve talked to you about in the past, our boxes on a membership basis are at historically been less developed than some of our competitors. So we would average slightly north of 25,000 numbers per box versus Costco in the 60,000-plus member per box range.So we clearly have room to grow. We’ve seen that growth with the membership base. But we’ve built capability over the last four years and have a model that drives pretty profitable marginal growth, which is exciting to see. We’re very efficient in getting pelleted goods to the sales floor with a relatively efficient labor model.So as we grew quickly, we were able to see good flow-through throughout the P&L and leverage from a G&A line, despite pretty considerable investments in safety and increased pay for our team members. Despite all of those investments, we still saw good flow-through, which is exciting.

Great. Thanks, guys.

Your next question comes from Karen Short with Barclays.

Hi, thanks for taking my question. I was wondering, actually, if you could give a little color on the ticket and where that’s standing now in terms of COVID? And then I was wondering if you could just give, and I know you said that you’re seeing slightly younger demographics, I think, on the new signups. But maybe a little more, can you elaborate a little bit more on that?And just to throw a number out there, it looks like you’re probably close to 8 million members. Yes, I think it would be about 8 million members as of now and still growing. Is that fair?

Sure. Bob, do you want to take the question?

Sure. I apologize, if you can hear my landscape is outside my house. But happy to take that question. So we talked in the prepared comments, Karen, about the 27% comp for the quarter was pretty equally driven between ticket and traffic. And you probably heard us talk about in our historical ticket somewhere in the $95 to $100 range. So you can do the math on it from there.So that takes it to somewhere near $110 for a ticket, pretty sizable growth during the quarter and similar results so far into Q2. I think your total members’ number is at least on a paid basis a little bit high. But certainly, we’re seeing great growth and – into May as well.

Okay. And then – well, I guess, anything on the – anymore color on the demographics, other than and you just said skewed slightly younger, but any other color you can give there?

The – obviously, the membership growth we’re seeing is really across all of our geographies, which is encouraging and that was true of comp sales performance as well. It was surprisingly uniform and surprisingly strong across the business and in terms of the new membership enrollment.In terms of the new members specifically, as I said, they’re a little bit younger on average, a little bit younger for us is still people with families. So it’s not people in the early 20s, it’s older than that. But relatively young for our franchise, a meaningful higher portion signing up digitally and engaging with our digital platforms.And then considerably higher early shopping behavior than we would normally see, although that does owe to the business. Beyond that, we’re still just getting to know these members from an analytic and from a qualitative standpoint. So we may have more to say on future calls. But the early read is quite positive.

Okay. And then my follow-up…

One thing…

Oh, sorry…

…Karen, is that our ability to acquire these members in a digital way has really, really jumped. We’ve talked to you about members that were in the 10%, 12% range in past quarters and this result in Q1 was almost 30% members acquired digitally, so incredible progress from that standpoint as well.

Okay, great. And then you commented, the three quarters of the e-com growth was same-day delivery and BOPIC. Actually, can you just give more granularity on the split between those two?

Sure. Bob, do you want to take it, Bob?

Sure. We saw tremendous growth in all things digital during the quarter as we talked about 350-ish percent growth in digitally-enabled sales. The vast majority coming from same-day delivery and BOPIC. And I believe, Lee, correct me if I’m wrong, same-day delivery was up about eightfold from the previous watermark. So that was the predominance of that number.

Yes, that’s right. I think, as we’ve talked to you in the past, we do think we have an economic advantage when it comes to omni-sales, right? So think about the simple formula of a bigger pack size leading to bigger rings. Even though we have lower percentage margins, we have higher dollar margins. And we’re picking in an environment of 7,000 SKUs versus 100,000 SKUs if you pick your other mass merchant or grocery competitor.And so we are very excited to see the considerable growth in same-day delivery and buy online, pick up in-club. And as I mentioned, we’ve already started to pilot that including curbside delivery and then inclusion of fresh goods as well. And so we’re going to continue to lean into omni as a real differentiator for us and the engagement this quarter was fantastic.

Great. Thanks very much.

Your next question comes from Robbie Ohmes with Bank of America.

Hey, guys, thanks for taking my question. Lee, may be for you. I was wondering if you could just tell us how you’re thinking about the reopening phase. And anything you’ve seen in regions where restaurants have reopened or discretionary retailers start reopening stores? I’m just curious how you’re thinking about how that could change the dynamics you’re seeing now and how you would be planning for that?

Yes, Robbie, it’s a great question and something that we’ve been thinking a lot about. Our footprint is essentially Maine to Florida and as Far West as, is now Michigan. And the reality is the bulk of our footprint is still under pretty considerable stay-at-home orders.And so as you think about our concentration and the Mid-Atlantic and the Northeast, in particular, we remain under those orders and we will likely be that way at least for an extended period of time in large measure. But in our business in the South, including in Georgia, we’ve been watching this closely, because it is the early indicator of how demand will change.So far, we haven’t seen meaningful change for deceleration in the business. It would appear that people continue to consume significantly larger quantities of food at home. They haven’t ventured back in large numbers to restaurants. And I think a number of the office jobs stay-at-home.So as you think about schools closed, offices closed, fewer people out in about during the day, you’re seeing large quantities. And I think, even as restaurants begin to open, they’ll do it with limited capacities. And so as we look at that whole mix, it’s really hard to predict what demand will look like going forward.But as we said in the prepared remarks, it’s hard to see they’re not being elevated demand for the foreseeable future, even as the world begins to open back up. And that’s part of the reason we gave the intra-quarter color on Q2 and that we’re not seeing a slowdown in May, because we felt like giving a little bit more about the current state of the business would be important and help you think through the potential future results, which we’re quite excited about.

That’s really helpful. And just one follow-up, Lee, any color you can give us on the impact from the stimulus checks hitting, and how you guys think about how much that is supporting comps?

Sure. I think there’s two factors that are likely supporting comps kind of in terms of an economic impact and that’s the stimulus checks, as well as an increase in EBT food stamps. And we certainly saw late in the quarter into Q2 an acceleration in some different categories.So as Bob mentioned, general merchandise went from a negative comp in Q1 to being positive in Q2. And we saw relatively significant growth in work from home categories, but also some potentially more discretionary categories like electronics and TVs. And we would imagine that, there is certainly an impact from stimulus checks that are impacting the business.It’s hard to quantify exactly what that is, because the overall shape of demand has remained elevated and relatively consistent. But I think it’s right to assume there is some benefit flowing through from stimulus checks in the business.

Gotcha. That’s helpful. Thank you so much.

Your next question comes from Chuck Grom with Gordon Haskett.

Hey, thanks, good morning. Congratulations on a great quarter. Lee, you talked about some and I think I’ve heard some of BJ’s in a long time about suppliers that you typically don’t deal with starting to knock on your door. And maybe if you look back at the history of Costco, it’s obviously something that’s helped them over the past 10 years or 15 years. So I was wondering if you can maybe just amplify on that a little bit for us?

Sure. I think it’s a combination, Chuck, of us knocking on their door and then knocking on our door. As you think about our general merchandise business, in particular, we’ve been fortunate to remain open when large sections of specialty retailers, mall-based retailers, the department stores have been closed. And so many of the vendors who supply those channels have had their own challenging dynamics.And in that world, we become potentially attractive outlet, either for opportunistic buys or ongoing relationships. And so we have certainly asked our store general merchandise team to push and engage on this measure, because it’s likely true that a lot of the other players, particularly some of the weaker or more financially leverage players may struggle if demand does not snap back pretty meaningfully.And so as those businesses come under potential distress, it creates an opportunity for us to engage with companies that may not normally choose to sell to a club or sell to us specifically. And so that’s a potential silver lining in this for us as we may get access to some new categories, some new brands that would be new and exciting for our members.

Okay, that’s great to hear. And then, just to circle back on membership, again, the 40% growth, just, is there a way to put that number in perspective. Maybe if you look at the past four quarters to eight quarters average of what the average has been for the membership growth. And then I think there has been a lot of retailers that I’ve seen a surge in customers. And for you guys, clearly, there is a fee attached to it.So the stickiness what you would think would be good. But just wondering what steps you guys are going to take to cultivate those relationships going forward. So you can keep them not for just the next two to three quarters, but for multiple years?

Sure. Let me start and then I’ll ask Bob to comment on it as well. 40% is really strong and we’re very excited about that growth. The challenge for us is, I mean, a lot of places we’ve been in the markets for a long period of time, some people feel like they know us.And so it’s always the biggest challenge to get people to walk through the door and see how we’ve changed the business that we have, omni platforms that we have, new assortments that we’ve changed, lots of things about the environment. And the pandemic has created extra motivation to walk in the door that is above what we could drive simply by traditional marketing.And the trick once you get them to walk in the door is to get them to shop and to shop early and that’s been impacted as well. And so we’re hopeful that people signing up for a year-long membership and shopping early affords us a nice opportunity to engage those members on an ongoing basis and convince them of the value of our franchise. And so we’ll be looking to pull all the levers we have developed.So engage people from an omni-channel standpoint, try to get them enrolled in our credit card offering to save even more money, promote to them to get them to explore different elements of the business. And against the backdrop of the potentially recessionary environment, we think people will be looking to save money.And so, some of the challenges of shopping in a club, a little bit longer trip, a little bit bigger pack sizes or sacrifices, people may be more willing to make and that’s certainly been the history of the company when there’s been recessionary environments we tend to outperform.

Okay, that’s great. And then just one quick follow-up for me. It would be just curious how big of an opportunity BOPIC with fresh could be for you guys? I’m sure you’ve started to test. So anything you can learn or share with us targets announced that they’re going to start doing that in the next several months. So just curious how big of an opportunity that could be? Thanks.

Yes. We think it could be a pretty meaningful opportunity in the test clubs. We’re seeing really strong engagement in terms of the number of baskets that have fresh goods in them. It clearly introduces an extra operational challenge and that you need to keep the goods refrigerated and be even more disciplined in terms of pickup times and making sure that people don’t abandon the baskets, but the early dynamic has been quite favorable.And so we’re working to get the operational model right. And then with that, we think there is an opportunity to scale it. And so, as Bob described, we would look to lean into that in this environment in terms of omni investments and other investments we can make.

Great. Thanks a lot.

I will now hand the call back to Lee Delaney for closing remarks.

Great. Well, thank you everyone for your engagement. We’re clearly excited about the quarter. But more so for the potential signals, it sends for our future. So thank you for your engagement. Thank you for your questions, and please stay healthy and safe in this environment. We’ll talk to you again soon.

That concludes today’s conference. Thank you for your participation. You may now disconnect.