BJ's Wholesale Club Holdings, Inc. Q1 FY2024 Earnings Call

Hello, everyone, and welcome to the BJ's Wholesale Club Holdings, Inc. First Quarter Fiscal 2024 Earnings Conference Call. My name is Candice, and I will be coordinating your call today. After the speakers' remarks, there will be a question and answer session. I would now like to hand the conference call over to your host, Cathy Park. Please go ahead.

Good morning, and welcome to BJ's First Quarter Fiscal 2024 Earnings Call. Joining me today are Bob Eddy, Chairman and Chief Executive Officer; Laura Felice, Chief Financial Officer; and Bill Werner, Executive Vice President, Strategy and Development. Please remember that during this call, we may make forward-looking statements within the meaning of the federal securities laws. These statements are based on our current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectations described on this call. Please see the Risk Factors section of our most recent Form 10-K and Form 10-Q filed with the SEC for a description of those risks and uncertainties. Finally, please note that on today's call, we'll 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. And now I'll turn the call over to Bob.

Good morning, everyone. Thanks for joining us today to discuss our first quarter results. This quarter was marked by continued strong growth in membership fees and market share. We are also proud of the continued growth in comparable sales. We expected the first quarter to be a tough lap given last year's inflation dynamics. So we are particularly proud of our continued momentum underpinned by strong traffic and unit growth. Our team continues to manage the day-to-day well while staying laser-focused on executing our long-term strategic priorities. Comparable club sales excluding gas sales grew by 0.6% in the first quarter. Our compelling value proposition both in the club and at our gas stations drove strong traffic contributing 3 percentage points in the quarter, similar to our traffic trend in the fourth quarter of last year. Inflation was above flat, and we continue to grow unit volumes with our perishables, grocery, and sundries division increasing comparable units in the first quarter. Our members are rewarding us for our merchandising improvements and our amazing value. Consequently, we gained market share in both units and dollars in the quarter. Comparable growth for our perishables, grocery, and sundries division was up over 1% in the first quarter. We experienced the strongest growth in perishables, particularly in unit volumes, led by our fresh produce and dairy categories. Comparable unit growth in grocery and sundries was equally impressive, especially when compared with declines in the broader marketplace. Our general merchandise business delivered a slightly negative comp in the first quarter as a handful of weather-sensitive categories weighed on the overall division. We saw about a 10-point variance in GM comp performance across markets that experienced better weather versus markets with cooler and wetter weather compared to the prior year. Consumers remain discerning in their purchasing, and we have also found that members are increasingly waiting to shop higher ticket seasonal categories such as patio sets and air conditioners exactly when the weather turns, not in anticipation of it. When presented with great quality of value, members are spending. General merchandise is critical to our model, and we continue to make outstanding progress on our transformation efforts. We are intensely focused on delivering a new and exciting assortment that is presented and marketed in the right way at the right time and at the right price. Successful execution quarter after quarter is crucial to shifting member perception, and we believe we are delivering on this front. In fact, the categories that drove our general merchandise growth in last year's fourth quarter continued to showcase strength in the first quarter with consumer electronics and apparel both comping meaningfully positive. We're especially pleased with the performance of our home categories, which turned positive for the first time in a long time with the segment comping nearly 7% in the first quarter. Home textiles led much of this growth. Higher-quality products such as our bath towels and sheets are resonating with our members. We've also elevated and enhanced the assortment in our kitchen and cleaning appliances, leaning into trend-right items in higher-growth categories designed to drive greater member demand. Members who engage in general merchandise exhibit trip and spend behaviors that highly correlate to membership renewal. Strengthening the treasure hunt and inspiring the general merchandise shop is a significant opportunity for the long-term growth of this company. I'm proud of the progress we're making and remain confident in our ability to realize the significant potential we see in this division. Our four strategic priorities remain critical to our long-term success. These priorities are improving member loyalty, giving our members an unbeatable shopping experience, delivering value conveniently, and growing our footprint. We are making significant progress in each of these areas. Our membership momentum continues to build, demonstrating the power of our growing value proposition and 90% renewal rate. Member counts increased both year-over-year and sequentially. We are expanding membership in both new and existing markets with our digital platforms powering nearly half of this growth. We're improving membership quality as well. Our highest tier member base consists of our One+ members who pay a $110 fee and hold our co-brand credit card, which we believe is the best offering in retail today. As you know, these are our most loyal and highest spending members, exhibiting the greatest lifetime value. This tier continues to grow double digits year-over-year, helping our higher tier membership penetration surpass 38% in the first quarter. As a testament to ongoing success, in the first quarter, we reported membership fee income growth of 8.6% year-over-year. We will remain focused on maintaining our strength in membership to drive long-term value for both our members and owners. A great shopping experience keeps our members coming back to shop with us, deepening their loyalty and driving higher renewals. This is why we continually strive to improve the member experience through merchandising, digital and in-club conveniences, and, of course, amazing value. We know our members choose where they do their weekly grocery shopping based on produce and meat. Members already love our assortment as well as the differentiated amenities such as our full-service deli. While we know they value the selection and quality of our meat, we knew we could do better at produce. Having full control over our perishable supply chain has been an enormous benefit, and we launched our Fresh 2.0 initiative last April, bringing even more freshness and excitement to our produce offering. Fresh 2.0 was built directly on insights and feedback from our members. We reassessed every step of our process from sourcing to packaging to marketing. We implemented robust training, giving our team members the knowledge and tools to maintain maximum freshness and quality of our produce. We invested in speeding up the supply chain in areas such as berries, resulting in faster and fresher arrivals at our clubs and ultimately into members' homes. We strengthened existing vendor relationships and also forged new ones to improve in-stocks and introduce newer seasonally relevant products. We've already received great feedback on new offerings such as sumo mandarins and dragon fruit. Our comprehensive Fresh 2.0 pilot, which ran through much of last year, drove incremental member engagement in the category and yielded 6% more produce trips than our control clubs. In light of this success, we are scaling the program chain-wide this year with compelling displays and signage in club that help improve navigation and showcase our freshness, quality, and value. This month, we began installing coolers at the front of our clubs so that our members are drawn in by this high-quality, low-priced produce in the first moments of their visit. We're amplifying this effort in our marketing with featured content and enticing promotions across all our channels. We believe the improvements we've made in our fresh offering in the last year have delivered significant value to our members, contributing to our perishables performance and supporting our consistently strong traffic trends. In fact, our fresh produce category has delivered 8 points of comp unit growth in the first quarter, outperforming the market. As we advance our Fresh 2.0 rollout this year, we will continue to work to win the shop, aiming to further solidify BJ's as our member's destination. We're innovating with our own brands, Wellsley Farms and Berkley Jensen, to provide members with high-quality products at substantial value. Our own brand sales penetration continues to grow each quarter. Our sundries categories lead the way in areas such as paper and trash. In the first quarter, we've launched our own food storage bags. This offering is a strong illustration of our capabilities and approach to own brands. Our research suggests that our members were seeking greater value than the national brands offer. We underwent extensive benchmarking and analysis and identified a partner to help develop high-quality products that are comparable to the leading national brand while offering a value of more than 30%. Our members' response has exceeded our expectations, improving the category sales trend, with more than half of the sales coming from new members to the category. Owned brand sales make up over 1/4 of our business, and we're confident in our goal of reaching 30% in the future. Finally, gas is a traffic driver for us, and it's a way in which we deliver value to our members. We gained share once again in the first quarter, with comp gallons growing by approximately 6% year-over-year. This compares to the broader U.S. market, which was down mid-single digits in the same period. Our philosophy on gas, like the rest of our business, is grounded in delivering value. This mindset allows us to proactively offer extra savings to our members through gas promotions and our co-brand credit card, which we believe deepens member loyalty. We work hard to save our members time and money. For members taking advantage of our value proposition, it is easier than ever as our digital conveniences allow them to shop our clubs how they want. Our convenience initiatives include buy online, pickup in club, curbside pickup, and same-day delivery. In-club shoppers can also leverage our digital coupon gallery and skip the lines with Express Pay checkout. Our digitally enabled sales have posted double-digit growth in every quarter in the past 2 years. This is on top of meaningful growth through the pandemic. In fact, our digitally enabled comp sales in the first quarter were up 21% year-over-year. We're continuously refining and improving our user experience. In fact, this month, we are rolling out the ability to locate products through our app, making shopping in our 100,000 square foot clubs a whole lot easier. This is one of the numerous enhancements enabled by our autonomous inventory robots, which is also driving labor efficiencies in our digital order fulfillment process. We will continue to lean into our digital capabilities to deliver even more value and convenience to our members in the future. Finally, we continue to make great progress on our real estate strategy. We opened our third club in the Nashville market in Goodlettsville earlier this year. We expect to open 11 more clubs in the back half of our fiscal year, including openings in new markets like Louisville, Knoxville, Southern Pines, and Myrtle Beach, while also expanding in our core markets with 2 openings in the New York Metro market and 4 openings in Florida. In addition to our new unit expansion, we are investing in our existing footprint with upgraded signage as well as remodels as part of Fresh 2.0. We continue to move at an accelerated pace with our real estate initiatives and are building on our future pipeline, which remains at the highest levels in our company's history. As we assess the health of the consumer, members remain selective and incredibly value-focused, which we believe bodes well for our business model. In a limited SKU environment, members rely on us to deliver a highly curated assortment that maximizes quality, value, and convenience. In doing so, we are driving great member engagement as exhibited by growth in trips, units, and market share in the first quarter, an achievement in today's challenging retail backdrop. We're driving greater trip frequency across all income levels that we track, high, mid, and low. Spend per shopper remains consistently strong with our mid- to higher-income members while our low-income members remain under pressure, particularly due to waning government aid. They continue to supplement their purchases with additional forms of tender, meaning they're spending more of their limited budget with us and not elsewhere. In fact, in the first quarter, overall sales from this member base started to grow again year-over-year after 2 consecutive quarters of declines. Looking ahead, we remain confident in our ability to grow the business, reinforced by healthy membership, traffic, and market share. These are key markers of the underlying strength of our company. Furthermore, we believe our operating model, deep focus on our strategic priorities, and unwavering dedication to delivering value keep us well-positioned for long-term success. I'd like to close with my gratitude for our 34,000 team members. I'm impressed and inspired by their dedication to taking care of the families who depend on us every single day. To our team members listening in today, thank you for all of your hard work. I'll now turn it over to Laura to provide more details on our results and outlook for the year.

Thank you, Bob. I'd like to join Bob in thanking our team members across our clubs, club support center, and distribution centers, whose efforts contributed to another quarter of strong financial results. Let's dig into our results. Net sales in the quarter were approximately $4.8 billion, growing 4% over the prior year. Total comparable club sales in the first quarter, including gas sales were up 1.6% year-over-year, led by gallons sold. Merchandise comparable sales, which exclude gas sales, increased by 0.6% year-over-year and by 6.3% on a 2-year stack. We are pleased to maintain traffic and unit growth in the quarter, which demonstrates our strong value proposition, which continues to resonate with our members. As Bob mentioned, inflation was about flat for the quarter, April inflecting slightly positive following several months of slight deflation. Our first quarter comp in our grocery, perishables, and sundries division grew by more than 1% year-over-year. We drove market share gains once again in this quarter, which supports our belief in a growing and loyal member base that relies on BJ's for its shopping needs. Our general merchandise and services division comp decreased by just under 5% for the first quarter, with general merchandise outperforming the rest of the divisions in this calculation. Digitally enabled comp sales for the first quarter grew 21% year-over-year and 40% on a 2-year stack. About 90% of our digital sales are fulfilled by our clubs with services like buy online, pick up in club, and same-day delivery, which remain meaningful drivers of our digital growth. Members who leverage our digital conveniences save time in their shopping and become more loyal members. This is a major win-win, and we will continue leaning into these mutually beneficial enhancements in the future. Membership fee income, or MFI, grew 8.6% to approximately $111.4 million in the first quarter, driven by broad-based strength in membership acquisition and retention across both new and existing clubs. In addition to our Goodlettsville club opening in the first quarter, we also continued to add new members from the 5 clubs that mostly opened late in the fourth quarter. We are pleased with our momentum in growing membership size and quality. Moving on to gross margins. Excluding the gasoline business, our merchandise gross margin rate decreased by approximately 50 basis points year-over-year. As expected, we experienced some unfavorable lapping of our co-brand financial flows as we anniversary last year's launch, which led to this quarter's year-over-year decline. Our first quarter merchandise gross margin rate remains higher than historical levels. SG&A expenses for the quarter were approximately $721.8 million. The year-over-year increase was primarily attributable to our new unit growth and other investments to drive our strategic priorities. As Bob mentioned earlier, we continue to gain share in our gas business with comp gallons growing by approximately 6% year-over-year. From a profitability perspective, the broader industry faced margin headwinds in the quarter, resulting in profits that fell below our expectations. We reported first quarter adjusted EBITDA of $236.4 million, which, as a reminder, no longer includes preopening and noncash rent expense add-backs. Our effective tax rate of 24.4% was primarily driven by higher-than-expected tax windfall. All in, our first quarter adjusted earnings per share of $0.85 were flat year-over-year and in line with our expectations. Moving on to our balance sheet. We feel good about our inventory position. Our team is working hard, improving our ability to have the right amount of product in the right clubs at the right time. We ended the first quarter with inventory about flat year-over-year despite 7 new clubs and approximately 180 basis points of improvement in our in-stock levels over the same period. Our capital allocation strategy is consistent with the framework we set forth a year ago at our Investor Day. We continue to believe that the best use of our cash is applying it towards profitably growing our business. As such, investments to support membership, merchandising, digital, and real estate initiatives will continue to be funded by our cash flows and enabled by our strong balance sheet. We ended the first quarter with 0.6 turns of net leverage, which aligns with our long-term target of sub 1 turn. Returning excess cash to shareholders remains an important part of our capital allocation strategy as well. We repurchased approximately 405,000 shares for $30.2 million. And as of the quarter's end, we have approximately $159 million remaining under our current authorization. We will continue to take a disciplined and balanced approach to deploying our capital to maximize shareholder value. Turning to our outlook for the year. Our guidance for the fiscal year remains unchanged. We continue to expect our fiscal 2024 comp sales, excluding gas, to range from 1% to 2%, getting closer to our long-term algorithm towards the back half of the year. We are still assuming a slightly inflationary year and a strong consumable business led by traffic, units, and market share. Despite external pressures beyond our control, we are pleased with our continued progress in general merchandise. We are proud of our achievements in membership as we consider all of the elements that drive membership fee income, including the aforementioned timing of new club openings last year, and the cadence of openings this year. We believe the year-over-year MFI increase of 8.6% in the first quarter will be the highest growth rate of the year. We continue to expect to deliver merchandise gross margin rate improvement of approximately 20 basis points for fiscal 2024, driven by strong cost management and continued growth in our own brands. We are planning for continued SG&A deleverage in fiscal 2024 as we invest in our growth initiatives, particularly in unit growth as new club sales continue to ramp over a multi-year period. A reminder that we are also lapping variable compensation tailwinds from fiscal 2023. Our expectations for gas remain unchanged. We are planning for an effective tax rate of approximately 28% for the remaining 3 quarters of the fiscal year. Putting all of this together, we continue to expect to deliver adjusted EPS in the $3.75 to $4 range. Longer term, we remain confident in the underlying strength of our business and believe we are well-positioned to deliver sustainable growth to maximize shareholder value.

Thanks, Laura. We are celebrating the company's 40th anniversary this year. As I reflect on our history, we've taken a great business model and transformed it to be even better, particularly over the past 5 years. Our purpose is clear and simple. We take care of the families who depend on us. This, combined with our strategic priorities, has built a strong foundation in the way we operate, leading to sustainable growth and value creation. We will grow the size and quality of our membership. We will offer an unbeatable member experience through our merchandising improvements. We will elevate our digital conveniences to save our members' money and time, and we will profitably grow our footprint and strengthen our brand. Above all, we will always deliver compelling value to our members. I'm proud of our entire team, and I'm excited for our future. Thanks again for joining us today and for your support of BJ's Wholesale Club. I'll now turn it back over to the operator to take your questions.

The first question comes from Peter Benedict of Baird.

First, just on the MFI growth. Obviously, very impressive there. I recognize it is 8.6%. It's probably the fastest growth rate. But as we look out through the balance of the year, just any reason why the dollar number would step down sequentially? Or should we expect it to continue to grow a little bit? And curious kind of how the robust performance influences your willingness to consider a fee increase at some time this year? That's my first question.

Thanks, Pete. Good morning. I'll take the first question regarding the fee increase. Look, I think we've had a great quarter from a membership perspective. The team is doing impressive things signing up new members and renewing members. Our field folks have been doing a fantastic job of interacting with our members. We're engaging them nicely as well. So I think we've got a lot to be proud of there. As we said in the prepared remarks, 8.6% was pretty high, and we don't expect that to recur. Most of that increment over our previous trend was just the way the spacing of the clubs last year fell and how that falls into this year. But with that said, we are slightly ahead of last year's trend outside of that and slightly ahead of our own plans. So we're pretty pleased with what we're doing and where we're going from a membership fee perspective. As to the fee increase, we haven't really given a whole bunch of thought to it at this point. And so when there's news to share, we'll definitely share it.

Got you. Fair enough. So my follow-up is on inventory and merchandise margins. Inventory looked really clean. Just curious about your progress there, what you've done to kind of get that in line? And what does that mean for the merchandise margin path from here, down 50 basis points in the first quarter, your sales 20% for the year? Maybe just help us understand the cadence in Q2 versus the second half.

Sure. Yes. Look, we're pretty happy with where our inventories are at this point. The team has been doing a lot of work. We frankly weren't happy with our inventory levels last year, particularly from an in-stock perspective. And so the team has done a lot of work to raise our in-stocks, which are significantly higher today than they were a year ago and to find ways to offset those increases in inventory levels by reducing inventory that we frankly don't need. Not inventory that's going to go bad, but just a more efficient way to present and move inventory around. So I think we've got continued upside there. We should be able to raise the in-stocks even further and continue to rationalize the inventory base as well. Obviously, we've got new clubs coming into the portfolio that drive inventory up a little bit. So we're pretty pleased with where we landed for the end of the quarter. And maybe I'll let Laura tackle the margin question.

Yes. On merchandise margins, it is as we expected when we guided for Q1 when we gave a little bit of color on it. Largely what happened in Q1 was the transition of our co-brand portfolio last year and lapping that. So we continue to expect that this was a Q1 event only and will not drive margins down as we progress through the remainder of the year.

The next question comes from the line of Kate McShane of Goldman Sachs.

Last quarter, we had asked you about the promotional environment and pricing. And I think the answer at the time was maybe the environment was a little bit more promotional. But how are you thinking about it now, especially in the context of pricing actions taken by a competitor and rollbacks from another? I know you have your competitive price gap, but how are you thinking about that right now?

Kate, thanks for the question. Certainly, a relevant one. I would say others are searching for value, and that's what we and the club channel provide every day of the week. So there's a lot of space between us and some of our competitors out there. So I'm not sure that we spend a lot of time thinking about what's been in the news. We spend a lot of time, obviously, thinking about how we can provide better value to our members every single day, whether that's through pricing, promotions, or the co-brand credit card. All sorts of different things contribute to what I think is a fantastic value proposition for our members. So we'll just keep focusing on making sure we're providing the right day-to-day shelf value and promotional values as we go.

Next comes from the line of Simeon Gutman of Morgan Stanley.

I want to follow up on the MFI. The spread in MFI growth versus club growth, I think it's been the highest in quite some time. So can you talk about why it was so good in the quarter? And then why should it step down from here? And I guess you'll be opening more clubs throughout the year. So just thinking about the timing and why that was so strong?

Thank you for the question, Simeon. The strong performance this quarter is largely due to the opening of several clubs near the end of our fiscal year. We signed up many members at those clubs, but did not recognize any membership fees until the first quarter. This created an artificial boost. You're correct that as we continue to open more clubs in the latter part of this year, particularly in Q3 and Q4, we expect an increase in membership fees. However, the Q1 number is likely to be the highest. We are proud of our achievements and ahead of our plans. Looking at the rest of the year, our trajectory is slightly better than our full-year MFI from last year. We're pleased with the influx of members, as prospective members are responding positively to our marketing and promotions. Our team is effectively engaging with them, helping them choose the right membership, and converting them into loyal members. We're very satisfied with the progress we are making.

And can you share any insight if you take new members that had never been to BJ's before and look across the spend? What they're spending on across categories, and you compare it to an existing member. Are you able to see the traction you're making in some of, I guess, the nonfood items in that spend? Or do they typically start with the grocery, food, and then you get them into the other categories?

Look, I think there are two different trip missions when you come to BJ's. One is in grocery trip, and one is a general merchandise trip. We've talked a lot about the fact that we run a fantastic grocery business, and we've done a great job meeting our member needs for their day-to-day grocery purchases. We have a tremendous opportunity in expanding general merchandise. I think we've had great capability in general merchandise in certain categories, like consumer electronics, for a long time. Our aim is really to expand that credibility into other categories. We talked about the fantastic Q4 results in CE and apparel; really, that apparel momentum has continued. We're also seeing the home business come alive for the first time in a long time. That's 3 out of the 4 big ones. We've got to get the seasonal business going, and I think that's largely weather-related at this point. We're finally getting some warm weather here in the Northeast, so we should have a good read on that very soon. With that said, we're pleased with the progress we're making in GM to build on the success of the food business. As we look at member spending levels, as we talked about in the prepared remarks, they are increasing. So it looks like we're going in the right direction as we continue to attract new members and bring them into the fold.

The next question comes from the line of Robbie Ohmes of Bank of America.

Bob, I have two questions. Can you discuss the performance of the new market clubs in relation to your expectations? If there are variations among the recently opened clubs, could you explain the reasons for those differences? My second question pertains to the coolers located in front of the clubs. Can you provide an update on that and how it impacts comparable store sales?

Yes, sure. Why don't we take them in reverse order? The coolers are a part of our Fresh 2.0 effort. We talked a lot about that in our prepared remarks today. We spent most of last year testing in Florida how to make our produce assortment better and how to make members react to it better. We learned a lot. We were, I think, good at produce, but not great. Fresh 2.0 really has put a spotlight on ways to improve. It was all across the board, as we talked about. We have really changed our sourcing methodology a bit. We've changed our assortment, changed the way that product flows through our system to get it here faster. We've changed our marketing. We changed signage in the clubs. The coolers act as a sort of signpost to get people thinking about buying produce from us. We tend to put things in that cooler that are right from a timing perspective. They are priced right and fresh. It's been a big win. I wouldn't say there's been a tremendous driver to comps, but it is certainly raising the visibility of our produce to our members. We've seen gains across the produce business as a result of not just the coolers, but the entire Fresh 2.0 effort. We need to make sure that we're giving our members the freshest produce because they're buying it in bigger quantities than they would at a grocery store. So we need to provide more days of freshness, give it to them in the right pack sizes, and at the right price. Fresh 2.0 is aimed at all of that. The early returns are pretty favorable. We've got a lot of room to run, and we haven't rolled it out through the entire chain yet. We need to keep pushing on it. Our members are telling us they like what they see, and they're buying more produce in the clubs that have undergone this transformation. So we'll keep pushing there. From a real estate perspective, Bill and the team have been doing a great job getting more clubs into the pipeline. We said it's the biggest pipeline we've ever had. That's true by a long shot. We've got a fantastic slate for this year, back-end weighted, as I said earlier, and a good slate for next year as well. I guess I would tell you, all of our new clubs, really since we started opening new clubs again several years ago, have done well and met or exceeded their underwriting. We are learning how to interact with new members in these new clubs, learning how to tell our story in new markets, learning how to run a new club efficiently and effectively. But the returns across the portfolio have been great. That's why we've got our foot hard on the gas pedal at this point.

No, I would just add, Robbie, that last year was a big year for us with entry into the Nashville market, entry into our 20th state in Alabama and Madison, and we've seen a really good response to our membership in those markets. Looking forward to this year, we'll continue to expand in Tennessee, moving into the Knoxville market with the new club in Maryville that we just announced. Also looking at great expansion throughout our core with growth down in Florida. We talked about a couple of clubs in our key New York metro market, including our first club on Staten Island. So as we look out, Bob mentioned our pipeline, we talked about it being the most robust in the company's history at Q4. We've grown it by a bunch of units here in Q1. So it's now even deeper, and we continue to see great results and will continue to lean in.

That's okay. I was just going to jump on the cooler comments. Just a reminder, all of that work that we're doing on Fresh 2.0, including the coolers and the comments I've already made, started with our acquisition of Burris. This is something we've been working on for a while. We're just starting to see it all come to the market and really show our members what that supply chain and acquiring that did for the company.

The next question comes from the line of Chuck Grom of Gordon Haskett.

Bob, can you talk a little bit more about general merchandise? You sound really good on CE apparel, but there are obviously other parts of the business that need to pick up the slack a little bit. I noticed that the overall category, including services, were down 5%. So I guess what's going on in services that's weighing on the category?

Look, Chuck, you've got a few things in there. You've got core GM, you've got services, and you've got what we call ancillary or other, and that's where the co-brand accounting lies through. So that's sort of the biggest drag making the vision negative. Services were slightly negative. We're still pleased with the way the business is working. There's some timing going on through there. We would expect services to be fine in Q2. General merchandise was very slightly negative as we discussed. We had really strong results in CE and apparel that continued that trend. The home business is doing really well. Members are reacting to a new assortment there. That's been really key in many of these categories. I'm making sure we have the right stuff on the shelf, that it's on trend, at the right quality, and making sure the value is correct and simple. In apparel, for instance, reducing the number of brands and colorways in a particular SKU, so that members can easily shop and understand what we're doing. We were delighted to see the home business come alive. That was one we thought would be harder to fix, but so far, the stuff we've done in that category has resonated with our members. The seasonal aspect this quarter is highly weighted. As we get into the summer seasonal time of year, it becomes a big part of our business that weather in the Northeast impacted. In our Southeast clubs or actually all those clubs with warmer weather, we saw a 10-point differential positive comps from north to south. So we're pretty confident that as the weather starts to turn here, some of that stuff will turn on, and we'll get back to positive comps in GM in the second quarter.

Okay. That's good to hear. And then, Laura, just on the core gross margin down 50. It sounds like that was all related to the co-brand transition. So as we look ahead to 2Q through the balance of the year, can you talk about the drivers of the upside on the gross margin line? And if you could tie in your CMP work, SKU rationalization, and other efforts that help you get there?

Yes, look, I think you got part of the answer there. So two things. I would say, right, we think 20 bps for the full year is still a good number. How does that come? That comes from the work we started doing and talked about at year-end with CMP. That's really looking across categories at assortment to make sure we have the right value and the right assortment on the shelves to deliver that to our members. So a little bit from that. We continue to work on our own brand efforts, and we're very happy with the progress we've made there. Longer term, we continue to think that 30% penetration is in sight. Some of that gross margin expansion will come from the work we continue on that. In the prepared remarks, we talked a little about storage bags, trash, and paper that continue to do really well for us. That gives us excitement about the remainder of the year, as we continue to progress on those efforts.

The next question comes from the line of Greg Melich of Evercore ISI.

It sounds like gas profits came down in the quarter. Is that alleviated? Or could you update us on where we are penny profit?

Yes, it was a challenging quarter in terms of profitability for gas. Despite significant gallon growth and an increase in market share, we are proud of our members who continue to appreciate our value in this part of our business, showing a 6% increase compared to this time last year. We have been steadily gaining market share for several years. As you know, we generally sell out of gas every day. In a rising cost environment like Q1, we find ourselves putting more expensive gas in the ground compared to our usual competitors who sell less volume. This compresses margins in a rising cost environment, which is exactly what we experienced in the first quarter as oil and gasoline costs rose sharply due to global events. The situation has improved a bit in Q2 so far. Q1 was below our expectations by a few million dollars, but Q2 is looking better. Gas prices are difficult to predict, and we don’t attempt to forecast them on a quarterly basis. However, we feel reasonably confident about our yearly plan, which remains unchanged. We believe we can continue to grow the business and enhance the synergy between our gas and core operations, bringing more customers from the pumps into our clubs. We remain confident that this is a profitable aspect of our business that will contribute positively to our bottom line.

That's great, Bob. I guess my follow-up would be back on margins. Laura, I think you said the gross merch margin from the credit card changeover was mostly but not all down because of that. Could you help unpack the rest of the credit card changeover and how that's impacting the top line margin SG&A?

Yes. So you're right. What depressed the Q1 merch margin rate was largely driven by lapping of co-brand. There is a component of it dragging down comp in the first quarter slightly. As I said before, that dissipates as we go into the remainder of the year. As we look at Q2, Q3, and Q4, we expect that there won't be any disruption from the lapping of co-brand, and it will be really core business merch margins. Again, like I already discussed, we expect those to grow over the course of the year, about 20 bps, largely from our CMP efforts and our own brand penetration and all the great work our merchants are doing, thinking about value and assortments we offer to our members every day.

Just as a reminder, last year the impact this year is roughly one-third of what it was last year, at least on the top line. I have that in my notes somewhere, but I want to make sure I got it right.

So the transition last year, first quarter, I don't know that we've quantified the number, but again, we'll lap it, and it's a non-event for the remainder of the year.

Next question comes from the line of Mike Baker of D.A. Davidson.

Can you describe your monthly trends throughout the quarter? As the weather improves here in the Northeast, do you lose business during bad weather or does it return? Additionally, I have a follow-up question. The basic math indicates that comparisons should improve as the year progresses because the comparisons become easier, especially with the co-branded credit card pressure easing. Is it correct to assume that comparable sales should improve throughout the year?

Mike, you are right. Comparisons will improve as the year progresses, as we anticipated. Part of this is due to the phase-out of the co-branding, part is related to easier year-over-year comparisons, and part comes from our efforts to enhance the business through initiatives like Fresh 2.0, expanding general merchandise, and increasing membership. As we mentioned, we expect to approach our long-term target by the year's end. We knew this quarter would be tough because we were up against ten points of inflation, and that has been the case. Our 0.6% comp was slightly better than we had planned, so we are pleased with that. I expect we'll see improvements as the year unfolds. Regarding monthly trends, there weren't significant variations. However, March was weaker than February and April, which is not surprising based on what we've heard from others. Our performance aligns with that trend. Concerning the general merchandise business, I don't want to dwell on it too much. We believe the decline is due to seasonal factors tied to the weather. It’s still early in the summer season, and we haven't lost any sales; people are just waiting for better weather to make purchases. There’s no incentive to buy outdoor products when it's rainy and cold. I anticipate that this segment will ramp up in the second quarter. The weather has been pleasant in Boston this week, so I hope May will wrap up on a positive note.

The next question comes from the line of Edward Kelly of Wells Fargo.

I wanted to start just, first, the clarification around membership fee growth this year, Bob. I think you mentioned that you expect to maybe be a little bit above last year when all is set to a number. But is that the exit rate that you're talking about? Is that full year? I'm just trying to get a better gauge of the step down from Q1 there.

Yes. Thank you for the question. I was providing commentary on the full-year rate. We were around 6% for the full year last year. We are slightly above that, and our current version of the plan is slightly below the Q1 number.

Got it. Okay. And then second question for you around income cohorts. I think I heard you say on the call that your lower-income cohort was positive, better than it's been in quite some time. That's not something I think we're hearing sort of elsewhere. Can you just talk a bit more about what you're seeing from that customer? Is that lapping a snap? Are you seeing share gain? Just curious as to what you're seeing there.

Yes. Look, I think we're seeing share gain there. We've talked about a couple of things over time. Those folks are very sensitive to the direction of government benefits. When they received more, their spending would go up; when they received less, their spending would go down. That's largely not been the case with us in the last year or so. They have been spending more of their non-government benefit wallet with us, which we've frankly never seen before last year. That tells me we've convinced them that we are a destination for them, and we can provide the right value. They need the value more than anybody else. We're particularly pleased after a couple of quarters of total spending in that cohort going down that spending has turned back around to be slightly positive. I don't think it's a huge source of growth given the number of dollars in their wallet, just to be fair about it, but we're very pleased that they continue to come to see us. Their trips are holding in there nicely, and they are putting the right stuff in their basket. Hopefully, they continue to do that. We're very pleased with their behavior so far.

The next question comes from the line of Chuck Cerankosky of Northcoast Research.

Everyone. Bob and Laura, if you go back to the gross margin line again, you talked about units improvement. Does that reflect an increased number of clubs as well as average lower retail per item purchased?

Chuck, when we talk about units, it's comp units, right? So units in our comp base. New clubs would be excluded. It's really a good measure of what our member base is thinking about. They're certainly looking for value at this point. They’re coming to see us. I think it's a good mark of share of wallet—how much we're picking up there. We certainly have a tough lap from an inflation perspective. If that gain in share continues, and the inflation lap wanes, I would expect comps to grow from here. We're pleased with the unit behavior. And frankly, the traffic. We’re running 3 points of traffic quarter-on-quarter, which is a fantastic indicator of the momentum we have in the business.

When you're talking about own brands business, can you quantify what pickup in that would impact? What impact that had on the comps? Sales comp simply because the merchandise is priced lower?

Yes. Look, it's usually a drag on comps. Certainly, there are cases where members are getting into a new category for the first time. We talked about that in the prepared remarks with our food storage bags. But a lot of the own brand increase is just switching from brands since they tend to be 30% cheaper. So just remember that calculus—30% cheaper than the brand—and they're about 1,000 basis points more accretive to us from a margin perspective. For every percentage point of growth, there tends to be a little bit of a comp headwind, but it tends to give us a 10 basis points of margin rate growth as well. So you won't see the own brand business really in the comp all that much, but you'll see it in margin, and you'll see it in repeat shopping, renewal rate, and member satisfaction.

This now concludes the Q&A session. So I'd like to hand the conference back over to Bob Eddy, Chairman and CEO, for closing remarks.

Great. Thank you. Thanks for your time this morning, everybody. We're very proud of the results we reported to you this morning, and we've got tremendous confidence in our business going forward. I wish you all a great summer, and we'll talk to you at the end of the second quarter. Thanks so much.

This concludes today's conference. You may now disconnect your lines.