Earnings Call Transcript - BJ Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the BJ’s Wholesale Club’s Q2 2021 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. Please be advised that today’s conference is being recorded. I would now like to hand the conference call over to your speaker today, Faten Freiha. Thank you. Please go ahead.

Faten Freiha, Speaker

Good morning, everyone. Thank you for joining BJ’s Wholesale Club’s second quarter fiscal 2021 earnings conference call. Bob Eddy, President and Chief Executive Officer; Laura Felice, Chief Financial Officer; and Bill Werner, Executive Vice President, Strategy and Development 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 our current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectations described on this call. Please see the Risk Factors section of our most recent Form 10-K and Form 10-Q filed with the SEC for a description of those risks and uncertainties. Finally, please note that on today’s call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today’s press release posted on 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 Bob.

Robert W. Eddy, CEO

Good morning and thank you for joining us. The second quarter was another impressive quarter for our company. I'd like to take this opportunity to thank our team throughout the chain for their execution and dedication during a dynamic and challenging period. Our stance on safety has not changed. Our highest priority continues to be the safety and well-being of our team members and members. As a result, we have heightened our COVID protocols in response to the resurgence of the virus, including the introduction of a vaccine mandate for our home office and field support teams. We will continue to operate in an agile manner with a focus on doing the right thing for our team members and members. When I reflect on our performance over the last year and a half, it is clear that our progress against our strategic priorities has enabled our success. We've invested in our team members, the value of our membership, our digital infrastructure, and physical footprint, all with the aim of getting our flywheel going faster, and it is clear to me that we are making progress. In the first half of this year, we drove outstanding membership results and strong market share gains, particularly in our gasoline business. Furthermore, we elevated the value proposition to our team members through meaningful investments in wages and bonuses. Our team members are central to driving our strategy forward and these investments will help us attract, retain, and motivate the best talent, helping ensure that they can thrive in our business. During the second quarter, we delivered strong results: Two years stacked comp sales of 21%, adjusted EBITDA of $220 million, adjusted EPS of $0.82, and free cash flow of $240 million. As a result of those very strong cash flows, we ended the quarter with a leverage ratio of 0.8 times. Our team delivered these terrific results in the face of three external factors influencing our business: inflation, a fast-paced labor market, and inventory availability challenges. Let me talk about how our team is managing these to continue powering the strong momentum we see in our business. Let's start with inflation. We experienced meaningful inflation this quarter and more is on the horizon. The increases are both deep and broad, impacting many categories, some significantly. Managed appropriately, inflation can be good for our business. Historically, inflationary pressures have widened our price gaps relative to grocery, leading to market share gains and top-line growth. It does come at the cost of investing in value in the initial days of cost increases, which will pressure margins as inflation works its way through the industry. This trade-off is one we're willing to make, as value is paramount in our business. Our team has worked diligently to mitigate the impact on our margins while investing in price where necessary to maintain outstanding results for our members. Next, labor challenges are impacting our industry like many others. For a long time, we chased the labor market. Recently, we've chosen a different path, one that calls for a significant investment in our team, backed by our great financial performance to ensure that we get ahead of market forces and better serve our growing membership. Specifically, we have made the largest increases in starting hourly wages in our history. Additionally, we rewarded our club and distribution center team members this quarter with a one-time recognition bonus in appreciation of their continued hard work and commitment to serving our members. These investments are material to Q2, and we expect these investments to get larger as we go through the year. Our average hourly wage is now well above $15 per hour, and we will continue to invest in our teams so that we can recruit and retain top talent across our footprint. Finally, there are widespread challenges in the global supply chain. Ninety days ago, the pressure was limited to certain general merchandise categories. Now many categories, some entirely domestic like poultry, pet food, and juice, are having trouble meeting demand. We expect supply chain and sourcing challenges to continue for the foreseeable future. Our team's execution and ability to stay in stock at the height of the pandemic last year demonstrates the strength of our capabilities and our capacity to thrive in challenging environments. We remain intently focused on executing our strategy, validated by the strength of our performance, centered around four pillars: growing and retaining members, delivering value with an optimized assortment, improving convenience with digital, and strategically expanding our footprint. Let me provide an update on each. Membership is the foundation of our business, and we continue to enhance the size and quality of our membership base. In Q2, we grew our membership by 3% relative to the prior year and 14% compared to 2019. Our growth this quarter was driven primarily by record renewals. We continue to experience the highest rates of renewal on the largest class of members we've ever attracted. Our first-year renewal rate and on-time renewals are at historic levels. As we noted last quarter, we are intently focused on renewals this year because these renewing members are generally more valuable than the average new member. We're seeing both more timely renewals and incremental renewals, and we continue to believe that we will finish the year with all-time high first-year renewal rates. As a reminder, all of these renewal results continue to be strong, and several factors could still influence the renewal rates we ultimately disclose at year-end, such as timing and behavior differences. Membership quality continues to improve. In prior quarters, we have reported higher tier penetration and easy renewal participation rates as evidence of increases in quality. Those same facts are present in this quarter. Higher tier penetration for the second quarter is at 33%, representing a 400 basis point improvement relative to the prior year. This group consists of our most loyal members, with the strongest renewal rates and highest lifetime value. Additionally, more than 74% of our members are now enrolled in easy renewal. As further evidence that the team continues to improve the value of our membership, we are seeing a notable improvement in MFI per member. Our MFI growth has outpaced member growth for the last two quarters and that should continue in the back half. The progress we're making in membership in terms of size and quality has elevated the lifetime value of our members across the chain and will help power our future results. Assortment optimization remains key to continuing to deliver unbeatable value to our members. We remain focused on curating the best assortment of products and services to meet our members' evolving demands. Our goal is to simplify and expand into new high-demand categories. Last year, we were able to accelerate certain simplification initiatives like expanding into better-for-you snacks as we sold through existing center store grocery inventory at a high rate. This year, the inflationary environment has provided an impetus to simplify, ensuring we can limit inflationary pressures while also allowing for the benefits of simplification such as improved clarity of offering and the addition of new categories. Our plan is to drive these changes through various CPI initiatives. Our suppliers should note that we will be aggressive in this area in order to maintain great value for our members. Private label remains essential to providing great value to our members through our assortment simplification initiatives and through our category profit improvement efforts. We made great progress this quarter. Own brands penetration increased to 23% of merchandise sales compared to 21% in the prior year. This increase was driven by strong growth in summer seasonal, recreation, and other home-related categories, as well as frozen, dairy, and perishables. We will continue to build on this progress and further expand our own brands portfolio over the long term, which will strengthen member loyalty, increase value, and improve our margins. Our services business is one of the important areas where we intend to grow our business along the lines of our club competitors. We have a tremendous opportunity to elevate the value of our membership and deliver growth by scaling and enhancing our core portfolio of services. This includes businesses such as optical, travel, home improvement, and cellular phones, where we offer our members outstanding value in the market, making the savings easily comparable to the cost of a membership. Our focus in the near term is to scale these existing businesses to drive stronger top-line growth. For example, we've bolstered our optical services with telehealth capabilities, which are now live in 30 clubs. This will be a long-term build, and we expect services to be a meaningful source of growth for the top line and from a margin rate perspective. Let me touch briefly on our gasoline business, where we are seeing significant market share gains. Gallons in comp clubs were up 25% this quarter and are increasingly ahead of the market. Since gasoline is likely the best example of a key value item, with price signs around every corner, it's easy for us to demonstrate outstanding value. When we pair the gasoline business with the club, it drives tremendous loyalty. Members who shop with us for gas renew at much higher rates, and their gasoline purchases keep BJ’s top of mind for additional shopping trips in the club. We're very pleased with the performance of our gas business as we believe it drives robust member engagement. Our digital platforms continue to resonate with our members and allow us to offer convenient access to the tremendous value we provide every day. Our digitally enabled sales grew by 4% this quarter and over 300% on a stacked basis. Digital sales growth relative to the prior year was driven by strong growth in our BOPIC curbside offering. More than half of our BOPIC orders were delivered curbside this past quarter. Engagement among our members is most evident through the increased use of our app, which has been downloaded over 5 million times, and approximately a third of our members use it regularly. Additionally, our app continues to receive industry-leading ratings. Digitally engaged members have higher average baskets and make more trips per year than members who shop in the club only. Finally, our plan to enable members to use EBT payment when shopping on BJs.com for ship-to-home, same-day delivery, in-club pickup, and curbside pickup remains on track. This capability is now live in nine states and, pending state approval, we expect digital EBT payments to become available in all additional eligible locations in the next few months. Our efforts to expand our footprint continue to progress. This quarter we opened one new club in Seabrook, New Hampshire. While it's still very early, we're delighted with the initial membership response and sales trends. The remainder of our 2021 clubs are expected to open in the fourth quarter, including new locations in Port Charlotte, Florida; Commack, New York; Lansing, Michigan; and two clubs in Pittsburgh, Pennsylvania, which is a new market for us. We continue to expect to open as many as 10 or more new clubs in 2022. In addition, we expect to open nine gas stations this year, followed by a dozen or more gas stations in 2022, which means three-quarters of our clubs will have gas stations by the end of 2022. This is a great example of continued investment into getting the flywheel going even faster, tying back to my comments earlier on gasoline driving membership. We are very excited about our expansion, and our confidence is underpinned by the strong performance we're seeing in new clubs, particularly in new markets where our brand is resonating. In our Michigan clubs and in Pensacola, Florida, first-year renewal rates are well above chain-wide averages. Overall, we're incredibly proud of our results. We capitalized on the current environment and delivered record results. Our performance exceeded our internal plans across all key metrics, increasing our confidence in the balance of this year. While there continues to be a tremendous amount of uncertainty, our ability to retain members and market share has been strong, and we continue to execute at the highest levels. The resurgence of the virus and the resulting effects on plans to go back to work will likely keep food-at-home consumption high for longer. We also expect tailwinds from continued government assistance, such as the child tax credit. Offsetting those tailwinds are uncertainties around inflation and inventory availability, along with the expected decreases in unemployment funding. When we mix all that together, our current view of the back half sales trend has improved from what we thought it would be at the end of Q1. The stronger outlook for sales will be offset by increasing expenses such as margin pressures from inflation and freight costs, along with considerable investments we are proud to make in our team and their safety. While the impact and benefit of all these factors are far from clear, we do know that our business is extremely well-positioned and poised for further growth. Our better-than-expected results for the first half of this year continue to validate our strategy and execution. We remain confident that our membership trends, assortment initiatives, enhanced digital capabilities, and robust real estate pipeline will power a long-term algorithm that includes mid-single-digit top-line growth. Let me turn the call over to Laura to give a bit more color on our results and our view of the future.

Laura Felice, CFO

Thank you, Bob. And good morning, everyone. Let me start by thanking our team members and our clubs, distribution centers, and home office for their continued hard work in the midst of a sustained, challenging environment. We are excited to report another great quarter anchored by strong performance and significant progress against our strategic priorities. Let me now turn to our results for the second quarter. Net sales for Q2 were $4.1 billion. Merchandise comp sales, which exclude sales of gasoline, reflected a positive 21% two-year stacked comp and outpaced our internal expectations. Our performance exceeded our expectations for every month of the quarter, and we are very pleased with the results we are seeing across categories and geographies. Membership trends were strong throughout the quarter, and consumer spending habits as well as our market share gains exceeded our expectations. Digitally enabled sales grew by approximately 4% and 304% on a two-year stacked basis, driving about four percentage points of our 21% stacked merchandise comp. On a stacked basis, we saw robust growth across all of our digital channels, particularly in BOPIC and curbside pickup as well as same-day delivery. The nature of this growth is important because it's centered on the fulfillment methods where we have advantaged economics. As you know, we operate in a warehouse environment with a limited number of SKUs and a higher average ticket, enabling us to be more efficient. BOPIC and curbside sales tend to skew towards bigger baskets, and same-day delivery sales have the same margins as traditional sales in our clubs. As Bob noted, digitally engaged members have higher average baskets and make more trips per year than members who only shop in our clubs. And as we have said before, generally, the more a member shops and spends, the more likely they are to renew. Comps in our grocery division were 21% stacked, reflecting a negative 4% comp for the current quarter and a 25% comp in the prior year. On a two-year stack basis, we saw robust growth across all divisions, particularly in grocery and perishables, where stacked comps were in the 23% to 24% range. Despite the in-stock challenges we experienced in certain food and other household categories, the team delivered a strong performance, demonstrating our continued relevance with our members. Our general merchandise and services divisions comped at 28% stacked, reflecting a negative 2% comp for the current quarter and a 22% comp in the prior year. Our growth on a stacked basis was driven by strong sales in seasonal categories such as patio sets, apparel, and home-related categories like furniture and consumer electronics. It's important to note that our general merchandise sales this quarter were impacted by inventory availability in certain seasonal categories. We saw strong growth across our services portfolio, where comp sales doubled relative to the prior year. Although services currently represent a small portion of our business, we will continue to invest in scaling our core offerings and expect these investments to fuel future growth. In our gasoline business, we continue to see strong gallon growth and gain share. Gallons sold at comp clubs in the second quarter grew by approximately 25%, significantly outpacing overall market performance. While margins contracted in the gasoline business relative to the prior year, the performance of the business exceeded our internal plans. Membership fee income, or MFI, grew by 8% in the second quarter to $89 million. Our MFI growth was driven primarily by strong member renewals and improved membership mix. Our renewal rates for first-year members and on-time renewals remain at historical highs. We are pleased with the progress we're making in improving the quality of our membership base. Higher tier members now represent 33% of members, and more than 74% of our members are enrolled in easy renewal. Let's now move to gross margins. Excluding the gasoline business, our merchandise gross margin rate increased by 30 basis points, driven by improved private label penetration and the mix of our general merchandise sales. These tailwinds were partially offset by investments in price and increases in freight and distribution costs. SG&A expenses for the quarter were $598 million, compared to $591 million in the prior year. This quarter, we incurred approximately $8 million of expense related to the team member recognition bonus that Bob mentioned earlier. As you may recall, we incurred approximately $48 million of COVID costs in the prior year period. We have seen some deleverage in our SG&A line this quarter as we elected to invest in our business and team members. As Bob said, our team members are central to driving our strategy forward, and it is important for us to attract and retain top talent across our footprint. Our adjusted EBITDA grew by 2% to $220 million, reflecting continued margin expansion and disciplined cost management. Interest expense for the quarter was $16 million and included a $3 million non-cash charge related to debt paid down. Adjusted net income in the second quarter was $113 million, or $0.82 per share, reflecting a 7% year-on-year growth on a per-share basis. Our earnings growth highlights the strength of our business and reduced interest expense as we continue to enhance our balance sheet. As a result of our solid performance, we generated $240 million of free cash flow during the quarter for a total of $431 million year-to-date. In addition, we paid down approximately $360 million in debt and bought back $64 million worth of shares in the first half of this year. We ended the quarter with a 0.8 times funded leverage. With this reduced level of debt, we have further increased our flexibility to continue to invest in the future. Let me now touch on our outlook for this year and provide some perspective on our long-term algorithm. As we've said in our press release, we will continue to refrain from providing formal guidance as 2021 remains difficult to forecast given the number of uncertainties, most notably the timing and size of the shift in consumer behavior away from food at home. That being said, I will share with you our best high-level view as of today. Looking at our top line and based on our current assumptions, we would expect comps for the remainder of the fiscal year to be in the low to mid-single digits, implying a two-year stacked comp in the mid to high teens for the full year. Our assumptions are primarily based on strong membership results and the improving trend in food-at-home consumption when compared to our expectations at the end of the first quarter. From a membership standpoint, we continue to expect total member count to be flat or better during 2021 and for MFI growth to outpace member growth. MFI growth for the year is slightly ahead of our prior expectations due to stronger than expected renewals and higher tier penetration. We expect continued investments in price, as well as significant increases in freight and distribution, labor, safety, and sanitation expenses. Freight and distribution costs have been increasing throughout the year, and we expect that they will be worth an incremental $10 million of margin pressure in the second half of the year. We anticipate our investments in labor and incremental COVID-related safety and sanitation costs will drive an incremental SG&A burden of approximately $30 million. These costs could escalate if market conditions change. Know that we will always do our best to keep our team members safe, and we will continue to invest in our business and team, particularly in membership, digital, and geographic expansion. While external factors are impacting our near-term results, it's important to reinforce that our performance for 2021 continues to be ahead of any historical plans, and that our confidence in the long-term health of our business remains very strong. The next few quarters will likely be noisy as the trajectory of the pandemic remains uncertain. But we are confident that through our enhanced membership trends, our improvements in digital, our large real estate pipeline, and our assortment initiatives, we will achieve a much better comp algorithm that includes mid-single-digit top-line growth in the future. At this point, I'll hand it back to Bob to close.

Robert W. Eddy, CEO

Thanks, Laura. I'd like to leave you with a few key messages. Our financial, operational, and strategic performance continues to be strong, and our world-class team is executing at the highest levels. Membership trends, including growth, quality of members, and renewals are exceeding our elevated expectations. Our growing relevant and robust digital business continues to be ahead of peers on a scale-adjusted basis and is resonating with our members. Our accelerated geographic expansion efforts remain on track and will fuel future comp growth. Our brand is resonating in new markets, and we continue to see strong membership growth and renewals. We generated nearly $1 billion of free cash flow over the last five quarters. We've transformed our balance sheet, and we'll use the resulting flexibility to invest in making our flywheel spin as fast as possible. I'm incredibly proud of our team and thankful for the opportunity to lead them. And now I'll turn the call back over to the operator to begin the Q&A session.

Operator, Operator

Our first question comes from the line of Edward Kelly with Wells Fargo.

Edward Kelly, Analyst

Hi, good morning. Thanks for taking the question. Bob, I wanted to just go back to some of the comments around costs and on the food price inflation side. Just curious, what level of inflation you're seeing now, what the expectation is in the back half? The market seems like, from what we can tell from others, it is kind of accommodative to cost pass-throughs, so I'm just kind of curious as to how you're thinking about managing the business through all of that. You have some control over what you're going to pass through and how much level of pressure is sort of like acceptable from a gross margin standpoint as you think about pass-through inflation?

Robert W. Eddy, CEO

Yeah, thanks. Good morning, Ed. Listen, as I said in the prepared remarks, inflation has been a big topic for us. I'm sure it's been a big topic for everybody in our business. We've seen probably the most aggressive inflation we've encountered in my career here at the company. It's a process we're managing with an extensive team and toolkit to ensure that we continue to provide outstanding value to our members. That toolkit includes negotiating with our suppliers, changing pack sizes, cutting items, buying inventory ahead of cost increases— all sorts of different things we can do to provide that outstanding value and manage the margin rate we put on our financial statements. I do think this is going to continue. We have quite a view into the future from our suppliers and the cost increase environment. Our team has done an impressive job managing it as we've gone through the first half of this year. The second quarter was worth about a half a point of comp, so it wasn't truly enormous, but it was certainly significant. As we go forward, we will continue to use that entire toolkit to manage it; we will continue to invest in price, as value is the thing that we care most about. Our business is running very well, and we've got all the freedom in the world to invest in the biggest class of members we've ever had. Keeping those members happy is my first objective, and so we will continue to manage it, we will continue to invest, and hopefully continue to exceed our members' expectations.

Edward Kelly, Analyst

Okay, and then just a follow-up on the labor side and particularly the $30 million in the back half. You had $8 million in Q2, which seemed a bit more sort of like one-time in bonus. I'm kind of curious as to how much of the $30 million is more one-time-ish versus what we should carry forward into the future?

Robert W. Eddy, CEO

Yeah, it's a great question. Most of that $30 million is carry forward into the future. As I said in the script, we've chased the market for a while trying to manage what we pay our team in the context of our greater P&L. I get paid to run the business for the long term. I believe you're only as strong as your team, and we need the best team on the field every day. Wages are a big component of that. This year has been a dynamic labor market for us as every industry suffers some sort of labor shortage to one degree or another. Maintaining our team, continuing to recruit great people, and continuing to serve our members is our focus here, and we will continue to invest in our team going forward. As one of my competitors talked about yesterday, I don't think this is going to change. I think labor pressure will continue, wage pressure will continue, and we'll continue to invest to put the best team on the field.

Edward Kelly, Analyst

Great. Thank you.

Robert W. Eddy, CEO

Yeah. Thanks, Ed.

Operator, Operator

Your next question will come from the line of Robbie Ohmes with BofA Securities.

Robert Ohmes, Analyst

Hey, good morning. Thanks, Bob. I had two questions. One would be, can you talk a little more about the inventory availability in general merchandise and just how you guys are thinking about that as you set up for holiday this year and is there anything we should think about that as we try and figure out our models? And second, how are you seeing grocery market share play out for you right now and what you're thinking on grocery market share for the back half?

Robert W. Eddy, CEO

Yes, good morning, Robbie. So let me take the second part first. Grocery has been pretty strong for us. If you look at the business through our old four-division lens, grocery led our business with positive comp for the quarter, which is indicative of its strength. It is led by a great team, and they put together a wonderful quarter. I think that strength continues. I think we've been able to maintain, if not grow, market share in key grocery categories. We are putting the right items on the shelf at the right price and giving our members a great experience. So that business is running very well. Inventory availability has been a challenge; it's a daily battle. Some categories are hand-to-mouth. I mentioned a few of them. Some of them are continuing problems, like consumer electronics and apparel—things coming out of China. Some of them are new. We are doing our best to keep in stock for our members, but it's uncertain, right? We are, like everyone else, on allocation in certain key categories, like consumer electronics. We're not receiving all the inventory that we're ordering in some of those categories, or we have reduced visibility, meaning the supplier doesn't commit to shipping us on the timeframe that we normally get notice of shipments. It's a bit of a daily battle from that standpoint. But again, our team throughout the last 18 months has done an admirable job of keeping in stock at levels equal to or better than our key competitors. I don't see why that would change heading into the holiday. I'm sure we're doing the same things that our competitors are doing: accelerating shipments, bringing holiday stock in earlier, and setting back-to-school items earlier. We're trying to think forward into next year because the supply crunch I think will continue for the foreseeable future. So, we'll manage it as aggressively and forward-leaning as we can and keep everybody up to date as we go.

Robert Ohmes, Analyst

That's really helpful. And just one last quick question, any change in your customers' behavior due to the variant that you've seen so far?

Robert W. Eddy, CEO

Yes, I would say slightly. Certainly, the growth throughout the year has been driven by the great performance and memberships we've seen and the great performance in digital and brick-and-mortar. You can see more so the impact of stimulus dollars in the business, the child tax credit coming in, for instance, and EBT flows. I would argue there's been a slight change from a Delta variant perspective going on, but I wouldn't say it's materially driving the business. I think it’s great execution, great membership results, and other factors as I mentioned.

Robert Ohmes, Analyst

Got you, really helpful. Thanks, Bob.

Operator, Operator

Your next question comes from the line of Christopher Horvers with J.P. Morgan.

Christopher Horvers, Analyst

Thanks and good morning. So, maybe starting at a high level. If you look at the first half of this year, your operating margin was roughly flattish with a bunch of puts and takes on the gross and SG&A side. Is the message that you're conveying going forward is, look, you can think about operating margins being relatively flattish plus or minus versus last year, and this is really about driving that membership base, driving the top line, and flowing through those dollars to the bottom line?

Robert W. Eddy, CEO

Yeah, good morning, Chris. That's precisely what we're saying. We're encouraged by the track of the business, but the top line is obviously outperforming our plans, actually every metric we care about, performed better during Q2. We're pretty bullish on what we see compared to where we were in Q1. However, the business is becoming a bit more expensive to run. Part of that is COVID costs, but the big part is freight and labor. The freight situation will persist for as long as the supply crunch remains, and the labor cost reflects us taking the opportunity to invest in putting the best team on the field. That will continue and, as I said, it will likely get more expensive as we go. So, we think sales trend is improving, but the bottom line trend may be improving a little bit less because we are choosing to make investments in our team and in the long-term health of the business through membership and value.

Christopher Horvers, Analyst

It makes total sense and the right thing for the long-term. As you think about the other part of the story, if you look at your balance sheet, obviously, you continue to grow EBITDA, you continue to deleverage the balance sheet, and you stepped up the buyback a bit here in the second quarter. So can you just talk long-term about capital allocation? Obviously, we understand you are accelerating growth CAPEX and reinvesting in the business as the first priority, but talk about the share repurchase outlook. Is there a point where you start to compound your balance sheet? Maybe add a bit of leverage—do the classic AutoZone strategy in terms of really leveraging that EBITDA dollar growth to enhance shareholder returns?

Robert W. Eddy, CEO

Sure. Maybe I'll make some comments and then Laura can chime in. As you said, our job is to grow the company, so that's our first place to put cash. You'll hear us talk about continuing to grow real estate and gas stations. That's an example of allocating cash towards growth. You probably also see us do some more remodels and similar initiatives from that standpoint as well. We will use that cash to invest in the business, whether it be in real estate, digital, membership or our team—all of those things come before buyback or anything else. However, I think Q2 provides a hint as to what we plan to do from a cash flow perspective. We've significantly ramped up the buyback during the quarter, and this has been an active topic with our team and with our Board on capital allocation for the future. Maybe Laura can add to any thoughts there.

Laura Felice, CFO

Yes. I think the only thing I'd add here is that you’re right about the buyback. You'll continue to see us lean into that as we head into the future after we've made meaningful investments into the business. Like Bob said, that's certainly the priority and will be the priority going forward. I'd expect that in the back half we'll have a clearer plan on what we're doing long-term. And certainly when we have that, we'll be able to share it more broadly.

Robert W. Eddy, CEO

To put a fine point on an obvious point, we're ramping the buyback up because we believe the stock is undervalued. Given our view of the strength of the company, the flywheel we have going now, and what we think will happen in the future, we believe this is a different company than it was pre-pandemic, and we will come out much stronger. That drives our desire to grow even further and to buy back shares along the way.

Christopher Horvers, Analyst

Thanks very much. Best of luck.

Robert W. Eddy, CEO

Thanks, Chris.

Operator, Operator

Your next question will come from the line of Chuck Grom of Gordon Haskett.

John Parke, Analyst

Hey, good morning, guys. This is John Parke on for Chuck. It seems like you guys are very pleased with the renewal rates for the COVID cohort. Can you tell about what you're seeing from a frequency and spend standpoint from these new members?

Robert W. Eddy, CEO

Sure. We are absolutely pleased with what we're seeing in membership. The strength that we saw in Q1 has continued into Q2 in terms of the size and quality of the membership as we talked about. We planned to be a little bit negative in member counts and then towards the end of the year get back to flat or maybe even grow a little. We're tracking ahead of that at this point as total members were flat here in Q2, and hopefully, we can continue to grow them throughout the rest of the year, particularly as the new clubs come on in Q4. The quality is going up, as I said, with premiums increasing by 400 basis points, and easy renewal at 74% with MFI per member growing nicely. We're really seeing great results from a membership perspective that gives us reason for optimism. When you look at what the members are doing, we see strong spending habits across the cohorts, including the COVID cohort. We believe we're on track for all-time high renewal rates among first-year members. We've seen strong membership results, and all of the cohorts are performing very well. They’re visiting us often, spending a lot when they show up, buying much more gasoline as we discussed a little bit earlier. They're also engaging with our digital properties very strongly, so we're encouraged by their behavior.

John Parke, Analyst

That's perfect. And then just kind of switching gears a little bit. Can you talk about the ramp in the drive-up business, the curbside business and I guess at this point, what percentage of your members you think have actually tried some of these new services?

Robert W. Eddy, CEO

Look, it's very encouraging. There's been strong adoption here: 50% of our BOPIC orders were delivered curbside this quarter. Remember, this is a service we launched in Q2 last year sort of on a shoestring into the teeth of the pandemic. So we've taken the opportunity to perfect it as we've gone through the last year and really started to advertise it a bit more to our members. We're seeing a huge portion of our members try it and reuse it once they've done it. Our teams are executing very well during delivery. We've set robust service levels for how fast we should get an order to someone's car. Our team members are doing a superb job of servicing our members in that respect. You know how retail works—every time you give someone a great experience, they come back and do it again. We’re pleased to see that for those members that interact with us digitally, curbside is no different; they’re our best members. They are the most engaged, visiting us more often, and their baskets are bigger. We’re very pleased with what we’re seeing from a digital perspective, particularly in curbside.

John Parke, Analyst

Awesome. Best of luck, guys.

Robert W. Eddy, CEO

Thank you, John.

Operator, Operator

Your next question will come from the line of Rakesh Parekh with Oppenheimer.

Rakesh Parekh, Analyst

Good morning. Thanks for taking my question. So I guess, Laura, just starting out with some of your commentary just on merchandise margins and SG&A. Is there any more clarity you can provide on how to think about merchandise margin in the back half versus what you saw in Q2? And then on SG&A, I think in the first half, of course, your SG&A growth on a year-over-year basis was 16% to 17%. Is there a way to frame how to think about that for the back half versus what we saw in the first half?

Laura Felice, CFO

Yes. Good morning and thanks for your question. From a merchandise margin standpoint, I think we've talked a bit about that. There are a number of uncertainties in the back half, but we will continue doing all the great things that our team has done to manage through the first half. We expect that they’ll continue to do that. There will be some pressure, which we mentioned in the prepared remarks, largely due to rising freight and distribution costs. This will be real, but we will continue to do our best to manage it appropriately. From an SG&A standpoint, I think we framed that as well in the prepared remarks. We expect some drag on SG&A from the investments that we've made in our team members. We see those as really important. We quantified that as about $30 million in the second half, and that will certainly continue into next year. So, that amount will represent a full run rate going forward. Again, as Bob indicated, we believe that investment is meaningful for our business and important. Despite the drag, we’ll continue to manage SG&A accordingly moving forward.

Rakesh Parekh, Analyst

Great. And then maybe just one follow-up question on store growth, just given the cost pressures that you see in some of the labor availability challenges. Does that at all impact the pace of store growth that you guys are thinking about going forward?

Laura Felice, CFO

The simple answer to that is no. It's certainly something we think about as a team on a daily basis. It's core to our business, but we don't think it will have any impact on our store growth going forward.

Robert W. Eddy, CEO

Yes, since you brought it up Rakesh, maybe I'll ask Bill to give some comments. We're very pleased with what's going on from a real estate perspective and wanted to highlight that.

William Werner, EVP, Strategy and Development

Hey, Rakesh, it is Bill. Listen, we've seen great results as we've leaned into the new clubs—the latest being here with Seabrook and then the maturation of our new Long Island City clubs, which have been really great so far. We've talked to analysts and investors about this; our new club rollout is a 24-month window. We're making decisions today for 2023 and beyond, and we'll continue to step on the gas in terms of both existing and new markets as we look to grow the footprint. So, any near-term transitory pressures don’t really impact how we think about the long term. We're bullish on growth and store performance and will continue to lean in.

Rakesh Parekh, Analyst

Great. Thank you.

Operator, Operator

Your next question will come from the line of Chuck Cerankosky with Northcoast Research.

Chuck Cerankosky, Analyst

Good morning everyone, nice quarter. Bob, when you're dealing with these inflationary pressures, I categorize them into three buckets: one from the supplier’s wage inflation, and then supplier or logistics inflation. How do you think about it in terms of passing it through, and the timing thereof?

Robert W. Eddy, CEO

Yeah, that is a good question, Chuck. I guess, I'll tell you what I tell the team: we need to play to win. That means being as aggressive as we can with suppliers, battling for inventory, battling against inflation. Regarding our team members, it’s about investing and providing them the great environment we do every day to survive and thrive. We will do things that are sometimes detrimental in the short term to win in the long term. Your question on how we manage inflationary price increases is valid. Inflation isn't inherently bad for our company or our industry. Typically, it has allowed us to widen our price gaps against grocery. But it does take some time for that to work its way through. Our primary product is memberships, and to sell memberships, you need to show great value. So we aim to do that every day. In an inflationary environment, that means we probably lag pricing, especially on key value items. It was true in 2008, the last time we experienced inflation, and it’s true today. We will invariably lag pricing on key value items to ensure our members perceive the value. That might be tough on margins in the near term but is beneficial in the long term. We can pick and choose regarding your core question; we don't have to invest at the same rate in every product or category. Our merchants did a great job this quarter balancing that, as you saw merchandise margin rate growth, although inflation was probably dragging a bit on it. There are many different stories across products and categories, and we invest where we think it is necessary to provide great value in fast-moving items and key categories, and won’t invest as heavily where we don't find it as important. We will continue to do what’s right for our members and our team members as we move forward.

Chuck Cerankosky, Analyst

Thank you.

Robert W. Eddy, CEO

Sure. Thanks, Chuck.

Operator, Operator

Your next question will come from the line of Paul with Citigroup.

Unidentified Analyst, Analyst

Hey everyone, this is Brian Cheedam on for Paul. Thanks for taking our question. I just want to follow-up on that. As you look at investing in price, is that primarily to smooth out any shock to your customers, or do you actively look at price gaps and competitor pricing to ensure they are maintained at a certain level before you allocate any the price increases?

Robert W. Eddy, CEO

Yeah, thanks, Brian. We spend a lot of time and energy tracking what our competitors do. Just like I expect they do, we have invested considerable time in competitor stores. We analyze a lot of data to assess what the industry is doing as a whole. We monitor our price gaps every day, weekly, monthly. We perform about 50,000 price checks a week, which creates a thorough data set we analyze extensively to figure out the right course of action. In an inflationary environment, this becomes even more important. We've got enhanced surveillance of what's happening in the market right now, ensuring we’re doing right by our members and appropriately for our business. As I responded to Chuck’s question, every product is different. We’d likely lag pricing longer on something like bananas or bottled water, and not lag on lesser-hit products.

Unidentified Analyst, Analyst

Got it. And just one more for me. Can you talk about the product mix? I'm curious if private label is taking share and outperforming the store, or is this growth driven by new product launches and new categories? I'm just curious where you are in that progression.

Robert W. Eddy, CEO

Yes, I'd say we're in the middle innings from a private label perspective, and it's one of the things I’ve discussed with the team about playing to win. We've been quite careful in how we’ve expanded private label in the past, since while it's the best for business in terms of loyalty and margins, it can lead to some comp pressure when we switch someone from a branded good to a private label good. Previously, when we were comping in the low singles, we were very careful of that comp hit while still attempting to grow private label penetration. I’ve challenged the team to rethink that stance now, given the strength of our business because we're strong today, and private label can help us become stronger tomorrow. In this past quarter, we saw both improvements in existing categories and product launches. This will continue. Our goal is to reach a private label penetration of 30% or better, though it will take a few years to achieve. It's essential for us to demonstrate value to our members, which is crucial, along with driving margins and long-term loyalty.

Unidentified Analyst, Analyst

So it could lead to comp pressure but overall improved profitability?

Robert W. Eddy, CEO

Absolutely right. There is a bit of comp pressure when trading from branded to private label, but we achieve around a thousand basis points more in margins.

Unidentified Analyst, Analyst

Thanks. That's helpful. Good luck.

Robert W. Eddy, CEO

Thank you.

Operator, Operator

Your next question will come from the line of Simeon Gutman with Morgan Stanley.

Michael Kessler, Analyst

Hey guys. This is Michael Kessler on for Simeon. Thanks for squeezing us in here. My first question, I wanted to ask about the first-year renewal rates. You mentioned they are at historic levels. Can you give us a sense of exactly how much higher they are than historic levels and as we move now several months into that kind of COVID cohort, how that's trended as more and more of those first-year members that have joined since COVID have elected to renew or not to renew?

Robert W. Eddy, CEO

Yeah. Hey Michael. It's a great question. As I mentioned earlier, we're very pleased with our membership metrics, including the first-year renewal rates. As we discussed in Q1, it was early for the renewal of the COVID cohort. We are much further along today than we were then. In Q1, we observed the best renewal rates we've ever seen on any cohort—not just first-year cohorts. However, it is true that we were at that point very early in assessing if it was truly incremental or just more on-time renewals. We have about 25 to 30 years of membership renewal rate history, and this cohort has been running higher. We didn't know if that would come back toward previous cohorts, especially as time passed. We expect to see increased timely renewals as well as incremental renewals, which has indeed been our experience. Our members are shopping us more often, which typically encourages more on-time renewals, and we've observed those incremental renewals as well. The curve for this COVID cohort has stayed higher than prior first-year cohorts, which is certainly encouraging. I won’t specify how much higher it is, especially since we still have a few more months to assess that, but we remain on track for all-time high first-year renewal rates.

Michael Kessler, Analyst

Okay, great. That is helpful. My follow-up on margins and the outlook there. This is maybe the second year in a row that your margins are going to be over a point higher than the prior several years, which is a real step change given your margin profile. Given the different inflationary pressures, how much better do sales need to be or how much do sales need to be retained for your margin in a normalized post-COVID world to remain higher than when it was pre-COVID, and is that something you're expecting to see or managing to in any sense? Thank you.

Robert W. Eddy, CEO

You're right. The business has become more profitable over time because it has scaled so much in the past two years, particularly. Taking a broader view, the changes we've made in gross margin over the past five to six or seven years have genuinely enhanced profitability as well. The next few periods will likely be noisy as we've mentioned. None of us have a perfect view of what's going to happen, but one simple thought is that the more volume that passes through our business, the better off we are. While the immediate future may be busy, we expect the new economic algorithm post-COVID will involve higher sales leading to increased profitability, especially as we manage to buy back more shares. So we are bullish about the long-term state of the business as it relates to both top line and bottom line improvements.

Michael Kessler, Analyst

Great, thank you guys.

Operator, Operator

At this time, there is no more time allotted for questions. Do we have any closing remarks, Mr. Eddy?

Robert W. Eddy, CEO

No. Christy, thank you for hosting. Everybody, thank you for listening. We appreciate your time and interest in support of our company. We finished up a great Q2 and look forward to the future. We will speak shortly in Q3. Thank you.

Operator, Operator

Ladies and gentlemen, thank you for participating in today's BJ's Wholesale Club Q2 2021 earnings conference call. At this time, you may disconnect.