Earnings Call Transcript - BJ Q1 2022

Operator, Operator

Hello, everyone and welcome to the BJ's Wholesale First Quarter 2022 Earnings Conference Call. My name is Victoria, and I will be coordinating your call today. I'll now pass over to your host, Cathy Park, to begin. Please go ahead.

Cathy Park, Host

Good morning and thank you all for joining BJ's Wholesale Club's first quarter fiscal 2022 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 Eddy, CEO

Good morning. Thank you for joining us today. In the first quarter, we continued to build on the transformational gains we have driven over the last two years. Our membership continues to get stronger, achieving new all-time records in key membership metrics, including eclipsing 6.5 million members in the first quarter. Our digital business remains a key competitive advantage. We are quickly expanding our footprint, opening three clubs already this year. Our recent acquisition of our perishable distribution network from Burris Logistics will support our future growth efforts, and with this environment of high inflation and waning government stimulus stretching consumer wallets, value is becoming a necessity in purchasing decisions being made today. As a result, the club channel remains more relevant than ever, and we are delivering more value to our members while executing on our key initiatives to drive membership lifetime value. Our performance in the first quarter was strong as we navigated what is already shaping up to be another dynamic year here in 2022. Our first quarter comp sales were up over 4%, adjusted EBITDA grew 9% to $221 million, and adjusted EPS grew 21% to $0.87. Our comps were driven by significant gains in traffic and market share, and our sales were led by our grocery and perishable categories. The current consumer environment in the gasoline business drove continued increases in comp gallons up 23% versus last year, and up 51% on a two-year stack basis. This dramatic increase in market share and the rapidly increasing price of gasoline during the first quarter drove traffic into our clubs as members continue to recognize the value of their BJ's membership. We made further progress in the first quarter on our strategic priorities, which are growing and retaining members, delivering value, improving convenience with digital, and expanding our footprint. Let me briefly touch on each. Our membership stats are as strong as I've seen in my history with the company. In the first quarter, our member count grew 5% year-over-year, reaching 6.5 million members. We achieved this milestone earlier than expected, driven by a combination of strong renewals, as well as membership acquisition related to new club growth. In terms of membership quality, we made great progress here as well. Easy renewal enrollment was just shy of 76% compared to roughly 72% in the prior year quarter. Higher tier membership penetration grew to 36% in the first quarter, representing a 4-point improvement from the first quarter of last year. Higher tier members are more valuable to BJ's given higher spending and loyalty. Therefore, as the penetration of these members increases, the quality of our membership improves meaningfully. Not only are we driving growth in membership count and quality, but in MFI per member as well. In fact, in the first quarter, our average MFI dollars per member crossed the $60 mark for the first time in the company's history, up 5% from last year. We are also taking meaningful strides toward achieving our targeted 90% tenured renewal rate, having hit a record 89% last year. Within the membership cohorts that we track, we see encouraging shopping behavior. Lower income cohorts are increasing and while we see some pressure on the lower end of the economic spectrum, that is more than offset by gains at the higher end as those members increasingly search for value. We will invest to continue delivering value in order to foster long-term growth. The gains in membership count, quality, and rates over the past quarters and years will power us into the future. One of the many benefits of our membership model is that it allows us to truly focus on delivering unbeatable value to our members. Earlier this month, we closed on our acquisition of our perishable supply chain from Burris Logistics. I mentioned last quarter that our fresh foods are a major reason why our members shop at our clubs. Having full control over our perishable food supply chain will allow us to provide more value through network efficiencies and also opens the door to long-term growth of the business. There's a lot we can do here to elevate our fresh offering over the long run, but in the meantime, we are thrilled to welcome over 800 new team members to our BJ's family. Improving our merchandising is a crucial element of providing a great member experience, and the key is having the right talent. Over the past year, we have been very deliberate and focused on building a best-in-class merchandising team by promoting our star merchants from within as well as recruiting the best talent externally. In addition to Rachael Vegas, our Chief Merchant, we now have two incredibly talented individuals heading up our own brands and B2B initiatives. We also hired a fantastic new Head of General Merchandise. Growth in our general merchandise business is at the top of our list of merchandising improvements to come. The transformation of this company over the last handful of years can be directly linked to attracting and retaining the best talent, and continuing those improvements is my first priority. With respect to our assortment improvement initiatives, we continue to make progress on our sundries simplification work in the first quarter. Our clubs typically carry more SKUs than our warehouse club peers yet compete in fewer categories, thus eroding our members' ability to efficiently shop at our clubs. We're looking to change that by reducing SKUs and categories where we feel there is unnecessary choice and introducing new categories or increasing SKUs in categories where we feel there is too little choice. The simplified categories performed well in the first quarter and are much easier to shop and service. As you know, one of our ongoing initiatives is increasing the penetration of our own brands Wellsley Farms and Berkley Jensen. We continue to gain traction in the first quarter with own brands' penetration up 200 basis points to an all-time high of 24%. I can't think of a better time than in these economic circumstances to lean into our own brands, showcasing value and deepening member loyalty. A recent example of success here is our new Wellsley Farms' single cup coffee pods, which we introduced in March. Based on an understanding of our members' needs and extensive benchmarking of competitive offerings, we invested in a better quality product and delivered savings for our members, bringing our price per cup down by 20% and giving our members more than 40% savings per cup against branded competitors. Eight weeks in, we're already seeing strong sales and repeat rates. This is just one example of our efforts to broaden our own brands' reach. On the digital front, we are driving robust growth across all of our digital channels, particularly in BOPIC and curbside. We also continue to expand the ways in which our members conveniently shop with us. We know that digital engaged members tend to have higher average baskets and shop with us more frequently, and members who make more trips have a higher likelihood of renewing. Our growth in digitally-enabled sales continues as we develop new offerings like our partnership with DoorDash and strive toward frictionless shopping. We believe that adding convenience shopping offerings to the significant value offered by the club channel is a long-term winner. We also launched Same-Day Select in the first quarter, which offers BJ's members the ability to pay a one-time fee for either unlimited or 12 same-day grocery deliveries over a one-year period. While it's still in the early days, we are encouraged with the adoption rates and are thrilled to see our efforts resonating with our members. Finally, we remain on track with our real estate plans and our confidence in our expansion strategy continues to grow with each new club opening. Year-to-date, we have opened three new clubs and two new gas stations. This includes our small box pilot BJ's market in Warwick, Rhode Island. BJ's market is about half the size of the pivotal club. It will serve as a place where we can test assortments, displays, product demonstrations, and convenience initiatives, and then apply those lessons across the broader portfolio to strengthen our operations over time. We continue to expect to open a total of 11 new clubs this year and see a path to opening another 10 next year. I'm proud of the significant transformation we've made at this company. We are a much stronger company with a clear path for sustainable long-term growth and value creation. This is evident in our membership base, our digital business, and footprint expansion, and our conviction is further validated by our share repurchases executed in the first quarter. These are turbulent economic times. Inflation is continuing, gasoline prices are high, and last year's stimulus benefits are winding down. In light of all this, we have continued to invest in our value proposition. In fact, our internal competitive pricing benchmark shows our pricing positions have improved over the past few quarters. A good example is our signature rotisserie chicken, which at $4.99 maintains industry-leading pricing despite robust inflation impacting this item. We've made similar investments in select categories such as paper and water, which we know are key member value items. These are the times that our business and the club industry overall was made for. When consumer wallets are pressured by the search for value, they come to us. We believe we are well-positioned for the future. Our results remain a testament to the strength of our team members and their continued dedication to the company and serving our members. To our team members who are listening in today, thank you again for all of your hard work. With that, I will turn it over to Laura to provide more details on our results and outlook for the rest of the year. Laura?

Laura Felice, CFO

Thank you, Bob. First, I'd like to quickly share Bob's gratitude for our team members across our clubs, distribution centers, and home office. The success of our company is the result of their hard work. Now let's dig into our results. Net sales for the first quarter were $4.4 billion, a 16% increase over the prior year quarter. Merchandise comp sales, which exclude sales of gasoline, increased by over 4% and were driven by traffic growth. Our two-year stack was negative 1%, reflecting a three-year stack of over 26% as our business continues to settle into a higher normal pace than pre-pandemic levels. Comps in our grocery, perishable, and sundries division grew by 7% in the first quarter, which equates to down approximately 3% on a two-year stack and up nearly 30% on a three-year stack. This division was led by continued strength in our food business and particularly in grocery, where comps were approximately 15% in the first quarter and up 3% and nearly 36% on a two-year and three-year stack, respectively. Our general merchandise and services division comps were down 10% for the first quarter and up 22% and up 19% on a two-year and three-year stack respectively, as discretionary spend normalizes towards a new higher base from the past two years. Weather also played a role in our first quarter comp as our core Northeast markets experienced cold and rainy weather. General merchandise comps in our Southeastern clubs were 3 points better than the rest of the clubs across the team. As we discussed last quarter, and Bob reiterated in his remarks today, we are experiencing the highest levels of inflation in several decades. In fact, cost inflation accelerated sequentially in each month as we progressed through the first quarter. We also saw significant increases in freight costs that corresponded to the increase in the price of diesel fuel. Despite these pressures, we manage margin rate well while making investments in key items to maintain outstanding value for our members. Digitally enabled sales for the first quarter grew 26% year-over-year and over 400% on a three-year stack. Approximately 80% of our digitally enabled sales are fulfilled by our clubs with services like buy online, pick up in club, curbside, and same-day delivery. In our gasoline business, we continued to gain significant market share as retail prices increased. Gas gallons sold at comp clubs grew by approximately 23% in the first quarter, outpacing the overall market by a wide margin. This growth combined with higher than normal gas margins resulted in gas profits that significantly outperformed our internal plan. Membership fee income or MFI grew by 12% during the first quarter to $97 million and underscores the progress we have made improving the core of our business. We saw strong growth in new members, renewals trending well, and we are thrilled with the continued success we are seeing in our membership KPIs. As Bob noted, our penetration of higher tier memberships increased to an all-time high of 36% as we continue to improve the quality of our membership base. Moving on to gross margins, excluding the gasoline business, our merchandise gross margin rate decreased by 30 basis points. While we passed on a majority of inflationary cost increases, we did make tactical investments in some key items. Rate was also pressured by increasing supply chain costs during the quarter. SG&A expenses for the quarter were $635 million. The year-over-year increase was primarily attributable to increased labor costs associated with the wage investments we made last year, higher occupancy expenses, and other costs incurred to drive our strategic priorities. Our first quarter adjusted EBITDA grew by 9% to $221 million, reflecting sales growth and outsized cash profits. This quarter, we incurred nearly $8 million of one-time costs related to our Burris acquisition, which we closed on May 2. These costs were adjusted for in our adjusted EBITDA metric. Adjusted net income for the first quarter was $180 million, or $0.87 per share and reflected a 21% year-over-year growth on a per share basis. Our 21% tax rate within the quarter included a benefit of $8.4 million tax windfall compared to $3.1 million in the first quarter last year. We anticipate the tax rate for the remainder of the year will normalize at approximately 26%. Our earnings growth continues to highlight our ability to prudently manage costs throughout our P&L in a highly inflationary environment as well as the benefits of a lower share count. Our balance sheet remains strong as we ended the quarter with less than one turn of net leverage as measured by our net debt to adjusted EBITDA. With respect to our inventory levels, our teams have proactively worked to stay ahead of supply chain challenges that have hampered our business last year. We have also opportunistically made the decision to buy inventory earlier than usual, partially to combat inflation heading into the second quarter. These actions combined with the impact of cost inflation have resulted in a year-over-year increase in our balance sheet merchandise inventory, net of accounts payable, of $98 million. As we allocate capital going forward, our first priority remains growing our business. Investments to support membership, digital, and our real estate growth plan will be funded by these cash flows and enabled by our strong balance sheet. We also believe that share repurchases remain a good use of excess capital and expect to continue buying back shares opportunistically. At the end of the first quarter, we had $435 million remaining under our $500 million buyback authorization. Let me now touch on the current outlook for the year. Our first quarter results were generally in line with our expectations, with the exception of a stronger than expected gas business. While our gasoline business has significantly exceeded our plans for the first quarter, as we sit here today, we are back to levels of profitability that are in line with long-term historical averages. Given the lack of predictability in the drivers of gas, we continue to carry the same philosophical approach of modeling our gas business through the rest of the year, that is assuming normal profit per gallon with a slight year-over-year volume increase over the next three quarters. As Bob mentioned in his remarks, we are navigating a dynamic macro-environment that can create considerable variability in our operations, including record levels of inflation and waning stimulus. That being said, these circumstances have also resulted in a stronger propensity for customers to gravitate towards value, and we believe our business is favorably positioned to continue to strengthen membership, gain market share, and grow member traffic. Taking all of these factors into consideration, our fiscal year 2022 EPS outlook of flat year-over-year remains unchanged, as we believe our first quarter excess gas profits will be largely offset by heightened margin pressures driven by growing supply chain costs. Finally, subsequent to the first quarter end on May 2, we closed on the acquisition of our perishable distribution centers from Burris. From the individual P&L line item view, we expect minimal impact for each quarter and remain confident that the acquisition will deliver approximately $20 million of EBITDA and $0.07 of EPS for the year. As a reminder, this expectation is already embedded in our flat EPS guide for the year. Before turning it back to Bob, I'd like to reiterate our confidence in the strength of our business and the transformation we have made at the company. As a result of the fundamental improvements in our membership, our footprint expansion strategy, and the structural advantages of a warehouse club model, we believe we are positioned to deliver a better growth profile than prior to the pandemic. This should result in a long-term algorithm of mid-single digit revenue growth. With that, I will turn it back to Bob for closing remarks.

Robert Eddy, CEO

Thanks, Laura. I'd like to conclude with some final thoughts. I remain excited about the future of this company anchored by the continued progress we are making in our core strategic priorities. We are growing the membership size and quality, we're providing great value and convenience to our members further accelerated by our digital efforts, we are relentlessly working to improve our merchandising, and we are broadening our reach into new markets and solidifying our brand in existing ones. Our efforts to fundamentally strengthen our business served us well through the pandemic, and I believe our business model will continue to resonate with members in the current environment as we remain focused on what we do best, delivering great value. As was evident in our growth in traffic across our clubs during the first quarter, and we believe we will remain favorably positioned to help our members stretch their purchasing dollars when times are tough. I'm incredibly proud of our team and I'm honored to be working alongside them as we continue to serve our members, provide unbeatable value, and grow our business. I'll now turn the call back over to the operator to begin the Q&A session.

Operator, Operator

Perfect. Thank you. We will now start our Q&A session. And our first question comes from Robert Ohmes at Bank of America. Please go ahead. Your line is open.

Robert Ohmes, Analyst

Good morning. Great quarter. Actually, two questions. One was, Bob, I think you mentioned that you are seeing some lower end customer pressures. Can you talk more about the behavior changes that you're seeing and how that's different versus the higher end customers? And then the second question is just, maybe could we get a little more color on the buying inventory early and costs going up and more help on how to think about the timing of that impacting or not impacting margins as we move through the rest of the year? Thanks.

Robert Eddy, CEO

Hey, Robby. Thanks for your questions. Look, we had a fantastic quarter from a topline perspective. We've had an incredibly demanding environment. Our membership was off the charts good, right. The membership count up five against last year, up two against Q4. The quality of the membership up incredibly in terms of higher tier penetration and Easy Renewal, all the things that we track. If you sort of peel back and get to your core question in terms of what are these members doing? All the income cohorts that we track were a little bit better than we thought they would be. The core hypothesis that we had going into the quarter was, given the roll-off of stimulus, we would see some headwinds from a lower income perspective. But we would also see some tailwinds at the top of the house with higher income folks, and that's exactly what we saw. Every one of the income cohorts that we track is spending well versus our expectations. So we're very pleased to see that. We certainly saw more traffic in the higher income cohorts as they search for value in these tough times. We also saw gas driving a tremendous amount of traffic; certainly, it drives traffic in a normal world that drives renewal rates as well. But as you get to levels of the price of gasoline that we've seen in the past couple of weeks or months, certainly, people care more about saving money on gas, and we saw that in our gas clubs as well. So all in all, a pretty strong quarter from a traffic perspective, a spend perspective, and certainly from a membership perspective. Your second question on inventory, maybe I'll pick quickly and then Laura can fill in. Our inventory was up about 30% year-over-year. A large portion of that is just the cost of inventory going up. We made some strategic choices to bring in extra supplies from a food business perspective. The last thing I'm worried about is more inventory in our food business given how strong that is. And then certainly from a general merchandise perspective, we've got more inventory. Last year was a little bit light. This year is probably a little bit heavy. But we don't see tremendous markdowns coming through our general merchandise business. Maybe I'll ask Laura to comment as well.

Laura Felice, CFO

Yeah. I think you got that right, Bob. The only thing I might add is a little context on the general merchandise comment you made. So that inventory, I think Bob said we feel okay about. I would emphasize that we don't think that there is markdown risk on it as of right now. We feel well positioned. Our general merchandise inventory is not heavily fashion-based or something that we think about as risky as we look forward to the remainder of the year.

Robert Ohmes, Analyst

Got it. That's really helpful. Thanks so much.

Peter Benedict, Analyst

Hey. Good morning, guys. Thanks for taking the question. I guess first one would just be around inflation. When you talked about record levels, I'm not sure if you'd be able to quantify maybe what the inflation impact was on your merch comps. And then on MFI, on the fee income, obviously, great growth there. Any reason why those numbers wouldn't continue to build sequentially in dollars and just how you're thinking about the growth in MFI this year? Thank you.

Robert Eddy, CEO

Hey, Pete. Thanks for the questions. Certainly, inflation was a big impact on the quarter. I think we had talked about 4 points of inflation in Q4. It's meaningfully higher than that at this point, so think about maybe 7 points of inflation. As Laura talked about, it did increase in every month of the year, I think it's probably going to continue to increase from here, and that's a tough operating environment. It drives a tough consumer environment. But frankly, I think our merchants and our team overall have done a fantastic job managing the inflation. We've been able to pass through most of it. But the higher it goes, the more time we have to spend with our suppliers, managing the cost and what we pass through. I think we need to continue to do what we can to help our members navigate this tough consumer environment. Certainly, from a membership fee perspective, as I said earlier, we're very proud of the results that we had, renewal rates are higher. We were able to get a ton of new members for the three new clubs that we opened during the year, and we exceeded our own expectations in pretty much all things MFI-related, including the dollars per member, as you mentioned. I do think, and I don't want to jump in front of Laura's guidance, but I do think we should see a little bit better MFI performance than we initially thought and that should carry through the remainder of the year as well. Maybe I'll let Laura pile on to that comment.

Laura Felice, CFO

Yeah, I think that's right, Bob. The only thing I might add is to think about the timing of the MFI and how it rolls into the P&L. So some of that is coming from the record levels we had in the fourth quarter of last year, and we're getting the benefit from all of those members that we added in the fourth quarter of last year rolling through. So I think everything that Bob said is a fair point from a full year and how to think about it. It should continue, and we're really happy with all of the membership steps that we talked about, including the one thing is easy renewal and all of our members that are included in that program, and that certainly helps.

Robert Ohmes, Analyst

No, that's super helpful. If I could, just one quick follow-up, just on the pricing and the inflation comments, Bob. You talked about some strategic price investments that were going on. I'm just curious maybe where you feel like that's most useful and how the gaps are right now in grocery and gas relative to maybe where they have been? Thank you.

Robert Eddy, CEO

Yeah. No doubt. Thanks for asking that. But to simply put, our price gaps are better than they've been in a while, better than last quarter, better than last year. We spent a lot of time figuring that out. It's a very detailed analysis every day, every week, every quarter at this point, given the pace of inflation. Our team has done a wonderful job managing it. I feel great about where we are from a price gap perspective. And obviously, that's driving our traffic. And you bring up gas; that's important as well. We sell lots of gasoline. It is not something we look to make a tremendous amount of money on, but certainly, it's something we look to provide a tremendous amount of value to our members. And we did a nice job with that during the quarter, pricing our gasoline as low as we can do it and using that to drive traffic into our buildings. We also have built our co-branded credit card portfolio to almost 1.5 million cardholders at this point. Those folks get $0.10 off a gallon every day at the pumps. We've done a number of different promotions to try and get people who are visiting our gas stations to get inside the club during the same trip. I think our gallons really show that, right, up over 20% during this quarter, up over 50% on a two-year stack basis. Just a tremendous effort to merge those two businesses and really take that value that we show every day at the pumps and convert that into traffic on our registers inside the store.

Peter Benedict, Analyst

No. That's great. All right. I'll pass it on. Thanks so much, guys.

Mike Baker, Analyst

Great. Hey. Thanks, guys. So a couple, I suppose, follow-ups. One, on the general merchandise and your lack of markdown risk. Maybe this is too short term to question. But how much of that is seasonal? A lot of other retailers have said that the weather has been better in May, and that's allowed them to work through some of the seasonal product and see a rebound there. Is that one reason why you don't see markdown risk? And how concerned are you that Target and Walmart, their inventories were up massively and they're going to start marking stuff down? Does that impact you at all from a competitive standpoint? Even though you don't think you'll mark down stuff, if they do, do you have to follow?

Laura Felice, CFO

Yeah. Hey, Mike. Go ahead, Laura. Okay. I'll jump in, Mike, and then maybe let Bob jump in after. My comment earlier on the general merchandise was pointed at it not being fashion, so no markdown risk; you got that right. I would say it is heavy from a seasonal perspective. So think about everything kind of spring, summer. Your comments on Target and Walmart and their markdown cadence, I think that's something we deal with on a regular normal operating basis. We will continue to watch the markets, figure out what's going on, make sure that we're delivering the right price and value to our members. But as of right now, we feel okay about where we are, and we'll see kind of where the quarter goes.

Robert Eddy, CEO

Thank you, Mike. As I mentioned earlier, we're observing positive shopping trends across various income groups. There are more shopping trips occurring, and we are noticing some trade down, as evidenced by our own brand penetration increasing by 200 basis points. While part of this is due to our efforts, it’s clear that many consumers are looking for value, which is not surprising. Additionally, higher income groups are shopping significantly more, compensating for any challenges at the lower income level. I would say the pressures in the lower income groups are as we anticipated; they are manageable and not concerning. This aligns with our projections. Furthermore, the performance of the higher income cohorts has exceeded our expectations, contributing to the increased traffic we experienced this quarter.

Edward Kelly, Analyst

Hi. Good morning, guys. Nice quarter. Can we just start with my first question on merchandise margin, and can you talk about how you're thinking about the second quarter and the rest of the year? As part of this, how does pass-through expectation of inflation change, as it's accelerating? And then you did mention incremental pressure on supply chain. Could you quantify that as well as part of all that?

Robert Eddy, CEO

Good morning, Ed. I'll begin by outlining our performance, and then Laura can provide additional details. I'm really pleased with our membership and margin results for the quarter. We effectively managed inflation and adjusted prices in a reasonable manner. We made several strategic investments, particularly in rotisserie chicken, where we kept prices stable despite significant inflation because it's important to our members. We've also invested in similar categories like paper and bottled water. Overall, we have managed to pass on most of the inflation thus far. However, we are experiencing increased supply chain costs, particularly with fuel prices rising, and we expect this trend to continue into the second quarter and beyond. We will do our best to manage these costs, but there is some risk involved, especially the longer these conditions persist. We've discussed potential markdown risks, which we currently believe are limited based on our observations. With that, I’ll turn it over to Laura to share her insights on what we expect for the second quarter.

Laura Felice, CFO

As I reflect on the second quarter, it's clear that compared to last year, there's some pressure primarily due to rising diesel prices, which are beyond our control. This situation will likely impact merchandise margins in the short term. Additionally, regarding our import business, we're largely insulated from import issues because we don't rely heavily on imported products annually. While there are supply chain challenges affecting merchandise margins, consumers will also experience these pressures. Gas prices could keep rising or stabilize, which may help drive traffic to our business. We believe our value proposition will resonate with our members, as evidenced by traffic patterns in Q1, and we expect this trend to continue into Q2. On the topic of passing through inflation, we're closely monitoring that situation daily and will adapt as needed. If necessary, we are prepared to invest in specific categories just as we did in the first quarter.

Edward Kelly, Analyst

Okay. Great. And then just a quick one for you on new clubs; you've opened up seven clubs in the last six months or so. Just kind of thoughts on what you're seeing there?

William Werner, EVP, Strategy and Development

Yeah. Hey. This is Bill. Robert Eddy: Maybe I'll start it off and let Bill fill in. We're incredibly proud of the progress the real estate team and our team overall have made in expanding our footprint. As you said, we've done a great job in the last six months, a great job this quarter. Three clubs alone in this quarter since we last talked, and each of them is doing spectacularly. We look forward to getting about 11 clubs in this year and see a route to 10 more next year. Just very proud of what we've been able to accomplish. So Bill, why don't you take it from there? Yeah. Sure. Hey, Ed. Listen, the results have been really good and capped off, I would say, over the last couple of weeks with probably what was our best membership campaign ever in our opening last week in Lady Lake, Florida. So both the membership as well as the sales levels in the clubs have been really, really promising so far. So as Bob mentioned, really happy with the results, really proud of the work the team has put in, and excited for the clubs we are getting opened here in the rest of the year.

Kate McShane, Analyst

Hi. Thank you for taking our question. I was wondering if you could share your thoughts on the progression of comparisons throughout the year. In our last conversation, you mentioned that Q3 might be a quarter with tougher comparisons. While we have maintained the guidance for the year-to-date, could you elaborate on your outlook for each quarter regarding the top line, and if there have been any changes?

Robert Eddy, CEO

Hey Kate. I think the general gist of it's about the same, and I'll kick it over to Laura in a second. We thought that Q1 and Q4 would be our strongest and then followed by Q2 and then Q3 would be likely negative comp. I think that still holds albeit given the level of inflation and the traffic that we saw in Q1 where we're a little more bullish on the general comp trend of the business. So let me kick it over to Laura, she can sort of fill in the expectations for Q2.

Laura Felice, CFO

Yeah. That's right, Kate. So I think the framing of it that Bob just gave is right from a cadence perspective. I think there is a big piece that will come from rising prices or inflation. So I would think about it from a cadence off of Q1, Q2 kind of hanging around where Q1 was, and then Q4 certainly will be higher. Q3, we continue to think we'll have pressure from a TYLY perspective as we lap kind of what we talked about last year that sundries pulled forward. So lowest in Q3 as we review it now.

Chuck Grom, Analyst

Hey. Thanks a lot. Good morning. Great quarter. Can you just provide some comment on the cadence of the comp throughout the period? And then if seasonal started to lift now in the month of May, now that the weather started to improve. And you talked about traffic driving the comp; I was wondering if you could unpack the comp between traffic and ticket.

Robert Eddy, CEO

Hi Chuck. You believe that the Q1 comparison was fairly consistent throughout the quarter, though February and April performed better than March. I wouldn't call it a significant difference, but March was indeed lower. As we analyze May now, the comparisons look promising, but it's still early. May is a quarter where we see service fluctuations due to the two holidays, Memorial Day and the 4th of July. Sales occur in chunks, so it's essential to perform well during both holidays to have a successful quarter. Therefore, I wouldn't read too much into our current position, although, as I mentioned, things look decent. Can you remind me what your second question was?

Chuck Grom, Analyst

Just the traffic versus ticket composition in the quarter.

Robert Eddy, CEO

That's right. So the comp was denominated almost entirely in traffic growth; basket was about flat, and so the rest of it is all traffic. We're really pleased with that, obviously driven by our membership gains, driven by the higher income cohorts within membership spending more and making more trips, and denominated in the gas benefit that we saw as well.

Chuck Grom, Analyst

Okay. Great. It does seem like you guys are amplifying the gas conversion more than maybe you have in the past. I mean Costco has talked about how roughly 50% of people who buy gas shop the club in like-for-like hours. I guess, is that the case for you guys? And I guess why do you think you're gaining share now in gas prices more than maybe you've seen in the past?

Robert Eddy, CEO

It starts with value. We have the best gas prices around. When you add the co-branded credit card benefit and some of the promotional efforts that connect the club with the gas station, those are driving our success. Initially, we didn't have a strong gas business at the beginning of the pandemic, similar to the rest of the industry, but we have been growing it for a couple of years now. The initial growth came from people consolidating trips for safety reasons, which gave them a chance to try us out and see our value in gas services. We've shown that we are a one-stop shop where customers can fill up their gas and get everything they need in one place. We're happy to report a 20% increase in gallon sales during the quarter, which was quite unexpected. Over the last two years, we've seen growth of more than 50% in gallon sales. We're really pleased with this progress, and it all comes back to providing value. These are challenging times for our consumers, and this is exactly the kind of environment where the club business, and our business in particular, thrives. We offer great value every day with a one-stop shopping experience.

Chuck Grom, Analyst

Okay. Great. And just one quick follow-up from me would be, you're not expecting an improvement in gas gallons gained for the rest of the year, correct?

Robert Eddy, CEO

We're not; we're sort of modeling gas as we always model it from a profitability perspective. We do think some increase in gallons is warranted to model, but we haven't continued to model 20% gains in gallons. And as Laura said in her prepared remarks, we're sort of back to normal from a per-gallon profitability perspective as we sit here today. So not modeling a huge windfall in gas prices. That usually, as you know, we don't tend to make a lot of money when gas prices rise, and in fact, in parts of the first quarter, we were losing money every day. If gas prices were to fall, they typically yield higher margins when we fall. So we'll see what happens from here. We're not modeling anything greater than our normal historical stance at this point.

Paul Lejuez, Analyst

Sorry. Paul, we're not getting any audio from your line. Unfortunately, we're still not receiving any audio from your line. So we will move on to next question coming from Stephanie Wissink at Jefferies. Please go ahead.

Blake Anderson, Analyst

Hi, guys. It's Blake on for Steph. Thanks for taking our question. Wanted to ask first on the ticket versus traffic just to follow up on that. I was wondering how the flattish ticket growth was versus your expectations? And just how we should think about that in terms of overall inflation? I didn't know if there's a tough compare or any mix impacts that might have affected that number as well.

Robert Eddy, CEO

Hey, Blake; so when you look underneath the cover, certainly traffic growth was very strong. It exceeded our estimate for the quarter, and I would expect that to continue given the environment that we're all facing together. Certainly, with the ticket flat, if traffic is up, that means units are down a bit as you unpack that. Your point on unfavorable laps comes to the fore, where you see categories like PPE and cleaning driving pretty significant unit declines as folks aren't wearing masks any longer. They're not buying sanitizing products all over the place. And certainly, our general merchandise units were down a bit given the comp there. Outside of that, units are doing fine and more or less in line with our plan. So I think the business is pretty healthy. I'd love to see the traffic gains continue, and given the membership growth that we've seen, I think that's probably a good bet.

Blake Anderson, Analyst

That's super helpful. Appreciate it. And just to follow up on that, and then I have one more. On the general merchandise, I didn't know if you could talk any more, but you just mentioned some of the PPE categories. I didn't know if you could talk any more about some of the other categories within general merchandise and maybe how those trended throughout the quarter. Maybe anything along the lines of electronics or bigger ticket or maybe any things that you're trying to really increase the penetration of as you build out that business?

Robert Eddy, CEO

Yeah. Look, I think GM is up against a tough comp with all the free money that was flying around last year. So certainly, the negative comp was expected, came across the business, particularly in the home categories that you would expect given what happened last year. So whether you think about seasonal or home or furniture or electronics, those categories had a tougher go than some of the other ones. They were not meaningful below our expectations. And given the membership and the traffic that we've talked about, I think they're perfectly fine for the future, and we look forward to showing our members the best value in those categories as we go through the rest of the year.

Edward Kelly, Analyst

Great. Thanks, guys.

Operator, Operator

Thank you for your question. Our next question comes from Krisztina Katai at Deutsche Bank. Please go ahead.

Krisztina Katai, Analyst

Hey, guys. Congrats on a good quarter. I do have a follow-up on gas. I mean, we did see you running several promotions on the fuel side. So I was curious if there is any way to quantify gas's contribution to traffic in the quarter? And what kind of a customer it is bringing in, if it's any different versus your average customer that's signing up right now? And then secondly, as you're building inventory and accelerating receipts, you did say limited markdown risk based on what you're seeing today. But I was just wondering how much have you factored in a potential further weakening of the consumer both at the lower end, but also potentially at the mid-to-higher-end consumers?

Robert Eddy, CEO

Thank you, Krisztina. Let me address the gas question first. We have seen significant increases in both gallons sold and traffic, and we expect that trend to continue. Our main focus is on providing the best value to our members every day. I'm not particularly concerned about the profitability of our gas business on a weekly, daily, quarterly, or yearly basis. What matters more is that we attract people to our locations, and gas is a highly visible commodity that consumers can easily compare prices on. We aim to consistently offer good prices. The challenge for us has been how to deliver even more value. Bill proposed the idea of a $0.10 per gallon discount with our co-brand credit card, which has been successful. When customers use our co-brand credit card, we capture all of their gas purchases, and they appreciate that benefit. We've implemented various promotions over the past few years to strengthen the connection between the gas station and the store. For example, buying specific items in the store can earn customers discounts at the pumps, funded by our suppliers. We also have other promotions that offer gas discounts based on basket size, some of which are also supplier-funded. Our goal is to provide the best value, recognizing that gas purchases can be emotional decisions. We will continue to emphasize membership and traffic over gas profits. Regarding inventory, we have noted that it is higher than we would prefer, influenced by inflation and our food business decisions. While our GM inventory is slightly elevated, we do not anticipate significant markdown risks. Based on our assessment of membership trends, we project Q2 will resemble Q1 in terms of spending, with some weakness in the lower-end and strength at the higher end.

Krisztina Katai, Analyst

Great. Thank you so much.

Operator, Operator

Perfect. Thank you, Krisztina for your questions. We will now terminate our Q&A session. And this concludes today's call. I'd like to thank everybody for joining. You may now disconnect.