BJ's Wholesale Club Holdings, Inc.
Q3 2020 Earnings Call Transcript

Published: 19 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the BJ’s Wholesale Club third quarter fiscal 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentations, there will be a question and answer session. To ask a question during the session, you will need to press star, one on your telephone. If you require any further assistance, please press star, zero. I would now like to hand the conference over to your speaker today, Faten Freiha, Vice President, Investor Relations. Thank you, please go ahead, madam.

[Faten Freiha:]

Good morning everyone. Thank you for joining BJ’s Wholesale Club’s third quarter fiscal 2020 earnings conference call. Lee Delaney, President and CEO. Bob Eddy, Chief Financial and Administrative Officer, and Bill Werner, Senior Vice President, Strategic Planning and Investor Relations are on the call. Please remember that during this call, we may make forward-looking statements within the meaning of the federal securities laws. These statements are based on 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 Form 10-K filed with the SEC on March 19, 2020 for a description of those risks and uncertainties. Finally, please note that on today’s call we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute 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 Lee.

[Lee Delaney:]

Good morning and thank you for joining us. I hope you are healthy and safe. Q3 was another outstanding quarter with considerable strategic, operational and financial success. We are clearly benefiting from a unique combination of factors allowing us to dramatically accelerate our transformation and strengthen our business for the future. For the balance of my remarks, I will describe the major factors contributing to our success and discuss their implications for our future. First, our team has been amazing and I could not be prouder of them. They have stepped up to meet incredible challenges all year. Across our distribution centers, clubs and home office, our teams’ creativity, resilience and dedication has been so impressive. They have kept safety as our highest priority with extensive protocols to ensure a safe and healthy environment for our entire community. In partnership with our vendors, who too have been incredible, our team has continued to provide for members when they needed us most. Let me offer my sincere thanks to everyone who has and will continue to power our success. I deeply appreciate your contributions and partnership.

[Bob Eddy:]

Thanks Lee, and good morning everyone. Before I begin, I would also like to take this opportunity to thank our team members for their hard work and dedication during this truly remarkable year. We continue to execute at the highest standards and drive industry-leading results. Net sales for the quarter were $3.6 billion. Merchandise comp sales, which exclude sales of gasoline, increased by 18.5% and were driven by both traffic and ticket. We continue to see more members, tenured and new, shopping in our clubs, expanding their baskets, and penetrating all categories. These trends were consistent across our geographies. We saw consistently strong merchandise comp sales during the quarter. Each month’s comp was within 100 basis points of our quarterly comp. October’s merchandise comp was slightly over 18% and strengthened towards the end of the month. The consistency of our monthly performance coupled with the expanded market share gives us confidence that the underlying strength we have gained will outlast the transient benefits of the pandemic. Merchandise comps have continued to strengthen since the end of the quarter. In the first three weeks of November, we are running north of 20% with strength across almost all categories as we continue to see increased food at home trends and consumer home investments in addition to earlier holiday shopping. While we are pleased with our early fourth quarter comps, it’s difficult for us to predict how the rest of the quarter will play out given the number of significant uncertainties, such as inventory availability and member behavior during the holidays, namely as it relates to entertaining.

[Operator:]

Your first question comes from Robbie Ohmes of BofA Securities. Your line is open.

[Robbie Ohmes:]

Thanks, good morning guys, and terrific quarter. Just great execution. Actually two questions. One, I just wanted to ask about the membership growth rate - I think it was 11% for the quarter, so it sequentially accelerated a little bit, it looks like, from the second quarter. Can you just remind us how to think about how that could look going forward, and also is there a slowdown in new member growth happening the further that you’re moving into this year, and can you give us any thoughts on how we should think about what that could look like for next year? Then my second question is just on accelerating store growth, maybe some more color on how much you might start looking to really accelerate outside the northeast, given what you’re seeing in new stores, and maybe what regions you might be doing more stores in as you look out over the next few years. Thanks.

[Bob Eddy:]

Hey Robbie, this is Bob. I’ll take both of those questions. Thank you for both of them and for the good wishes on a great quarter. Membership is the bedrock of the business. As we sit here and stare at the numbers, we see a membership of record size with strong momentum and great and improving quality. In terms of the size, we’ve built on our 6 million member record from the second quarter, and total members on a net basis are up 12% year over year, so we’re very impressed with that continued growth. From a momentum perspective, MFI growth accelerated from Q1 and Q2 on the P&L, and that’s an important feature. More importantly, members are responding to the investments we’re making and did so throughout the quarter. As to the quality point, despite growing the overall membership, we were also able to improve our premium tier penetration to 30%, improve our easy renewal penetration to 70% to get to the 1 million co-brand cardholder, which is an important milestone, and we continue to see robust shopping behaviors across the portfolio, which makes us believe that these gains will be sticky going forward. You’re correct to point out there was a touch of a slowdown, and we did miss our guide by a couple hundred thousand dollars. I guess what I’d say to that is many things impact MFI, including the absolute member count, TYLY acquisition campaign timing and performance, the calendar quarter and versus the fiscal quarter end as it relates to easy renewals, footsteps in the club and on and on and on and on, so one way to look at it is to think about a slight miss or slight slowdown. The better view, I think in our estimation, is to really consider the record size and momentum and quality. We don’t see those things slowing down in our view, and hopefully as we get through the rest of this fiscal year and into next year, we continue to build on the gains on all three of those phases - record size, strong momentum, and great quality. As you think about store growth, certainly we’ve talked about that being our biggest priority in terms of investment in the company. We’ve made great strides in building a portfolio of clubs we can bring to bear. We are on track this year to get to four clubs - as you know, we opened one in Michigan and one in Pensacola, Florida already this year. We have two set to open in January, one in Newburgh, New York and one in Long Island City, New York. Those are right on track to open in January, as we said on our last earnings call, and our team is working with great haste to get that done. We’re excited for those clubs. As we get to next year, we’ve talked about six or more, and we are still on track to do that. I think you will see us pursue new markets and existing markets, so we will hopefully get into the Pittsburgh market next year and then sprinkle some other clubs throughout our chain. As we look forward to the following year, we see a path towards 10 clubs, but we are a long way away from that. As you know, real estate is a game full of surprises, so as we get through next year, we’ll certainly give a more robust update into that. But I think the same function will hold, where we will look to open at least one new market in that year and then add into our existing markets as we go.

[Robbie Ohmes:]

That sounds great. Thanks so much.

[Bob Eddy:]

No problem, thanks Robbie.

[Operator:]

Your next question comes from Chuck Grom of Gordon Haskett. Your line is open.

[Chuck Grom:]

Hey, great quarter. Thanks. Just wondering if we could just dive into the components of the gross margin strength, up 10 basis points which is better than the front half of the year, and then looking ahead, if you had any thoughts with regards to how you think the fourth quarter could play out.

[Bob Eddy:]

Hey Chuck, it’s Bob again. Maybe I’ll touch on the gross margin one and Lee can pile on as we go. Certainly we saw great performance from a gross margin perspective in terms of total gross margin. Gasoline had a great quarter and inside-the-box had a great quarter - you know, 10 basis points of merchandise margin inside the box. There were puts and takes against that, as we talked about in the prepared remarks. The biggest gain was our continuing success with our CPI program - that effort continues to move forward as we have talked about moving more towards assortment changes and getting into growthier and margin heavier categories versus just classic negotiation tactics, as we’ve talked about in the past, so great success from the CPI perspective. We did see some increased distribution costs that were primarily COVID related. We are doing the same things in our distribution centers that we are doing in our clubs and, frankly, in our home office, just to try and keep everyone safe and healthy as we go, and that weighed on gross profit a bit. Versus the front half of the year, we had a much better inventory position, particularly in apparel, and so where we talked about in the first quarter pretty significant markdowns in apparel, we did not experience those in the third quarter. Finally with the investments in price, we typically do that as just part of the everyday. As you know, it’s a big part of the club industry, maintaining the value that we offer to our members, which is tremendous and why they pay their membership fees. We did see some inflation during the quarter, although not terribly material, particularly in beef, and so we did invest in price in those categories and a few others as we went throughout the quarter. All together, very happy with the Q4 margin profile and what made it up.

[Chuck Grom:]

Any thoughts for how 4Q could play out?

[Lee Delaney:]

Hey Chuck, it’s Lee. I’ll jump in on fourth quarter. Just to set the stage for that question, let me just reiterate some of what Bob said on the membership, because it is the bedrock. We feel great about the membership. We have more members. The quality of them is really strong, and so we track the underlying quality, looking at how many people we have in different cohorts, how much they pay, and we’re seeing more or less every cohort paying more with more members, they’re younger, they’re digitally engaged, and they’re shopping more. The business began to strengthen in the back half of Q3, particularly in the last couple weeks of October. As we said in the prepared remarks, that’s continued into November. If you think about the broader environment, obviously Q3 as it relates to the pandemic was a period of more relative normalcy with warmer weather, the ability to eat in restaurants, etc., and as that changes in our footprint, we would expect to see a strong business. The big question clearly is the holiday gatherings and parties. We are expecting fewer of those, which is a big part of our business, but just an increase overall in at-home food consumption and investment in home, investment in gift giving for the holidays, and so as we sit here today, we feel like Q4 is in very good shape.

[Chuck Grom:]

Okay, great. Then just to follow up on that, you guys continue to make great progress on the SKU rationalization program. Can you talk about some of the things you’re changing for the holiday, and just to kind of dovetail with Bob’s comments about--it seems like the baton is getting passed a little bit from CPI being a major driver on the core margins, potentially some of these assortment changes helping you guys lean into higher merchandise margin rates in the home categories or furniture categories. Maybe if you could just talk a little bit about SKU rat and then also how that could help on the gross margin line. Thanks.

[Lee Delaney:]

Sure. I think the overall premise of your question is right. In the short term, the team, the merchants, the planning team, the supply chain team have been extraordinarily focused on keeping the stores well stocked. Clearly when you’re running at the comp levels we’ve been running, it begins to stretch the system thin and there’s been shortages on key products, and so we have made a number of changes to just keep the buildings in stock, the members satisfied. As you think about the longer term shifts that we’re driving, you’re right - we’re thinking about how do we drive growth in the business. That includes the simplification in some of the core categories where we’ve been over-assorted and an investment in categories that are on trend, things like healthy organic foods, and we talked about alternative snacking, but also into categories where we haven’t historically played. As an example, we launched fitness equipment this past quarter with a treadmill and exercise bike at significantly higher AURs than we normally would carry, and are seeing really good results with those items. That overall shift away from a real concentration in places where, frankly, we just felt like we were over-assorted to new categories that are growing on trend, where we have an ability and a right to play, that brings more excitement to the club, is the change we’ll make. It’s also worth highlighting services in that shift, and services is an area where we’re just incredibly excited about the growth potential. This has historically been our optical business, our travel business, and as we invest more in that, including a dedicated merchant team, we’re just finding really fantastic and exciting growth opportunities in new areas. As we said, this past quarter we re-launched major appliances and believe that alone can be a material contributor to growth going forward, so you’ll see us keep going down that path. The only piece that we didn’t touch on is private label. That will continue to be a focus area given the ability to offer better values to members at improved economics for us. In the short term, we’ve obviously been really just focused on getting product in the buildings, so a little bit less on private label, but over the long term that’s a major focus as well.

[Operator:]

Your next question comes from Peter Benedict of Baird. Your line is open.

[Peter Benedict:]

Hey guys, good morning. Two questions - first, just on the MFI growth, just given the dynamics of what you note today, just curious how you think about the shape of the growth curve? I’m not asking for specific numbers, but would you think that the growth rate kind of peaks in 4Q of this year and then starts to moderate a little bit, or earlier next year is the peak? Just trying to understand how you think about that, given the current sign-ups you have. That’s my first question.

[Lee Delaney:]

I think the right answer is it’s a little bit hard to say. There’s no doubt that the broad trends in the pandemic are causing members to seek out value, buying in bulk sizes and our particular value proposition, and I think as you’ve seen that flow through the business, particularly with the northeast being heavily affected at the start of the pandemic in Q1, kind of rolling into the broader geography in Q2, somewhat of a return to relative normalcy in Q3, those trends are clearly playing forward. The hope is as we move into the winter months, the public health crisis is more controlled, although that doesn’t seem terribly well aligned with the headlines and where we’re heading in the short run, and so I suspect you’ll see growth that falls out of that overall situation as people are eating more at home or they’re seeking value. We’re just incredibly on trend. The long term question is how many of those members will we be able to hold onto as the world hopefully returns to normal in the middle to the latter part of next year. Based on what we see now, we feel good about that. We have members who are engaging with us in a more elevated way than we would normally see. The quality of the membership is high. We know that a lot of the changes we’ve made to the base platform are things we wanted people to experience, and the pandemic has created a platform to do that, and so our hope is that we’ll be able to hold onto the membership gains and see a multi-year growth story fall out of the one-time unique event we’re experiencing now.

[Peter Benedict:]

That’s helpful, Lee. I guess my second question is just--you kind of alluded to this a couple of times, your sense that for ’21, you expect some of these trends to continue at least through the first half, so I’m just curious with the benefit of hindsight - you know, we went through the first lockdown last spring, obviously it feels like unfortunately we’re moving into something similar here, how are you buying for the first half of ’21? Given the experience you had earlier this year, are there things that you’re doing now that may position you better to be able to handle what could be ahead? I’m curious on how you’re planning the first half overall of ’21. It certainly sounds like you’re not expecting any material slowdown, but just wanted to hear you out on that. Thank you.

[Lee Delaney:]

We’re buying as aggressively as we can. The buildings are very clean from an inventory standpoint, particularly in some of the general merchandise categories, and we are still running at an in-stock level below what we would like. There have just been shortages in a number of categories and the inventory is turning so quickly that it’s frankly hard to keep up. If we could trade cash for inventory, we would definitely do that. I think we all hope that the public health crisis abates as quickly as possible, but as you sit here today and you look at the incidence of disease, the testing rates and a likely timeline for the vaccine distribution, it unfortunately seems like we’re in for an extended period of hardship, eating at home, renewed bans on restaurants, etc. Again, we hope those things don’t come to pass, but as we plan and buy for the business, we’re anticipating that elevated demand continues certainly for the short term.

[Peter Benedict:]

Okay, fair enough. Thanks so much.

[Operator:]

Your next question comes from Chris Horvers of JP Morgan. Your line is open.

[Chris Horvers:]

Thanks. A couple expense questions and one follow-up. First on the gas profitability side, how much would you say you over-earned on gas, if at all, here in the third quarter as we’re building out our models for next year? Then on the expense front, you talked about COVID costs accelerating in the fourth quarter relative to the costs in the fourth quarter - what drives that, and then within gross margin, would you expect higher COVID costs plus higher parcel ship to mitigate any merchandise margin expansion in 4Q?

[Bob Eddy:]

Hey Chris, it’s Bob. The expense story in Q3 was, frankly, a great one as you can see the incredible leverage we had on SG&A. I think the look forward and updating a little bit of guidance from the $17 million of COVID expenses in Q3 more towards somewhere in the neighborhood of twice that really dovetails nicely with Lee’s comments about our view of the course of the public health crisis. This is an incredibly hard thing to predict, but we will do the same thing we’ve done the entirety of this public health crisis and do everything in our power to protect our members and our team members as they’re in our stores and distribution centers and home office. Unfortunately the path of the disease looks like it’s accelerating and so we are tying our estimate of COVID-related costs to that fact. Should it improve, we’ll do better; should it get worse, we will spend more keeping our members and team members safe. It’s really as simple as that. That’s why we chose to give that increasing guidance. Hopefully we’ll be able to do better that what we’ve put out there, that the virus won’t be all that bad. Certainly the gas business had a great quarter this quarter and it has throughout the entire year. We’ve gained tremendous share, as we’ve talked about in the prepared remarks. Our gallons sold at comp clubs were up 2 and the market’s down double digits, call it 15, so we are gathering tremendous market share. That’s been a fact all year as well. Profitability-wise, call it a handful of million dollars extra in this quarter as you think about the set-up for Q3 next year, so a great quarter for sure but not going to bend the trend of our overall growth for next year as we go. Maybe I’ll let Lee jump in and talk a little bit about your parcel question on gross profit and talk about our omni business.

[Lee Delaney:]

Yes, I think we’re certainly seeing some constraints in the broader freight market, including parcel rates. As you think about our omni business, which as we noted is still growing at a remarkable rate - it was up 200% growth, the bulk of that growth and the bulk of the demand comes through Buy Online Pick-up in Club, same day delivery, both of which aren’t impacted directly by freight expense other than the broad supply chain, the challenge of getting those items to the store just like every other item. In those regards, we expect to see increased demand for those services. Curbside, in particular fresh curbside is working very well for us. When it comes to the shift to home business, we did see this coming and negotiated contracts and parcel rates ahead of time, along with increased levels of demand, and so we feel pretty good about where we are. The levels of inventory we have, the likely markdown exposure on our inventory will be lighter than normal, just given how quickly things are turning, and so from an overall margin standpoint we’re not terribly worried about the parcel costs, given those broad factors.

[Chris Horvers:]

Got it, that’s very helpful. Just as a follow-up then on the membership side, I understand you don’t want to guide, and there’s a lot of variables and maybe the recent surge helped sign-ups and reacceleration of customer acquisition, but maybe you could give us cash MFI in the third quarter relative to the 15%, 16% that you saw in the first half, just as we try to take a shot at building out the model. Right now, the consensus is looking for about another 12% gain in MFI dollars year over year in 4Q.

[Bob Eddy:]

Yes, I’ll take that, Chris. We didn’t offer cash MFI this quarter and probably won’t. We offered that statistic in the prior two quarters, having never talked about it before, because we thought it would help illustrate the incredible momentum we had behind the business, and while it might have done that, it also created a lot confusion and misunderstanding in the analyst and investor communities. You know, it’s stepping back after the second quarter, we thought we might have created a problem when we were trying to just illustrate the tremendous trends in our business, so we hesitate to offer it again. We’ll certainly talk about accounting MFI, which was up 11. We’ve talked about the total net member growth up 630,000. We’ve talked about our hopes for renewal rates as the member data would look like these folks will be sticky, and so I hesitate to give you the cash MFI. Instead, I’d concentrate on the record MFI, the record membership counts, the strong momentum we’ve had and the improving quality throughout the membership pace as well.

[Chris Horvers:]

Okay, so then just as a follow-up, if the membership base is up 12% on a year-over-year basis and you’ve got transition up to higher tiers and a more expensive fee there, plus the fact that it seems like the level of discounted membership is below what you had been running last year, that 12% growth in membership sets the base--you know, at a minimum the baseline in terms of the growth rate?

[Bob Eddy:]

I think you’re thinking about the pieces of it correctly. There’s the total net member growth, which is up, as you point out. There is a bit of a favorable mix shift in the premium memberships as we get people more up into the tiers and into the co-brand product - as you point out, that would build upon the member growth as we try and build out MFI. There’s also a slight offsetting mix shift as you just think about the math involved with just having more new members versus more tenured members, more renewal members. Those renewal members are generally paying full freight across the board and the new members are somewhat discounted, and so you just have to think about those two mix shifts that somewhat offset and you kind of get back to something around the net member growth.

[Chris Horvers:]

Makes sense. Thanks for that, very helpful.

[Operator:]

Your next question comes from Kate McShane of Goldman Sachs. Your line is open.

[Kate McShane:]

Hi, good morning. Thanks for taking my questions. This might be a little too narrow, but I was just curious to hear a little bit more about the Michigan stores. The membership per store being, I think you said 20% higher than the company average is impressive. Just wondered if you could give some insight as to what you think the combination of factors are that’s helping drive this, and as you think about introducing BJ’s into new markets, are there any learnings from Michigan, being that it was a newer market?

[Lee Delaney:]

Yes, why don’t I start and Bob can jump in. We’re very excited about the results in Michigan with now three clubs, two open for a longer period of time, and as we noted, we are seeing membership counts that are 20% above what we would see across the chain. It’s a combination of things that are driving that growth. One is just investing more in membership acquisition pre-open and during the open, and with more confidence about the potential for our franchise and a greater ability to invest into the buildings--in the membership drive, we’ve been able to drive more excitement in the market, see higher sign-ups both pre and post open, which has been very exciting. Two is we’ve really refined the offering, and so a number of the changes that we aspire to make across the chain when it comes to assortment, the in-club environment, signage, the integration of omni, we do from the very start in new clubs, so you put those two pieces together, more members at open and improved experience right out of the gate, we’re very hopeful about the potential for those clubs and it gives us confidence to invest into new geographies. The big question about Michigan was we didn’t have much in the way of brand equity, unlike you would see on the eastern seaboard, but we’ve quickly built a franchise there that we’re very excited about and it gives us confidence that we can grow into more new markets at an accelerated rate. So as we think about upping the count to six clubs next year, hopefully closer to 10 or more in the out years, we do that quite bullishly.

[Kate McShane:]

Thank you.

[Operator:]

Your next question comes from Edward Kelly of Wells Fargo. Your line is open.

[Edward Kelly:]

Yes hi, good morning guys. Lee, my question is for you. When you guys went public, you introduced an earnings algorithm that now kind of seems conservative. You talked about 1% to 2% unit growth, 1% to 2% comps. Can you just maybe take a step back for us and talk fundamentally about what’s really changed with the business since then, and how that potentially could impact the algorithm of the company over time?

[Lee Delaney:]

Sure, thanks Ed. I think it’s a really good question. We certainly feel like the long term algorithm today is considerably ahead of what we would have described at the IPO. There’s a few things playing out. One is the variety of investments and initiatives we had talked about in the IPO are gaining traction, and so it’s our ability to invest into the membership with greater data and science, it’s our changes to the merchandising assortment, the marketing. It’s our building of the omni system and then it’s our acceleration of real estate, and those are the same basic themes that we talked about the IPO but we’ve just further developed our ability and capability. Then clearly the pandemic is just such a unique circumstance, where a lot of the things that we wanted members to experience or new members to try were all accelerated by just the incredible relevance that we have. We operate very large buildings that, I think, afford more of the sense of safety because people are more spread out. We’re selling bulk groceries as people need to eat more at home, and we’re doing it at industry-leading prices as people need to save money. Then the omni offerings really work, and so the recent launch of curbside and curbside fresh is just incredibly relevant, and the advantaged economics we have there, we think is a part of the equation that can give us the long term ability to invest in those businesses ahead of what others might be comfortable doing. It’s kind of a combination of acceleration in the broad themes we talked about at IPO from some of the initiatives getting more steam and then just an incredible shot of adrenalin tied to the pandemic and our increased relevance, but we do feel really good about the long term state of the business.

[Edward Kelly:]

Just from a store growth standpoint, as we think about where you’re going over time, you talk about six next year and I think the hope to get to 10 or better, why can’t the number be higher than that? If you’re having success in these new markets and the merchandising side is aligning and Michigan is going very well, what’s the governor around that?

[Lee Delaney:]

I think the short answer is that it can be. The governor is finding real estate and developing it, and so we have a quite aggressive push internally to find and develop sites and properties. We’d love to move at a faster rate, but as you just think about the challenge of finding that many sites and moving at a faster rate, we’re governed simply by our ability to make progress. It’s less so from a financial attractiveness standpoint.

[Edward Kelly:]

Great, thank you.

[Operator:]

Your next question comes from Stephanie Wissink of Jefferies. Your line is open.

[Stephanie Wissink:]

Thank you, good morning everyone. Most of our questions have been asked, but I wanted to just tug on a couple of threads based on your response to the prior question. If we’re hearing you correctly, it sounds like one of your agendas is to really attract that millennial household - fitness equipment, you’ve talked about furniture, good for you foods, health and beauty. If you can talk a little bit about how you think about marketing, digital activation, customer acquisition through the lens of that next generation household and how you might be the chosen club for that emerging household? Then secondarily, how that factors into your thoughts around real estate and co-tenancy, are there certain retailers as you think over the course of the next three to five years that are the more ideal co-tenants maybe versus what would have been three to five years ago? Thank you.

[Lee Delaney:]

Thanks Stephanie. Let me take the first part and then maybe Bob, you can jump in on the real estate side of things. For us, the relevance of our channel is really around home ownership and family formation, and as we think about growing the membership, the ideal thing for us to do would be to engage people right at those two life moments, and the sooner we’re able to do that, the better because you see an acceleration in spend. As we look at the members that spend the most, it’ll tend to be the family with three or four teenage children in the house who are just eating you out of house and home, but to get them earlier, we need to market to them and make sure that our assortment is relevant. Frankly, we just--you know, we needed to revolutionize the assortment a bit, and that’s what you’re seeing us doing. It’s really understanding what the growth rates look like across different food and non-edible grocery categories, how do you invest in things that are relevant to a younger consumer. That will tend to skew towards healthier foods, natural household cleaners and the like, and it will also apply to our general merchandise assortment, where getting bigger into connected home, investing more in furniture, into fitness equipment are all categories that we know will appeal and work to that younger member, and we have the right to play and so we are broadly transforming our assortment to fit that demand. Then as we said, we think services can be a big part of that as well, where there’s just a whole host of categories where we can offer phenomenal values that are relevant to a new homeowner, a new family, and so you’ll see us continue to invest into those elements. Bob, do you want to talk about the co-tenancy, real estate part?

[Bob Eddy:]

Yes, thanks Stephanie. I think that’s a really smart extension of your question and really highlights something that we’ve been doing for the last couple of years, which if you think back to some of the older clubs in our base and in our club competitors’ base, you’d see clubs in distribution parks and office parks and hidden behind berms and all sorts of things, and in more recent years they’ve been in places that have much more classic retail gravity. I think you’ll see us continue to do that, where the retail gravity and the traffic that that brings outweighs what might be extra cost in those sites versus something in an office park or the like. As we look at real estate sites going forward, we are very much looking for active great traffic sites, and the other retail names you would not be surprised by, right - the TJX companies, Dick’s Sporting Goods, Cabela’s, the really high draw retailers are great for our business when we are positioned nearby or next door in the same shopping center. It’s a great question. It’s certainly something we’re looking at.

[Stephanie Wissink:]

Thank you.

[Operator:]

Your last question comes from Rupesh Parikh of Oppenheimer. Your line is open.

[Rupesh Parikh:]

Good morning. Thanks for taking my question. I have a quick one just on cash flow. We saw pretty significant improvement in your AP leverage, so I was just curious as you look at the improvement, what you view as more one-time in nature versus more sustainable, and also just in general as you look at your cash flows, was there anything that you view as more transitory in the cash generation this year? Thank you.

[Bob Eddy:]

Hey Rupesh, I’ll take that one. We were very pleased with our Q3 cash flows, as we talked about in the prepared remarks. We typically don’t make cash in Q3 as we’re buying inventory ahead of the holidays. We came out of the quarter with $20 million-odd in free cash, and to your point, good AP leverage. It is really a tale of two cities, right - we added a bunch of inventory during the quarter, which we’re happy about. To Lee’s earlier comments, we are buying inventory with both hands as the business has picked up in the last couple of weeks, and AP decelerated a bit in the beginning of the quarter and now has accelerated back up a little bit as the inventory spins a bit faster, so there is going to be some variation from an AP leverage perspective going forward that is probably most closely tied to comps. But this quarter, as we built inventory, you had a little bit of an offset to that too, so I think we’ll watch that. We’re not worried about the AP leverage. We do expect over the long term as the public health crisis abates that comps will moderate a bit, and as that happens, AP leverage will moderate a bit. But in any case, as with nearly everything we’ve talked about, the post-pandemic BJ’s will be better than the pre-pandemic BJ’s, and our AP leverage is no different than that.

[Rupesh Parikh:]

Okay, great. Then maybe just one follow-up. The quarter-to-date strength that you guys saw, what did you see from consumers, I guess, stocking up again, and also any sense of whether your November so far has benefited from maybe early promotions versus the prior year?

[Lee Delaney:]

Rupesh, this is Lee. I think we’re certainly starting to see the signs of another stock-up as you look at things like canned vegetables and paper products that people are buying more aggressively, and so I suspect that’s happening. There’s no doubt there’s a little bit of benefit from the early Black Friday promotions, but if you think about the breakdown in our business and the scale of general merchandise versus food, we’re seeing really good momentum in the food and traditional grocery categories, and that’s the overriding thing that will make or break the quarter, particularly the holiday season. So far, momentum looks quite promising.

[Rupesh Parikh:]

Great, thank you. Best of luck for the balance of the year.

[Lee Delaney:]

Thank you, you too.

[Operator:]

I’ll now turn the call over to Mr. Lee for closing remarks.

[Lee Delaney:]

Great. Thank you everyone for listening to the call, for your engagement and for your interest in the company. We really appreciate your time and your interest. Until we talk again, please stay safe and healthy. We wish you all the best for the holidays. Take care.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.