BJ’s Wholesale Club Holdings Inc (BJ) Q1 2022 Earnings Call Transcript

BJ’s Wholesale Club Holdings Inc (NYSE: BJ) Q1 2022 earnings call dated May. 19, 2022

Corporate Participants:

Catherine Park — Vice President, Investor Relations

Robert W. Eddy — President and Chief Executive Officer

Laura Felice — Executive Vice President and Chief Financial Officer

William Werner — Executive Vice President, Strategy and Development

Analysts:

Robbie Ohmes — Bank of America Merrill Lynch — Analyst

Peter Benedict — Robert W. Baird & Company — Analyst

Mike Baker — D.A. Davidson — Analyst

Edward Kelly — Wells Fargo Securities — Analyst

Kate McShane — Goldman Sachs — Analyst

Chuck Grom — Gordon Haskett Research Advisors — Analyst

Blake Anderson — Jefferies — Analyst

Krisztina Katai — Deutsche Bank — Analyst

Presentation:

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. [Operator instructions]

I’ll now turn over to your host, Cathy Park, to begin. Please go ahead.

Catherine Park — Vice President, Investor Relations

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 W. Eddy — President and Chief Executive Officer

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 wallet, value is becoming a necessity in purchasing decisions being made today.

As a result, the club general 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 2-year stacked 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 continued 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 account 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 numbers 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’re 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.

[Indecipherable] 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 perishables supply chain from Burris Logistics. I mentioned last quarter that our fresh foods are a major reason why our members shop 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 the over 800 new team members to our BJ’s family. Improving our merchandizing is a crucial element to providing 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 merchandizing team by promoting our star merchants from within, as well as recruiting the best talent externally.

In addition to Rachel 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 merchandizing 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.

Continuing those improvements is my first priority. With respect to our assortments 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 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 and 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 Farm and Berkley Jensen. We continue to gain traction in the first quarter with own brands’ penetration of 200 basis points to an all-time high of 24%. I can’t think of a better time that 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 rate. This is just one example of our efforts to broaden our own brand’s 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 way in which our members conveniently shop with us. We know that digitally 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 continue as we develop new offerings like our partnership with DoorDash and strive toward frictionless shopping.

We believe that adding convenient 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 onetime 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 plan and our confidence in our expansion strategy continues to grow with each new club openings.

Year to date, we have opened three new clubs and three 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 a typical 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. It 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’ve continued to invest in our value proposition. In fact, our internal competitive pricing benchmarks show 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 make 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 walls are pressured, they search for value.

When they 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 — Executive Vice President and Chief Financial Officer

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 in to our results.

Net sales for the first quarter were $4.4 billion, a 16% increase over the prior-year quarter. Merchandise sales, which exclude sales of gasoline, increased by over 4% and were driven by traffic growth. Our 2-year stack was negative 1%, reflecting a 3-year stack of over 26% as our business continues to settle into a higher, normal base 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 2-year stack and up nearly 30% on a 3-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 2-year and 3-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 2-year and 3-year stack, respectively, as discretionary spend normalizes toward 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 three points better than the rest of the clubs across the chain.

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 3-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 continue to gain significant market share as retail prices increase. 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 in improving the core of our business. We saw a 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 gas profits. This quarter, we incurred nearly $8 million of one-time costs related to our Burris acquisition, which we closed on May 2nd. These costs were adjusted for in our adjusted EBITDA metric.

Adjusted net income for the first quarter was $118 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 remained strong as we ended the quarter with less than one churn 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 an 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 a 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 feel esophageal 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 weighting stimulus. That being said, these circumstances have also resulted in a stronger propensity for customers to gravitate toward 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 and on May 2nd, we closed on the acquisition of our perishable distribution centers from Burris. From an individual P&L line item view, we expect minimal impact for each quarter and remain confident 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 W. Eddy — President and Chief Executive Officer

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’re 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 merchandizing. And we are broadening our reach into new markets and solidifying our brand and 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.

This 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.

Questions and Answers:

Operator

[Operator instructions] And our first question comes from Robert Ohmes at Bank of America. Please go ahead. Your line is open.

Robbie Ohmes — Bank of America Merrill Lynch — Analyst

Good morning, and great quarter. Actually, two questions. One was, you know, 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, you know, the second question is just maybe, could we get a little more color on the buying inventory early and costs going up and, you know, more help on how to think about, you know, the timing of that impacting or not impacting margins in the — as we move through the rest of the year? Thanks.

Robert W. Eddy — President and Chief Executive Officer

Hey, Robbie. Thanks for your questions. Look, we had a fantastic quarter from a top-line perspective, we thought, in an incredibly demanding environment. You know, our membership was off the charts, 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, 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 of the income cohorts that we track were a little bit better than we thought they would be. You know, the core hypothesis that we had going into the quarter was, given the roll-off in stimulus, we would see some headwinds from a lower-income perspective. But we would also see some tailwinds at the of the house with higher-income folks.

And that’s exactly what we saw. Every one of the income cohorts that we track is funding 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 tremendous amount of traffic.

Certainly, it drives traffic in a normal world. It 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 and months, certainly, people care more about saving money in gas, and we saw that in our gas clubs as well. So all in all, a pretty strong quarter from a traffic perspective, from a spend perspective, and, certainly, from a membership perspective.

You know, your second question on inventory, maybe I’ll take quickly, and then Laura can fill in. You know, 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.

And 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 — Executive Vice President and Chief Financial Officer

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.

You know, I would emphasize that, that we don’t think that there’s 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.

Robbie Ohmes — Bank of America Merrill Lynch — Analyst

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

Operator

Perfect. Thank you so much for your question, Robert. Our next question comes from Peter Benedict at Baird. Please go ahead. Your line is open.

Peter Benedict — Robert W. Baird & Company — Analyst

Hey. Good morning, guys. Thanks for taking the question. I guess, first of all would just be around inflation.

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 W. Eddy — President and Chief Executive Officer

Hey, Pete, thanks for the questions. So, certainly inflation was a big impact on the quarter. We had talked about four points of inflation in Q4. It’s meaningfully higher than that at this point.

So, think about 87 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, you know, that drives, tough operating environment, that drives a tough consumer environment.

But, frankly, I think our merchants and our team overall has done a fantastic job managing the inflation. We’ve been able to pass through most of it. But, the higher it goes, the more we — the more time we have to spend with our suppliers managing the cost and managing 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. You know, 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 and pretty much in all things MFI-related, including the dollars per member, as you mentioned.

I do think — 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 then that should carry through the remainder of the year as well. Maybe, I’ll let Laura pile on to that comment.

Laura Felice — Executive Vice President and Chief Financial Officer

Yeah. I think that’s right, Bob. The only thing I might add is to think about, the timing of 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 those members that we added in the fourth quarter of last year rolling through. So, I think all of — 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 stuff that we talked about, including, I think the one thing is Easy Renewal and all of our members that are included in that program, and that certainly helps.

Peter Benedict — Robert W. Baird & Company — Analyst

No, that’s super helpful. If I could, just one quick follow-up, just on the pricing deflation comment, Bob, you talked about some strategic price investment that was going on. I’m just curious maybe where you feel like that 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 W. Eddy — President and Chief Executive Officer

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, but 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. You know, 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 on 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. And I think our gallons really show that, right, up over 20% during this quarter, up over 50% on a 2-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 — Robert W. Baird & Company — Analyst

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

Operator

Thank you so much for your question. Our next question comes from Mark — Mike Baker at D.A. Davidson. Please go ahead. Your line is open.

Mike Baker — D.A. Davidson — 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 of a question, but how much of that is seasonal? And 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 — you know, 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, you know, do you have to follow?

Robert W. Eddy — President and Chief Executive Officer

Yeah. Hey, Mike. Go ahead, Laura.

Laura Felice — Executive Vice President and Chief Financial Officer

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.

Mike Baker — D.A. Davidson — Analyst

Okay. And if I could ask one more follow-up, just on the lower-income customer. Can you give a little bit more detail on what you’re seeing there in terms of, is there any trade-down? I know that — maybe that’s harder to see in your limited assortment, but is there a trade-down? Is there lower units per transaction? Is there fewer trips than others? What exactly are you seeing for the lower-income customer? Thanks.

Robert W. Eddy — President and Chief Executive Officer

Yeah. Thanks, Mike. As I said earlier, we’re seeing great shopping habits across the income cohorts. I’m — we’re seeing more trips.

We are seeing a little bit of trade-down, right, take a look at our own brands’ penetration up 200 basis points. That’s certainly — part of that is us driving that business but part of it is undoubtedly people searching for value. And that doesn’t necessarily surprise us. And then as I said, the higher income cohorts are shopping meaningfully more, and that’s making up for any pressure we see at the bottom of the house.

I would characterize the pressure in the lower-income cohorts as expected. It’s not tremendous. It’s not something that worries us. It’s right in line with what we thought would happen.

And the benefit at the higher-income cohorts is frankly a little better than what we expected, and that, you know, gets to the traffic gains that we saw during the quarter.

Mike Baker — D.A. Davidson — Analyst

Makes sense. Appreciate the color. Thank you.

Operator

Thank you for your question. Our next question comes from Edward Kelly at Wells Fargo. Please go ahead.

Edward Kelly — Wells Fargo Securities — Analyst

Hi. Good morning, guys. Nice quarter. Can we just start — my first question is on merchandise margin.

And can you talk about how you’re thinking about second quarter and the rest of the year? You know, as part of this, how does pass-through expectation of inflation changed 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 W. Eddy — President and Chief Executive Officer

Maybe — good morning, Ed. Maybe I’ll first set the tone and let Laura fill in with any specifics. So, certainly, pretty proud of where we landed from a membership — sorry, a margin perspective during the quarter. We were able to manage inflation very effectively and, as I said, pass it through in a pretty rational basis.

We did make a bunch of tactical investments. You know, I talked about the rotisserie chicken is probably the headline example where we haven’t moved off the price, given double-digit inflation in that particular item just because it’s such a meaningful thing to our members, smaller categories of, paper and bottled water and things. We’ve been making investments all along in those things, and we’ll continue to do that. But for the most part, we’ve been able to figure out ways to pass through the inflation that we’re seeing so far.

I do think we are seeing more supply chain costs. You can’t take diesel fuel from $4 to $6 without seeing that. We certainly saw it in the first quarter. We anticipate seeing more of it in the second quarter and beyond, if those prices continue.

We will obviously work to cover that, but I think the risk is there, particularly the longer that goes. And then we’ve talked a lot about potential from markdown risk which we think is pretty limited based on what we see today. So, with that as a starting point, let me kick it over to Laura. She can sort of fill in where she thinks the second quarter might land, and we can go from there.

Laura Felice — Executive Vice President and Chief Financial Officer

Yeah. So, you know, I think — as I think about the second quarter, I certainly think, as you compare it to last year, there is some pressure primarily from what Bob just said. As diesel prices rise, you know, there’s not much we can do about those. So, certainly some pressure on merch margins in the near term.

You know, two other things, I would add in there. As you think about — we’ve talked about our import business. We are relatively insulated from an import perspective just because, you know, from a mix, we don’t have a lot of products that we import on an annual basis. So, think about all of the supply chain issues that continue there, and we feel pretty good about that as we look across our peers.

And then, the other thing I’d say is that while there are supply chain pressures on merch margin, the flip side of that is actually that consumers will feel that as well. Probably, gas prices will continue to rise or at least stay where they are now, and that will continue to drive traffic. And we think the value that we can provide to our members, they will continue to see that. We saw it in Q1 with traffic patterns, and we think that will continue in Q2.

So, I think you’ve got the story on merch margin there. I think the only other thing is on your point about pass-through and how much of the inflation we continue — we can continue to pass through, that’s something we’ll watch. We watch it every day. We watch it weeks, months, and we’ll continue to react where we can.

And if we have to make investments in certain categories, we will continue to do that as we did in the first quarter.

Edward Kelly — Wells Fargo Securities — Analyst

Okay. And then just a follow up from me —

Robert W. Eddy — President and Chief Executive Officer

Ed, maybe I’ll just jump back in for one second and put a little bit of a finer point on what Laura said, we’re expecting a little bit more margin rate pressure than we saw in the first quarter — in the second quarter. So, we’re down 30 bps in the first quarter. We’re sort of forecasting down a little bit more than that in the second quarter. But a chunk of the traffic that we saw in the first quarter was driven by gas.

To the degree that gas prices stay high, I would think that benefits our sales line again in the second quarter. So, as we look at Q2, probably a little bit more sales than we initially thought, a little bit less margin rate and more or less the same bottom line.

Edward Kelly — Wells Fargo Securities — 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 — Executive Vice President, Strategy and Development

Yeah. Hey. This is Bill.

Robert W. Eddy — President and Chief Executive Officer

Maybe I’ll start it off and let — maybe I’ll start it off and let Bill fill in. We’re incredibly proud of the progress of the real estate team and our team overall has made in expanding our footprint. As you said, we’ve done a great job in the last six months, 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 it grow to 10 more next year. And just very proud of what we’ve been able to accomplish. So, Bill, why don’t you take it from there?

William Werner — Executive Vice President, Strategy and Development

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 and 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 are getting opened here in the rest of the year.

Edward Kelly — Wells Fargo Securities — Analyst

Great. Thanks, guys.

Operator

Perfect. Thank you so much for your question. Our next question comes from Kate McShane at Goldman Sachs. Please go ahead. Your line is open.

Kate McShane — Goldman Sachs — Analyst

Hi. Thanks for taking our question. I was curious if you could talk a little bit about your thoughts around the cadence of comps throughout the year. I know last time when we spoke with you, I think, Q3 was one of the quarters where you maybe had expected tougher compare, a tougher quarter.

Just — I know we kept the guidance for the year-to-date, but just how you’re thinking about each quarter when it comes to the top line if anything has changed there?

Robert W. Eddy — President and Chief Executive Officer

Hey, Kate. You know, I think the general — just 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 — Executive Vice President and Chief Financial Officer

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 pull forward. So, lowest in Q3 as we view it now.

Kate McShane — Goldman Sachs — Analyst

Thank you.

Operator

Perfect. Thank you so much for your question. Our next question comes from Chuck Grom at Gordon Haskett Research Advisors. Please go ahead.

Chuck Grom — Gordon Haskett Research Advisors — 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 W. Eddy — President and Chief Executive Officer

So — hey, Chuck. So, you think the Q1 comp was — it was fairly ratable across the quarter, although the first month, February, and the last month, April, were better than March. I wouldn’t say it’s a meaningful difference, but certainly, March was a touch lower. As we sit here in May, the comps look good.

But it is very early, and May is a service — I mean, Q2’s sort of a strange quarter. We’ve got the two holidays, Memorial Day and the 4th of July, in there. So, it comes in — the sales come in chunks. You have to hit both of those holidays to hit the quarter really well.

So, I’m not sure I would read anything into where we are at this point. Although, as I said, they are looking fine. And remind me what your second question was?

Chuck Grom — Gordon Haskett Research Advisors — Analyst

Just the traffic versus ticket composition in the quarter.

Robert W. Eddy — President and Chief Executive Officer

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 — Gordon Haskett Research Advisors — Analyst

Okay. Great. And 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 maybe than you’ve seen in the past?

Robert W. Eddy — President and Chief Executive Officer

Yeah. You know, it starts with value, Chuck, right? We have the best gas prices around, you layer on the co-brands credit card benefit, you layer on some of the things we’re doing promotionally to tie the club together with the gas station. Those all are really what’s driving it. Certainly, we didn’t really have the gas business flag in the beginning of the pandemic, like the entire industry.

We’ve been growing it for a couple of years. Undoubtedly, the beginning of that was people consolidating trips from a safety perspective. But I do think that allowed people to give us a try, understand our value proposition from a gas perspective, understand that we’re a one-stop shop where you can get your gas and get everything you need inside the box. And we’re very pleased with the 20% gallon growth during the quarter.

Actually, it was totally unexpected. We didn’t model that at all, 50% — more than 50% 2-year stack gallon growth. So, very pleased to see that and it all ties back to value. These times are tough for our consumers, and this is the type of environment that the club business and our business specifically was made for.

We give great value every day and do it on a one-stop shop basis.

Chuck Grom — Gordon Haskett Research Advisors — Analyst

Okay. Great. And then just one quick follow-up for me would be just, you’re not underwriting an improvement — continued improvement in gas gallons gained, correct, for the balance of the year?

Robert W. Eddy — President and Chief Executive Officer

We’re not. We’re sort of modeling gas where 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 as it rose, 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.

Chuck Grom — Gordon Haskett Research Advisors — Analyst

Great. Thanks a lot.

Operator

Thank you so much for your question. Our next question comes from Paul Lejuez at Citi. Please go ahead. Your line is open.

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 — Jefferies — 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 W. Eddy — President and Chief Executive Officer

Hey, Blake. So, you know, 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 lapse comes to the floor, 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 — Jefferies — Analyst

That’s super helpful. Appreciate it. And just to follow up on that, and then I have one more. On the general merch, I didn’t know if you could talk any more about — 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 merch. And maybe how those trended throughout the quarter, maybe anything along the lines of electronics or bigger tickets or maybe any things that you’re trying to really increase the penetration of as you build out that business.

Robert W. Eddy — President and Chief Executive Officer

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.

Blake Anderson — Jefferies — Analyst

Got it. And then last one was on gas. I know you’ve mentioned profit has kind of normalized here into the second quarter. I don’t know if you talked about it.

Are you still seeing a traffic benefit from gas in May? I don’t know if you could talk about that.

Robert W. Eddy — President and Chief Executive Officer

The gas benefit on traffic tends to correlate to the absolute price of gas, not to the profitability of gas. So, certainly, you know, gas prices remain high. And in fact, they’ve been going up for the past week or so. And so, certainly, we’re still seeing folks in our gas stations and improving gallons and improving cross-shop, where people come in to get gas and then come into our buildings.

We continue to see that happening here in May so far.

Blake Anderson — Jefferies — Analyst

Got it. Thank you very much.

Operator

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

Krisztina Katai — Deutsche Bank — 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’ 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 W. Eddy — President and Chief Executive Officer

Yeah. Thanks, Krisztina. Let me take the gas question first. So, we’ve seen tremendous gains in gallons and traffic as you see that we expect that to continue going forward.

And it’s about — as I said earlier, it’s about showing members the best value we can every day. I don’t particularly care if we make a ton of money in the gas business in any week or day or a quarter or a year. I care that we use that as an avenue to get people into our buildings, right, and it is the most underscored commodity in the world because there’s a price on them every street corner. So, people understand what a good gas price is and what a bad one is.

We try and put good ones up there every single day. The big thing for us over the past periods of time is, how do you show even more value? Are there ways to tie the box together with the gas station in a more meaningful way? Bill has great ideas several years ago of giving people a $0.10 per gallon gas discount with the co-brand credit card and has been a stalwart in that effort. When we get people into our co-brand credit card, we effectively get all of their gas purchases. They really love that benefit.

And as you said, we’ve done several promotions for a couple of years now, actually, trying to further that tie between the box and the club. So, we have promotions where you buy particular items inside the box, and you can get $0.10 per item off at the pumps. Those are funded by our suppliers. We do — the other ones where if you have a certain basket size, you get a certain discount on gas.

Again, some of those are funded by our suppliers. It’s really all about showing the best value, knowing that people sometimes make uneconomic decisions about gas. It’s a very emotional purchase, and we’re trying to take advantage of that by showing great value every day and then even better value when you get into the store. So, we’ll continue to do that.

We’ll continue to balance the traffic and membership gains that we get from that with the overall profitability of the business. But again, we’re always going to bet on membership and traffic, not gas profit. As you think about inventory, again, we’ve talked about being a little bit higher than we would have liked. Again, some of that inflation, some of that are food business, which was wholly intentional.

The GM business is a touch high at this point, but not dramatically so, and we don’t see tremendous markdown liability at this point in time. We have taken our best look at that, given what we see from our membership cohorts at this point in time. And that continues to be our best guess. We are modeling Q2 to look a little bit like Q1 from a spending perspective.

So, a little bit of weakness in the bottom part of the house and then some strength in the top part of the house. So, that’s how we thought the year would play out, that’s certainly how it’s going now. And I don’t think that’s different in Q2 than what we saw in Q1.

Krisztina Katai — Deutsche Bank — Analyst

Great. Thank you so much.

Operator

Perfect. Thank you, Krisztina for your question.

[Operator Closing Remarks]