BJ’s Wholesale Club Holdings, Inc. (NYSE:BJ) Q2 2023 Earnings Call Transcript

BJ’s Wholesale Club Holdings, Inc. (NYSE:BJ) Q2 2023 Earnings Call Transcript August 22, 2023

BJ’s Wholesale Club Holdings, Inc. beats earnings expectations. Reported EPS is $0.97, expectations were $0.9.

Operator: Hello, everyone, and welcome to the BJ’s Wholesale Club Holdings, Inc. Second Quarter 2023 Earnings Conference Call. My name is Carla and I’ll be coordinating your call today. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I’ll now pass the conference over to your host, Cathy Park. Please go ahead.

Cathy Park: Good morning, and thank you for joining BJ Wholesale Club second quarter fiscal 2023 earnings conference call. On the call today are Bob Eddy, Chairman and Chief Executive Officer; Laura Felice, Chief Financial Officer; and Bill Werner, Executive Vice President, Strategy and Development. Please remember that during this call we may make forward-looking statements within the meaning of the federal securities laws. These statements are based on our current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectations described on this call. Please see the Risk Factors section of our most recent Form 10-K and Form 10-Q filed with the SEC for a description of those risks and uncertainties.

Finally, please note that on today’s call we 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 and latest investor presentation posted on our Investor Relations website for a reconciliation of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. With that, I’ll turn the call over to Bob.

Bob Eddy: Good morning, and thanks for joining us to discuss our second quarter results. Our team managed the business well during the second quarter, leaning into our structurally advantaged operating model to deliver great value. This was validated by our members who voted with their feet and wallets as we gained traffic and accelerated our market share gains in the second quarter. By staying focused on executing our long-term strategic priorities and taking care of our members, we delivered strong profitability during the quarter. Our membership is strong, we are making progress on our merchandising improvements, our digital conveniences continue to save our members’ time, and we’re successfully growing our footprint. Our second quarter merchandise comparable club sales, which exclude gas sales, were up 1.1%.

This increase was driven entirely by traffic. Further, our focus on delivering great value to our members once again resulted in sales growth across each of our income cohorts, driven by increases in trips and spend per member. We were pleased with this result considering continued grocery disinflation, a tough lap in traffic provided by last year’s elevated gasoline prices and a tight discretionary spending environment. Our grocery and consumables business continues to be very strong. In fact, according to [indiscernible], we gained market share once again in the second quarter, with sales growing nearly two times faster than our key competition across the markets in which we operate. We have grown in the quarter and year-to-date periods, as well as in each of the last three years.

Our 52-week share is nearly 60 basis points above pre-COVID levels. The structural advantages provided by our model, most notably the value we provide, serve as an even more important reason for our members to visit our stores. We know that in uncertain times like these consumers search for value. Therefore, it is even more important that we continue to invest in value every day. That will not change. While these categories experienced sustained disinflation during the quarter, our member participation and transactions grew nicely, stacking up on last year’s gains. As a result, we delivered robust food and sundries performance with comp sales in this division up over 4%. Success with our own brands, Wellsley Farms and Berkley Jensen have contributed nicely to our share gains, having access to high-quality products at compelling values has deeply resonated with our members.

A great example is in our paper category, which is up nearly 10 percentage points year-to-date in unit penetration. In fact, during early August, sales of our Berkley Jensen paper towels eclipsed a bounty in both units and dollars for the first time ever. It’s a great product and an outstanding value. I encourage all of you to try it. We have consistently strengthened our own brand offering each quarter and are confident in our goal of ultimately reaching 30% penetration. Members who engage in our own brands spend more, visit us more often, and are, therefore, better members. Our general merchandise and services comp was down 13% year-over-year in the second quarter, reflecting three realities: First, we made an intentional and considered effort to re-baseline certain categories to get our general merchandise business to a healthier profile.

That meant less inventory and considerably higher margin rates than last year. This is an important step as we begin to set new on-trend assortments for the future. With that said, we continue to be optimistic about our ability to inflect our general merchandise business and grow it for the long term. Bright spots during the second quarter included our small appliances category, which was supported by better presentation and an improving assortment. Our back-to-school set, which runs from late Q2 into Labor Day, has historically been small relative to the rest of our GM business, but we’re encouraged by our performance season to date. Next, after years of stimulus-fuel purchasing, the discretionary dollar is harder for our members to part with and buying habits are returning towards normal.

This has affected sizable general merchandise categories such as consumer electronics, along with more seasonal categories like patio and outdoor furniture. The reality is that if you needed something in these categories over the last couple of years, you likely already bought it and purchase cycles are long. Finally, weather in our core Northeast markets during the second quarter was notably cold and rainy. Just one data point. July was the second wettest month in history in Boston, that was after a very wet May and June. Seasonal goods comprise a considerable amount of overall general merchandise sales in the second quarter, and sales in these categories were certainly impacted. Moving on to merchandise gross margins. We drove significant improvement in the second quarter as last year’s supply chain challenges dissipated.

We also managed our general merchandise inventory better this year, resulting in a healthier sales mix and more margin dollars and rate. In our gasoline business, while retail gas prices were approximately 25% lower year-over-year, we were pleased to maintain our significant share gains from the last several years. Volumes for the broader industry remained down double digits versus pre-pandemic levels, and we are outperforming this trend with year-to-date comp gallons up over 30% versus 2019. Following tough compares in May and June, July comp gallons were meaningfully positive. Profitability continues to normalize when compared to last year. Our second quarter profit per gallon landed near Q1 levels, which was slightly ahead of our expectations.

Overall gas profits, while in line with our expectations, were significantly lower when compared to last year’s record Q2 gas profits. All in, we reported second quarter adjusted EBITDA of approximately $269 million and adjusted earnings per share of $0.97. The combination of positive traffic, market share gains and margin improvement contributed to stronger-than-expected bottom-line results in the quarter. While our teams are focused on optimizing our performance in the near term, we have not lost sight of advancing our strategic priorities, which remain crucial to our long-term growth. They are: improving member loyalty, driving an unbeatable shopping experience, delivering value conveniently through digital and growing our footprint. Let me briefly highlight each.

Our members are at the heart of everything we do, and I’m pleased with the progress our teams continue to make in strengthening the size and quality of our membership. In the second quarter, we grew both membership fee income and member count by 5% year-over-year, leveraging both our new and existing clubs as well as growing digital acquisition. In addition to overall member growth, we are improving the quality of our membership with investments like our new co-brand credit card program, where new account growth is exceeding our plan. Higher-tier members are especially benefiting from our new program through greater awards and the increase in our gas discount program. In the first half of this year, the total rewards delivered to our higher-tier members were over 20% higher than last year.

We expect our continued investment into our membership value prop will increase higher-tier penetration and strengthen lifetime value going forward. As I reflect on the past five years, we have made significant strides in membership, growing our base by more than 30% to over 7 million members today. While doing so, we remained focused on maximizing member lifetime value through improvements in higher-tier penetration and renewal rates. Our higher-tier penetration has grown by nearly 15 points to 38% today. We grew our tenured renewal rate to a record 90% last year, up 3 points from fiscal 2018, and we expect to sustain that 90% this year. Further, the meaningful expansion of our member base has not diluted member behavior, with our members continuing to shop over 20 times a year on average.

Membership fee income has grown every year over the past 25 years, and we believe our commitment to value will help us drive sustainable MFI growth in the future. Strong loyalty is a direct outcome of great customer experiences. Our second strategic priority is delivering an unbeatable member experience, which for us is centered around value. Last year, we demonstrated our ability to strengthen our competitive advantage in periods of rampant inflation as we improved our pricing position by 130 basis points across our competitive set. As we face disinflation this year, we have continued to invest in key value items in order to drive trips and maintain our strong pricing position. Last quarter, we highlighted our investments in our Wellsley Farms bottled water.

In the second quarter, we invested in our USDA-certified Choice strip steaks offering them at up to a 38% discount against our competitors. This grew average number of baskets and trips as well as new engagement into the category. About 20% of our members who took advantage of this promotion were completely new to the fresh beef category, and many have already returned to the category after the promotion ended. Pricing is a crucial way we deliver value to our members, but we are also working to offer meaningful value in other ways, including through merchandising improvements and digital convenience. On the former, we are especially excited about our general merchandise transformation, which comes to life starting in the back half of this year.

General merchandise is an area where we can make a profound impact in showcasing value to our members, yet it is currently less than 15% of our business. We believe we have significant opportunity to profitably grow this division over the next few years. While about 80% of our members shop at general merchandise today, engagement is low. The majority of our members shop in only one or maybe two categories in GM, whether that is apparel, consumer electronics, home or seasonal. We know that members who shop GM derive more value out of their BJ’s membership and spend about 4 time more per year at BJ’s than members who do not engage in GM. We’re working to reignite our treasure hunt experience by elevating the quality of our merchandise while preserving the great value that our members expect at BJ’s.

Better assortments should allow us to grow member penetration and get members shopping across multiple GM categories, which we believe will expand our share of members’ wallets and deepen loyalty over time. It is important to note that this is a long-term build. It will take a while to grow our credibility in certain GM categories. And while the current operating environment may mute our efforts somewhat, our general merchandise transformation is a crucial part of our long-term growth strategy. We will continue to invest and innovate until we’re there. Digital convenience is our third strategic priority and it’s especially pertinent to our space, where shopping in 100,000 square foot boxes can at times be a high-friction experience. Through our app and website, we have improved upon the ways in which members engage with us over the years, and members’ preferences for these platforms are growing.

Our digitally enabled comp sales grew by 15% in the second quarter to approximately 10% of our net merchandise sales. Our BOPIC and curbside services are popular convenience options contributing to the majority of our digital growth. In fact, this quarter, we have made several enhancements, including functionality to allow members to add or replace items after completing their order. We’re also working to leverage technology to make BOPIC and curbside more efficient for our team members with a goal of cutting down member wait times for their orders. Our digitally-enabled members are more loyal, as indicated by higher spending and renewal rates. We will continue to lean into convenience initiatives that we believe will deliver outsized value to our members.

Finally, we remain pleased with the performance of our newer clubs and continue to grow our footprint through new openings. In fact, the 27 clubs we’ve opened since reinventing our new club opening model in 2016 contributed nearly $100 million of EBITDA over the last 12 months, more than double their original projection. In mid-June, we took another step westward with the opening of our first club in the Nashville, Tennessee market, our 19th state. Feedback from our new members has been incredibly supportive and the club is off to a great start. Our team will be busy with anticipated openings later this year as we enter our 20th state in Madison, Alabama, open two additional Tennessee clubs in Mount Juliet and Goodlettsville as well as a few others.

I’d like to close my remarks with my sincere gratitude for our team members. They show up every day for our members, our communities and each other, united in our purpose of taking care of the families that depend on us. To our team members who are listening in today, thank you for your dedication and hard work. I’m proud to be working alongside all of you. I’ll now turn it over to Laura to provide more details on our results and outlook for the rest of the year.

Laura Felice: Thank you, Bob. Before I get to the numbers, I’d like to echo Bob’s gratitude for our team members across our clubs, club support center and distribution centers who remain critical to the success of our company. Now, let’s discuss our results. Net sales in the second quarter were approximately $4.9 billion, a 2.9% decrease over the prior year. Total comparable club sales, including gas sales decreased by 5.3% year-over-year, with merchandise sales growth offsetting the decline in our gas sales, primarily driven by sharply lower retail prices at the pump. Merchandise comp sales, which exclude gas sales, increased by 1.1% year-over-year and almost 9% on a two-year stack. Our second quarter comp was driven entirely by traffic, which grew year-over-year on top of the strong traffic aided by high gas prices in the second quarter of last year.

The impact of inflation on our sales moderated through the quarter and at a slower pace than the first quarter. As Bob mentioned earlier, our second quarter comp in our grocery, perishables and sundries division grew by 4% year-over-year and was up 12% on a two-year stack. We are especially pleased to have delivered strong gains in market share in the quarter, which substantiates our belief in a healthy and growing loyal member base that relies on BJ’s for their shopping needs. Our general merchandise and services comp decreased by 13% in the second quarter and was down 9% on a two-year stack. As we called out last quarter, an increasingly discerning consumer dynamic has resulted in our members’ shopping closer to need. We also estimate that roughly a third of our general merchandise and services comp was driven by unfavorable impact of weather-sensitive categories.

We believe our digital offerings have made our members’ shopping experience more convenient than ever. Digitally-enabled comp sales for the second quarter grew 15% year-over-year, and approximately 90% of our digitally-enabled sales are now fulfilled by our clubs with services like BOPIC and same-day delivery. We remain committed to improving convenience by increasing our level of digital engagement for our members over time. Our gas business performed broadly in line with our expectations. Comp gallons in the second quarter were down slightly year-over-year and about flat year-to-date as we sustained our significant share gains from recent quarters. As Bob mentioned, comp gallons are growing again in July and August as we have come off last year’s pricing peaks.

Our gas profits were lower year-over-year as profit per gallon continued to normalize from last year’s levels. Membership fee income, or MFI, grew approximately 5% to $103.7 million in the second quarter, and we remain pleased with our membership trends, including in higher-tier penetration, easy renewal and first year and tenured renewal rates. Moving on to gross margins, excluding the gasoline business, our merchandise gross margin rate improved by 90 basis points year-over-year. Much like the first quarter, this improvement was primarily due to the unwinding of supply chain costs that challenged our business last year. Better inventory management also worked in our favor, skewing our mix to more margin accretive sales, particularly in general merchandise, where we had less markdown activity versus prior year.

Speaking of inventory, our merchandising, finance and planning and allocation teams remain diligent in optimizing our inventory for the current environment, and we feel very good about our position today. We ended the second quarter with inventory up about $164 million year-over-year, which was mostly driven by inflation and elements that are strategic in nature, including supporting new clubs and in-stock improvements in our consumable categories. Coming back to the P&L. SG&A expenses for the quarter were $695 million. The year-over-year increase was primarily attributable to our new unit expansion and other investments to drive our strategic priorities. We reported second quarter adjusted EBITDA of $268.8 million and adjusted EPS of $0.97, which reflects our merchandise sales and margin growth as well as our membership strength, offset by the lap in our gas business as well as higher interest and tax expense year-over-year.

Turning to our capital structure. We ended the quarter with $859.1 million of debt and 0.8 turns of net leverage, consistent with the prior two quarters. We expect to maintain this strength in the future. Our capital allocation strategy is consistent with the framework we set forth on our Investor Day. We believe that the best use of our cash is applying it towards profitably growing the business. As such, investments to support membership, merchandising, digital and real estate initiatives will continue to be funded by our cash flows and enabled by our strong balance sheet. We also recognize that when valuation levels deem appropriate, investing in our business through share repurchases is a prudent way to drive long-term value as well. In light of this view and our confidence in the long-term trajectory of our business, we accelerated our buybacks to over 715,000 shares in the second quarter for approximately $45 million.

Year-to-date, we have executed approximately $60 million of share repurchases, which compares to approximately $61 million of free cash flow we generated over the same period. We have $259 million remaining under our current authorization. Let me now address our outlook for the rest of the year. Our business as well as the broader industry continues to navigate shifts in consumer behavior resulting from lapping stimulus, dwindling savings, disinflation and rising interest rates. Disinflation or waning year-over-year inflation continued into the second quarter with the pace showing signs of moderation as grocery and sundries categories cycled through elevated levels from last year and fresh categories are bottoming out to more normal levels.

While members have become more resourceful on tighter budgets, they are clearly still spending with us for their household essentials and we feel great about our ability to maintain the momentum in our market share gains. We are confident in our plans for general merchandise as well and believe that we can leverage our traffic to engage members with our new assortment and strategies. Furthermore, a favorable shift in GM category mix and year-over-year GM sales comparisons should aid a recovery beginning in the back half of the year. We also acknowledge the considerations of macro-driven pressures on broader consumer demand. As a result, we have refined our sales outlook for the rest of the year to address the uncertainty in discretionary spend.

We now expect comparable club sales, excluding gas, to grow by approximately 2% for fiscal 2023. We continue to expect a robust consumable business as value continues to resonate with our members. We remain confident in the assortment improvements we’re making in our general merchandise business, but are taking a more conservative view on the near-term discretionary spend given the macro backdrop. We expect year-over-year inflation to ease through the back half. To be clear, we still believe we will exit the year with year-over-year inflation, not deflation. We expect MFI growth for the full fiscal 2023 to be approximately 5%, aided by member growth and sustained strength in higher-tier penetration. Moving down the P&L. We maintain our view that year-over-year improvement in merchandise gross margin rate will be front-half weighted this year.

That being said, our year-to-date performance has exceeded our expectations. As a result, we are raising our fiscal 2023 guidance to an increase of approximately 50 basis points year-over-year. In our gas business, we continue to expect slight comp growth in gallons for the full year. Our profitability assumptions also have not changed. As we’ve seen year-to-date, we believe that we will settle into more normalized gas margins as compared to prior years. As a reminder, when breaking down our gas business by quarters, we are lapping our toughest comparisons in gas margins in the second and third quarters this year. Some additional comments on our below-the-line items. While our debt levels have remained stable year-over-year, the average rate that we pay on debt has nearly doubled from last year, resulting in higher net interest expense in the quarter.

We are reflecting similar assumptions on rate for the rest of the year. On our tax rate, we anticipate a tax rate of approximately 28% in the back half of the year due to lower tax benefits as we saw in the second quarter. In summary, we expect in-club sales growth and merchandising gross margin improvements to partially offset normalizing gas profitability. As sales moderate into ongoing disinflation, we are also laser-focused on maintaining cost discipline to maximize our operating leverage. Putting all this together, we expect to deliver fiscal 2023 GAAP and adjusted EPS of $3.80 to $3.92, with EPS in the third quarter once again facing a tougher gas lap and the fourth quarter benefiting from a 53rd week. Before turning it back to Bob, I’d like to reiterate our confidence in the strength of our business and the transformation we continue to make in our company.

We believe we are positioned to deliver sustainable growth longer term. With that, I will turn it back to Bob for closing remarks.

Bob Eddy: Thanks, Laura, and thanks to everyone listening for their attention and support. We spend a lot of time on these calls discussing short-term up-to-the-minute trends. So I’d like to close with some comments on the long-term view of our business. We participate in a segment of retail that reliably gather share in good times and bad. We have considerably improved our membership, operations, digital business and many other things. But one thing matters most and that is value. Wholesale clubs have the best value and we invest every day to make our offering to our members even better. It is the largest reason why our membership is up 30% since 2018. It’s why our co-brand credit card continues to grow above our expectations.

It’s why people flock to our gasoline business. It’s why we continue to grow transactions when other forms of retail don’t. The fundamentals of our business are strong and favorably positioned to win in the broader retail landscape. We will continue to play the long game. We will grow the size and quality of our membership. We will improve our general merchandise business to match the value and credibility we have in our food and consumables business. We will grow our digital business and our store footprint, all while bringing more value to more members. I’m proud of our entire team, and I’m excited for the future they’re creating for our great company. With that, I will now turn it back over to the operator to take your questions.

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Q&A Session

Operator: Thank you. We will now start the Q&A session. [Operator Instructions] Our first question comes from the line of Peter Benedict from Baird. Your line is open.

Peter Benedict: Hi, guys. Good morning. Thank you for taking the questions. I guess the first one, maybe about the member trends in 2Q, sounds like you ended a little over 7 million. Just maybe talk a little bit about what you’re seeing from sign-ups from renewals. And then on the MFI related to that, expecting 5% growth this year. I think previously, you were 5% to 6%. Just curious why focusing at the lower end of that range for this year. That’s my first question.

Bob Eddy: Hey, Peter, good morning. It’s Bob. Listen, we’re very happy with our performance in growing our membership in both size and quality from a number of different angles. As you noted, we gained 5% in the number of members and dollars in the second quarter, pretty great year-on-year and sequential growth for us. And it’s important to note that we’re stacking those gains on top of gains from prior years as well in both bodies and dollars, right? And we’re focused on finding the right members for us and engaging them with fantastic products and great value across our building. We’ve also grown premium-tier members. Our co-brand program is growing very well. And as we mentioned in the prepared remarks, we’re well on track to another 90% renewal rate for the year.

So, we’re proud of where we are. I have the luxury, I’ve been around this business for a long time when growing members and MFI dollars sequentially and year-over-year wasn’t a given like it is now, we are doing quite a fine job consistently growing in the size and quality of our membership over the past several years. With that said, we’re not satisfied. That’s why we continue to invest in value every day. That’s why we’re trying to reinvent our general merchandise business to engage our members even further in our platform. That’s why we continually try and pass value back to our members through pricing, through promotions, through our co-brand product or our gas discount program and tons of other different ways. So, we’re happy with what we’ve done.

We’re excited for what we can do in the future, and I’m confident we can build on the gains that we’ve made today.

Peter Benedict: Okay. Thanks for that, Bob. And then I just — my follow-up would just be around the general merchandise outlook for the back half of the year. Obviously, you guys have taken that down a little bit. The inventory, I think Laura had mentioned a lot of consumables in there, new club growth, et cetera. But just maybe talk a little bit about how you’ve got your inventory planned in general merchandise for the back half of the year? And kind of the moderating demand outlook on that front, leaves you exposed in any way, or if you feel good about where you are in general merchandise inventory? Thank you.

Bob Eddy: Sure. So let’s talk a little bit about GM. As we talked about in the prepared remarks, a bunch of stuff impacting the second quarter, a lot of it having to do more, frankly, with last year than the current year. But first and foremost, we’ve taken the opportunity to rebalance how we think about the sales and margin trade in general merchandise. And that’s really an integral part of building the business for the long term as we see it. We’ve talked a little bit about changing assortments. I think about that as what to buy, but this quarter, we took a little bit of a look at how we buy as well in terms of building the resilience of the general merchandise processes and procedures around how much to buy, how much inventory to have, how to mark it down, how to exit seasons clean.

We are really building all those processes and procedures as we go with an eye towards a sustainable, growing, profitable general merchandise business going forward. So, our team is really doing the right things. We had tough compares against last year with all of the low- to no-margin liquidations of seasonal goods and certainly had some tough weather in the Northeast to deal with, which really depressed the sales of those seasonal goods in a pretty significant way. But as we look forward, we are bullish because we are putting more relevant assortments in front of our members. And where we’ve seen that so far, we’ve seen good results. That should come to life a little bit more in the back half as we get through reinventing us more assortments in general merchandise.

And as we continue to do that quarter in, quarter out, we should gain a lot more credibility with our members as we put better brands, better products, more value in front of our members on a repeated fashion. That will allow us, obviously, to capitalize on the tremendous traffic and market share we have on the other side of our business and add more value to our membership going forward. In the prepared remarks, we talked a little bit about our inventory balance. It is up year-over-year. That is all in our grocery and consumables business. In fact, our general merchandise inventory is considerably lower this year than it was last year. Again, we had a lot of seasonal goods last year to liquidate still at this point in time. And most of the increase in our inventory is really structural things that we’re making choices to do.

Certainly, part of it is inflation, right? As we sit here today, there’s still a few points of inflation in our groceries and sundries business that’s driving some inventory balance, but most of it is choices we are making and investing in growth. So think about inventory to support new clubs, think about a 300 or 400 basis point increase in in-stock levels in our consumable business year-over-year, really things that we’re doing to drive the health of the overall business and be the best version of what we can be when our members show up every day in our business. So, GM inventory is doing just fine, and we are not concerned about the level of consumables inventory. We are intentionally making investments there to better serve our members.

Peter Benedict: Great. Thanks for that, Bob. Good luck.

Bob Eddy: Thanks, Peter.

Operator: Thanks, Peter. Our next question comes from the line of Robert Ohmes from Bank of America. Your line is open.

Robert Ohmes: Hi. Thanks for taking my questions. A follow-up on — maybe for Laura, just in terms of the cadence of merchandise gross margin you’re expecting for 3Q and 4Q, and [indiscernible] is the freight impact or benefit year-over-year, I guess, I should say, is expected to be similar in 3Q versus 2Q and then maybe less so in 4Q, maybe some color on that? And then, just another follow-up on the same store sales expectation for the back half. Is there any cadence between the quarters? Should the general merchandise changes you’re making show up over the fourth quarter than the third quarter? Or any other extra color you guys could give?

Laura Felice: Yeah. Hey, Robbie, thanks for the questions. As we think about merch margin for the remainder of the year, certainly, in the second quarter, it was healthier than what we anticipated. In our prepared remarks, I talked about supply chain unwind. And part of that was also how we managed our general merchandise business. So, we’re really proud of the second quarter merch margin growth. As it relates to the back half, I think what we’re anticipating is that the levels of merch margin growth year-over-year will moderate. So, Q3 coming off of Q2 and Q4 being the lowest growth year-over-year. So, I think the only other thing I would add in there is freight costs are certainly embedded in our assumptions, but I think it will moderate.

Part of that moderation is — your second question on same store sales growth, I think it will be relatively balanced in Q3 and Q4. As you dig under that, I think there are two things that we are considering. Disinflation will continue in our core consumable business. So, I think the rate of inflation will come off and trail off through Q3 and be the lowest in Q4. And that will be balanced off by general merchandise growth. So, we think Q4 will be the strongest of the two quarters.

Robert Ohmes: That’s really helpful. Thank you.

Operator: Thanks, Robert. Our next question comes from the line of Edward Kelly from Wells Fargo. Your line is open.