Simeon Gutman

Simeon Gutman asked about the current backdrop for the furniture market, how customer demand for furniture changed in the quarter, the resonance of current product lines, and whether free cash flow is expected to remain positive going forward.

Answer

Chairman and CEO Gary Friedman acknowledged the unpredictable market but expressed confidence in RH's strategic investments and innovations, which he believes will create significant separation from competitors. CFO Jack Preston added that building blocks like inventory reduction and capital spending cuts are in place to maintain positive free cash flow, despite ongoing uncertainties and external challenges like tariffs.

Simeon Gutman from Morgan Stanley asked about the current backdrop for furniture demand, changes in customer behavior, the resonance of RH's current product lines, and whether positive free cash flow can be assumed going forward.

Answer

Gary Friedman, Chairman and CEO, acknowledged the unpredictable market but expressed confidence in RH's strategic responsiveness and ability to innovate through challenges, highlighting new retail concepts and design ecosystems. Jack Preston, CFO, affirmed building blocks for maintaining positive free cash flow, including inventory reduction and reduced capital spending, while acknowledging ongoing uncertainties.

Simeon Gutman inquired about RH's improving free cash flow and the necessity of real estate monetization given current financial trends.

Answer

Chairman and CEO Gary Friedman and CFO Jack Preston clarified that real estate monetization is opportunistic, not a necessity, highlighting the value of their Aspen portfolio and other owned properties like RH England and RH Detroit. Friedman also discussed the impact of rising interest rates on development and the strategic learning from being a landlord.

Simeon Ari Gutman asked about the sequential improvement in free cash flow, questioning if real estate monetization remains a necessary pursuit given the positive trend, and followed up on the timing of the business entering a new growth period post-investment cycle.

Answer

Chairman and CEO Gary Friedman explained that real estate monetization is opportunistic, not a necessity, as RH is primarily a developer with a sale-leaseback model. He detailed the Aspen portfolio and current market conditions, noting that selling now might not be ideal. CFO Jack Preston clarified that communicating real estate value is about understanding assets relative to debt. Friedman added that the business is ready for growth post-peak investment cycle, but cautioned about inflation risks from tariffs, which he believes could severely disrupt the furniture industry. He emphasized the need for rational, data-driven discussions with the administration regarding tariffs.

Simeon Ari Gutman inquired about RH's free cash flow improvement and whether real estate monetization remains a necessary strategy given the projected cash flow for fiscal 2025 and beyond. He also asked about the company's readiness for a new growth period, considering the easing investment cycle and new initiatives.

Answer

Chairman & CEO Gary Friedman and CFO Jack Preston clarified that real estate monetization is opportunistic, not a necessity, highlighting their role as developers rather than long-term owners. They discussed the Aspen portfolio, the impact of rising interest rates on development, and the strategic value of properties like RH England and RH Detroit. Friedman emphasized the business's readiness for growth post-investment cycle but expressed concern about inflation from tariffs, urging policymakers to consider the industry's perspective on potential new tariffs.

Simeon Gutman of Morgan Stanley asked about the impact of recent promotions on assessing underlying demand for new products and the strategy for margins. He questioned if the increased discounts could compromise the path back to 20%+ EBITDA margins or harm the brand.

Answer

Chairman & CEO Gary Friedman clarified that the increase in the RH membership discount from 25% to 30% is a permanent, strategic move to gain market share, not a temporary promotion. CFO Jack Preston confirmed this change is already factored into the full-year guidance of 20-21% adjusted EBITDA margin. Friedman noted a separate, short-term 35% discount on outdoor furniture was a tactical move to capture sales during its brief peak season.

An analyst on behalf of Simeon Gutman asked when RH expects to become free cash flow positive and how the company views its future funding needs.

Answer

Chairman and CEO Gary Friedman stated that RH expects to turn free cash flow positive in the next year and will be able to self-fund the business. He characterized the company's existing debt not as a need for cash, but as a strategic 'currency swap' used to repurchase what he believed was undervalued stock, a move that has already generated significant returns for shareholders.

Simeon Gutman asked about the confidence in the durability of the initial demand inflection and whether the company has enough data from recent product launches to gauge trends across its different product tiers.

Answer

CEO Gary Friedman affirmed that the company has substantial data and is very confident in its outlook, irrespective of interest rate movements. He noted that RH is significantly outperforming the industry, which supports the durability of the trend. He confirmed they have enough data on product performance to inform their strategy and that the key challenge now is maintaining focus and prioritizing the most impactful initiatives.

Simeon Gutman asked about Costco's approach to warehouse openings in the U.S., which are expected to reach a 20-year high next year, specifically if there are different membership strategies given the mix of infills and new markets.

Answer

Ron Vachris (President, CEO, and Director, Costco Wholesale Corporation) explained that next year's openings will be a mix of infills in established markets and new markets. Infill locations drive top-line sales by increasing frequency, while new markets garner better new sign-ups.

Simeon Gutman asked if Costco plans any different membership strategies as U.S. warehouse openings are set to reach a 20-year high next year, especially after lapping short-term membership promotions.

Answer

Ron Vachris, President, CEO, and Director, explained that next year's U.S. openings would include a mix of infills in established markets, which boost top-line sales by increasing frequency, and new markets, which drive new member sign-ups. He expressed increased confidence in entering previously challenging markets and confirmed a continuation of existing strategies with some new approaches.

Simeon Gutman questioned the impact of Amazon's increased fulfillment capabilities on Costco's e-commerce grocery business, specifically asking about any spike in Instacart-driven traffic and Costco's readiness to meet increasing online grocery demand.

Answer

President and CEO Ron Vachris noted that Instacart and Uber businesses continue to perform well and grow, with executive membership benefits being accretive. He acknowledged new competition and the strong member desire for Costco's fresh foods delivered to their homes. CFO Gary Millerchip added that Costco will soon report 'digitally enabled comparable sales' to include these services.

Simeon Gutman inquired about the impact of Amazon's increased fulfillment capabilities on Costco's Instacart-driven traffic and whether Costco possesses optimal capabilities to meet increasing online grocery demand.

Answer

President and CEO Ron Vachris stated it's difficult to precisely attribute changes, but Instacart and Uber businesses continue strong growth, with executive member benefits being accretive. He acknowledged new competition but emphasized the strong member desire for Costco's fresh foods and sundries delivered to their homes. CFO Gary Millerchip added that starting next month, these sales will be included in a new 'digitally enabled comparable sales' metric.

Simeon Gutman questioned the impact of Amazon's increased fulfillment capabilities on Costco's Instacart-driven traffic and whether Costco possesses optimal capabilities to meet increasing online grocery demand.

Answer

President and CEO Ron Vachris noted that Instacart and Uber businesses continue to perform well and grow, with executive membership benefits being accretive. He acknowledged new competition but emphasized the strong consumer desire for Costco's fresh foods and food and sundry items delivered to their homes. EVP & CFO Gary Millerchip added that these sales will now be included in the 'digitally enabled comparable sales' metric.

Simeon Gutman of Morgan Stanley inquired about Costco's current pricing strategy amidst a complex tariff environment, asking what guidance is being given to merchants and whether the company is observing meaningful changes in sales volume where it is holding prices steady relative to the market.

Answer

President, CEO & Director Ron Vachris responded that Costco is aggressively lowering prices wherever possible, especially as key commodity costs decrease. He noted that the company's competitive price landscape improved in the latter part of the quarter. Vachris affirmed the strategy is 'full force ahead on lowering prices' to drive business growth and mitigate tariff impacts for members.

Simeon Gutman of Morgan Stanley inquired about Costco's current pricing strategy amidst a complex tariff environment and whether the company is seeing meaningful changes in sales volume where it holds prices steady.

Answer

President and CEO Ron Vachris stated that Costco's strategy is "full force ahead on lowering prices" whenever possible. He explained that buyers are immediately passing on savings from lower commodity costs, like butter and eggs, to members. This aggressive pricing posture, combined with efforts to mitigate tariff impacts, is improving Costco's competitive position.

Simeon Gutman asked about the current state of the consumer, specifically their willingness to purchase discretionary items amid rising prices, and whether there were any signs of a slowdown in Canada.

Answer

Executive Gary Millerchip stated that consumer behavior remains consistent, with members focused on quality and value but still willing to spend, albeit choicefully. He noted a continued shift toward food-at-home and strong non-food trends, except for flatter performance in electronics and apparel. Millerchip also highlighted that Canada's comparable sales remain strong and in line with year-to-date performance.

Simeon Gutman of Morgan Stanley inquired about the health of the consumer, the clearance of seasonal and big-ticket inventory, and Costco's market share performance in discretionary categories.

Answer

Executive Gary Millerchip noted that members are choiceful but willing to spend on new, quality items at a good value, citing double-digit growth in categories like jewelry, home furnishings, and sporting goods. He also observed a shift from food away-from-home to at-home, with bifurcation in meat purchases. Executive Ron Vachris added that seasonal sell-through is strong, with a focus on foundational Christmas items like furniture and appliances. Gary Millerchip concluded that available data suggests Costco is gaining share across most mentioned categories.

Simeon Gutman asked how to reconcile Costco's goal of SG&A leverage with its recent wage increases, and followed up on the impact of new membership card readers on member growth.

Answer

Gary Millerchip, an executive, explained that Costco's model balances investments in members and employees with driving top-line growth to achieve leverage over time, noting that productivity offset recent wage hikes. Ron Vachris, an executive, added that the card readers, already used in Europe, improve real-time traffic counts, streamline front-end productivity by moving membership verification to the door, and have been well-received by operators and members.

Simeon Gutman asked for management's perspective on the newness pipeline for fiscal 2026, following a strong theme of newness in fiscal 2025. He also asked to separate the current year's improvements between newness and marketing, and to elaborate on the extent of internal operational improvements and future potential, given that some initiatives are still in 'early innings'.

Answer

President and CEO Kecia Steelman expressed strong confidence in the balanced newness pipeline for fiscal 2026. She explained that the 'early innings' comment refers to the benefits of significant technology and team investments made over the past few years, which are now starting to marinate and yield results. She noted that while FY25 was a heavy investment year in guest-facing initiatives, FY26 will involve more prioritized and thoughtful investments, allowing the company to realize the full benefits of prior investments and continue to grow.

Simeon Gutman asked for CEO Kecia Steelman's philosophy on the company's operating margin, questioning whether the goal is to push it higher or maintain a certain level to fund reinvestment for top-line growth.

Answer

President and CEO Kecia Steelman responded that the primary focus is on growing operating profit dollars and ensuring a return on investments. She emphasized that in a highly competitive category, the company will continue to invest to drive future growth, prioritizing value creation and returns over targeting a specific margin rate.

Simeon Gutman questioned the company's focus on new store growth as opposed to enhancing the existing store fleet and asked about the potential for an increased pace of remodels.

Answer

CEO Kecia Steelman defended new stores as a profitable share-gain opportunity and noted that remodels now incorporate more flexible fixtures. CFO Paula Oyibo added that the company frequently refreshes the fleet with new brand launches and plans to remodel 40-45 stores this year.

Simeon Gutman of Morgan Stanley asked about the scalability and incremental margins of Kroger's e-commerce business, now that it is projected to be profitable next year. He also inquired if there was an increased sense of urgency in recent strategic and tactical changes, and how the upcoming new CEO would impact the continuity of execution.

Answer

CFO David Kennerley stated that e-commerce, now moving from "red to green," will continue strong double-digit growth, but with profitability. Chairman and CEO Ron Sargent affirmed his objective to set the company for future success, emphasizing speed, tough decisions, and moving influence to divisions. He described the return to five-day in-office work as a function of retail's collaborative nature, stating there's "plenty of urgency" but not necessarily more urgency, and that the plans being built today should ensure little interruption with the new CEO.

Simeon Gutman asked for clarification on the sequential improvement in identical sales from Q1 to Q2, specifically whether ticket growth or volume growth contributed more to the 3.4% increase. He also inquired about the ongoing evaluation of Kroger's business, particularly if there's a debate around the pricing architecture, such as a potential shift to an Every Day Low Price (EDLP) model.

Answer

David Kennerley, EVP & CFO, explained that Q2 saw more moderate inflation and improved units, indicating a more balanced contribution with a greater emphasis on unit improvement. Ronald Sargent, Interim CEO & Chairman, added that grocery units have consistently improved and are nearly flat year-over-year. Regarding pricing, Mr. Sargent confirmed there is no debate about moving to an EDLP model, as Kroger's customers respond well to its promotional retailer strategy. He emphasized narrowing spreads on everyday items, being sharper, more focused, and simpler in pricing.

Simeon Gutman from Morgan Stanley inquired about Kroger's market share performance in the first quarter and the drivers behind any inflection. He also asked if e-commerce requires a step-up in investment and sought context on Ocado's decision to draw down its letter of credit.

Answer

Interim CEO & Chairman Ronald Sargent acknowledged significant market share improvements in Q1, attributing them to new store openings, better in-store execution, e-commerce growth, and the strength of Kroger's private label brands. On e-commerce investment, he noted the foundation is strong but all aspects are under review. EVP & CFO David Kennerly clarified that the Ocado drawdown was a contractual option exercised on the agreement's seventh anniversary.

Simeon Gutman from Morgan Stanley asked about Kroger's market share performance in the quarter, whether it saw an inflection, and the key drivers behind it. He also questioned if Kroger needs to increase e-commerce investment and sought clarity on Ocado's recent letter of credit drawdown.

Answer

Interim CEO & Chairman Ronald Sargent stated that while no retailer is ever satisfied with market share, the biggest driver is new stores, and Kroger saw share gains in markets where it has recently added stores. He also credited the in-store experience and strong e-commerce growth. On the Ocado matter, EVP & CFO David Kennerly clarified that the drawdown was a contractual option that Ocado was entitled to exercise on the seventh anniversary of their agreement and was 'nothing more'.

Simeon Gutman asked about the expected contribution from the core business versus alternative profits to the 2025 EBIT growth guidance. He also inquired about the board's CEO succession strategy, particularly the balance between internal talent and external candidates.

Answer

Interim CFO Todd Foley confirmed that the projected 3% EBIT growth will come from both the core business, which has strong momentum, and the alternative profit business. Interim CEO Ronald Sargent explained that the board is conducting a comprehensive search using a national firm to evaluate both internal and external candidates, with the primary goal of identifying the right leader to drive growth and shareholder value.

Simeon Gutman from Morgan Stanley asked for a characterization of the core P&L performance for 2024, excluding merger costs and the extra week lap, and questioned if the mix between the core and alternative profit businesses was as expected. He also followed up on commentary about consumer segments, noting a potential positive inflection for mainstream households.

Answer

Interim CFO Todd Foley confirmed it was a fair assessment of the strong core business growth despite fuel headwinds, with alternative profit growth meeting expectations. Chairman and CEO Rodney McMullen added that the alternative profit businesses have higher margins and are driven by the flywheel between physical and digital stores. McMullen also confirmed that mainstream customers performed better in Q3, while budget-conscious households remain under significant strain from cumulative inflation.

Simeon Gutman posed a two-part question on the composition of second-half comp guidance (units vs. inflation) and whether spending levels would persist in a low-growth environment next year.

Answer

Interim CFO Todd Foley explained the updated sales guidance reflects confidence against a ~1% inflation backdrop, with encouraging progress toward positive unit growth. CEO Rodney McMullen added that it is too early for 2025 guidance but affirmed the company's long-term business model remains intact.

Simeon Gutman asked about the strategy and linearity for Dollar General to achieve 6%+ operating margins, specifically inquiring about the role and timing of retail media's contribution.

Answer

Donny Lau, CFO, expressed strong confidence in reaching the margin target, with gross profit being the primary contributor. He highlighted shrink and damages contributing at least 120 basis points of expansion, with shrink improving faster than anticipated. He noted the DG Media Network is in early stages but expected to be a meaningful long-term contributor, alongside other drivers like markdown reductions and supply chain efficiencies. Todd Vasos, CEO, elaborated on the media network's substantial future contribution, driven by double-digit gains and monetization of first-party data from the myDG Digital platform, leveraging Dollar General's unique insights into rural consumers. Donny Lau also mentioned efforts to minimize SG&A deleverage, including normalized incentive compensation, remodel program benefits, work simplification, and potential future efficiencies from AI.

Simeon Gutman of Morgan Stanley posed a two-part question regarding the gross margin cadence for the second half of the year and the progress on key operational execution items since CEO Todd Vasos's return.

Answer

EVP & CFO Kelly Dilts stated that while gross margin should improve year-over-year in Q3 and Q4, the Q4 improvement will be smaller due to tougher comparisons. She also noted SG&A pressure in Q3 from repairs and maintenance. CEO Todd Vasos added that the company is in the "late innings" of its "back to basics" work, with a current focus on sustainability, evidenced by reduced employee turnover.

Simeon Gutman from Morgan Stanley questioned the importance of achieving 3% comps for reaching long-term margin targets and whether the Q1 shrink benefit could improve further.

Answer

CEO Todd Vasos suggested that a sustained comp above 2%, with a healthy mix of non-consumables, is key to achieving margin goals. CFO Kelly Dilts confirmed the 61 basis point shrink benefit exceeded expectations and is anticipated to continue providing a tailwind throughout 2025. She noted that improvements were seen even in stores without self-checkout removal, attributing the success to broad operational excellence.

Simeon Gutman from Morgan Stanley asked about the importance of achieving 3% comps for long-term margin expansion and whether the Q1 shrink benefit is sustainable or likely to improve further.

Answer

CEO Todd Vasos explained that a sustained comp above 2% is sufficient to achieve their long-term goals, but emphasized that the composition of that comp, particularly growth in higher-margin non-consumables, is critical. CFO Kelly Dilts confirmed the 61 basis point shrink benefit exceeded expectations and is expected to be a tailwind for the rest of the year. She noted that operational excellence is driving similar improvements in stores with and without self-checkout removal, suggesting the progress is sustainable and foundational.

Simeon Gutman asked for a diagnosis of the current consumer environment, requesting details on spending behavior, trip frequency, and financial stress levels over the last few months and quarter-to-date.

Answer

CEO Todd Vasos stated that the core consumer remains financially strained but is resourceful and adapting to inflation. He highlighted that a trade-down from mid- and upper-income consumers, which began in Q4, appears to be accelerating into the new year. Vasos affirmed that the company's 'Back to Basics' initiatives are positively impacting results and that they are closely monitoring potential tariff impacts.

Simeon Gutman asked about Dollar General's same-store sales algorithm, questioning how the increased mix of remodels versus new stores will impact comp growth and if the cost structure can adapt to deliver historical earnings growth.

Answer

CFO Kelly Dilts responded that the new 'Project Elevate' remodels should help maintain the real estate program's historical contribution to comparable sales. She emphasized a focus on managing the cost structure, particularly shrink, damages, and retail salaries, to work towards the company's long-term goal of double-digit EPS growth.

Simeon Gutman asked if the current transition period alters the long-term reinvestment strategy, potentially keeping margins suppressed, and inquired if there are underperforming store cohorts that should be rationalized.

Answer

CEO Todd Vasos explained that the largest margin opportunity lies in reducing shrink, which he expects to become a substantial tailwind in 2025. He detailed progress on the 'back-to-basics' plan, including improved staffing, reduced self-checkouts, better in-stocks, lower employee turnover, and significant inventory and SKU reductions. He emphasized that these operational improvements, coupled with promotional activity, will drive performance without indicating any plans for store rationalization.

Simeon Gutman asked about the current mix of 'wants' versus 'needs' in Petco's business and the vision for expanding the 'wants' segment, particularly regarding unique merchandising. He also inquired about the priorities among integrating store functions, focusing on 'wants' vs. 'needs', and forward investing to drive top-line growth.

Answer

Joel Anderson, Petco's Chief Executive Officer, explained that consumables are traditionally a 'needs' business but can incorporate 'wants' through innovation and newness, moving away from a 'set it and forget it' mentality. He noted that the discretionary side will focus on infusing newness in 2026. Regarding top-line growth, Anderson stated Petco will approach 2026 with the same rigor as 2025's bottom-line focus, executing against four outlined pillars and their building blocks.

Simeon Gutman asked about Petco's strategic shift from a 'needs-based' to a 'wants-based' business, inquiring about the current mix and the vision for unique merchandising to drive this change. He also followed up on the priority of initiatives for top-line growth in 2026.

Answer

Joel Anderson, Petco's Chief Executive Officer, explained that while consumables are traditionally needs-based, innovation and newness from vendor partners can introduce 'wants' elements. He highlighted a change from a 'set it and forget it' mentality to a focus on discovery. For 2026 top-line growth, Anderson stated Petco will apply the same rigor as 2025's bottom-line improvements, executing against the four outlined pillars and their building blocks, with no new, unheard initiatives.

Simeon Gutman of Morgan Stanley inquired about the current trend in the number of pet families and what the company is learning about their shopping behaviors across different departments and services. He also asked about the potential for inventory markdown risk as the company introduces new merchandise.

Answer

CEO Joel Anderson noted that industry data indicates the pet space is currently 'relatively flat.' He shared observations that Petco has an opportunity to convert one-time e-commerce shoppers and increase the share of wallet from its services-only customers. Regarding inventory, Anderson stated he sees no significant markdown risk, emphasizing a disciplined and methodical approach to the merchandise overhaul. CFO Sabrina Simmons reinforced this, stating new product buys will be tightly controlled and fast-turning.

Simeon Gutman from Morgan Stanley asked for management's perception of its pricing and the value of its Vital Care program. He also inquired about the implied comparable sales in the 2025 guidance and the underlying assumptions for the pet industry.

Answer

CEO Joel Anderson stated that after thousands of price adjustments, he feels the company is in a good position on price. He described the Vital Care membership program as a key long-term growth lever for 2026 and beyond. Regarding guidance, he emphasized that 2025 is a 'self-help' year, and the company's plans are not dependent on an industry recovery. CFO Sabrina Simmons added that they are not counting on a positive comp to achieve their adjusted EBITDA target.

Simeon Gutman from Morgan Stanley asked about the progress on Petco's top-line growth strategy (Phase Three) and sought clarification on the CFO's mention of addressing 'pricing gaps.'

Answer

CEO Joel Anderson stated that while foundational work for growth is underway internally, such as the 'North Star' project and product innovation, the external impact won't be visible until the latter half of the year and into 2026. CFO Sabrina Simmons clarified that 'pricing gaps' refers to a surgical, SKU-level review of the entire assortment to balance value and margin, a process that began before recent tariff news.

Simeon Gutman from Morgan Stanley asked about the progress on the company's top-line growth initiatives and sought clarification on a previous comment regarding 'pricing gaps' and the learnings from that analysis.

Answer

CEO Joel Anderson explained that while not yet externally visible, internal work on growth levers like marketing and product innovation is underway, with results expected in late 2025 and 2026. CFO Sabrina Simmons clarified that the 'pricing gaps' comment referred to a surgical, SKU-level review of the entire assortment to optimize value and margin, a strategic process that began before recent tariff concerns.

Simeon Gutman of Morgan Stanley asked for an update on the progress of Petco's top-line growth initiatives (Phase 3) and sought clarification on the 'pricing gaps' mentioned, including any opportunities identified from the merchandising review.

Answer

CEO Joel Anderson explained that while internal work on growth levers like marketing and product innovation has begun, the external impact won't be visible until late 2025 and into 2026. CFO Sabrina Simmons clarified that the pricing review is a surgical, SKU-level analysis to balance value and margin, a strategic process that predates recent tariff concerns.

Simeon Gutman from Morgan Stanley asked for an update on the progress of Petco's top-line growth initiatives (Phase 3) and sought clarification on a previous comment about addressing "pricing gaps" and the key learnings from the company's merchandising review.

Answer

CEO Joel Anderson explained that while internal work on growth levers has begun, the external impact won't be visible until the latter half of 2025 and into 2026. CFO Sabrina Simmons clarified that the company is taking a surgical, SKU-level approach to pricing and assortment to balance value and margin, a strategic process that was underway before recent tariff developments.

Simeon Gutman from Morgan Stanley asked about the progress of the company's top-line growth initiatives, seeking to understand the current stage of their brand and product repositioning. He also requested clarification on earlier comments regarding 'pricing gaps' and any opportunities identified.

Answer

CEO Joel Anderson explained that while external signs are not yet visible, internal work on growth levers like marketing, product innovation, and the 'North Star' project is well underway, with results expected in the second half of the year and into 2026. CFO Sabrina Simmons clarified that the company is surgically managing its entire assortment and pricing down to the SKU level to offer value and improve margins, a process that began before recent tariff concerns.

Simeon Gutman from Morgan Stanley asked about the progress on Petco's top-line growth initiatives and customer-facing repositioning. He also requested clarification on a previous comment regarding 'pricing gaps'.

Answer

CEO Joel Anderson stated that while not yet externally visible, significant internal work on growth levers like marketing and product innovation is underway, with results expected in H2 2025 and 2026. CFO Sabrina Simmons clarified that 'pricing gaps' refers to a surgical, SKU-level review of the assortment to optimize value, a process that began before recent tariff news.

Simeon Gutman asked about the puts and takes on Best Buy's Q4 guidance, specifically regarding sales and profit expectations, and how the current thinking differs from three months prior. He also inquired about the adoption curves and future momentum for products like the Nintendo Switch 2, other entertainment categories, and iPhones, looking into Q4 and next year.

Answer

Matt Bilunas, Chief Financial and Strategy Officer, explained that the high end of the Q4 sales guide is similar to previous expectations, with the bottom end raised. EBIT expectations were slightly lowered due to rate pressure and incentive compensation. He anticipates continued growth in computing and mobile phones, fueled by upgrades and innovation. Switch 2 is expected to contribute to Q4 growth, though other consoles may slow. Improved trends are expected in TVs, and the marketplace and ads business are projected to scale into next year.

Simeon Gutman inquired about the factors influencing Best Buy's fourth-quarter guidance, specifically comparing sales and profit expectations to those from three months prior. He also asked about the adoption curves for products like the Nintendo Switch 2 and iPhone, and their potential to drive momentum into Q4 and the next fiscal year.

Answer

Matt Bilunas, Chief Financial and Strategy Officer, explained that the high end of the Q4 sales guide was similar to previous expectations, with the bottom end raised. EBIT expectations were slightly lowered due to rate pressure and adjusted revenue. He detailed expected growth in computing and mobile phones, fueled by upgrades and innovation, continuing into next year. Gaming, particularly Switch, is expected to grow but at a slower pace. Improved TV trends are anticipated due to competitive pricing, marketing, and labor, with marketplace and ads business also ramping up.

Simeon Gutman of Morgan Stanley requested more detail on the gross margin outlook for Q3 versus Q4 and asked for a quantification of the services benefit versus product margin weakness in Q2. He also questioned if new technology could lift product margins despite promotions.

Answer

CFO Matt Bilunas explained that gross margin expansion in Q3 and Q4 will be similar to each other but lower than H1, as the company fully laps the benefits from its membership program changes. He noted the services and membership benefit in Q2 was 'significantly more' than the total gross margin expansion. He stated that future product margins depend heavily on the promotional environment and category mix, and while less promotion could provide relief, it is not guaranteed.

Simeon Gutman asked about the building blocks and confidence behind the expectation for Foot Locker to be accretive to EPS in 2026, despite Q3 softness and anticipated Q4 negative operating income. He also questioned if the accretion includes stock buybacks and the feasibility of Foot Locker's gross margins reaching parity with DICK'S post-cleanup.

Answer

Ed Stack, Executive Chairman, expressed excitement for Foot Locker, emphasizing the 'clean out the garage' strategy, the strength of the new management team (Anne Freeman, Matthew Barnes), brand alignment, and the passion of store employees. He confirmed 2026 accretion is based on core Foot Locker performance, not buybacks, and expects a meaningful increase in gross margin, with more details to follow post-Q4.

Simeon Gutman inquired about Foot Locker's Q3 performance, which appeared softer than expected, and the slightly negative operating income anticipated for Q4, asking for the building blocks and confidence behind the expectation that the acquisition will still be accretive to EPS in 2026. He also sought clarification on whether the 2026 accretion is solely from core Foot Locker and synergies, excluding buybacks, and if Foot Locker's gross margins could reach parity with DICK'S Sporting Goods post-cleanup.

Answer

Ed Stack, Executive Chairman, expressed strong confidence in Foot Locker's opportunity, highlighting the strategy of 'cleaning out the garage' by clearing old inventory and impairing underperforming assets. He cited confidence in the new management team (Ann Freeman for North America, Matthew Barnes for International), the passion of Foot Locker store employees, and renewed support from key brands. He confirmed that 2026 accretion is expected from core Foot Locker, not including potential buybacks. Regarding gross margins, he stated they wouldn't guide to parity with DICK'S but expect a 'meaningful increase' due to access to key products and better allocation, with more details to follow after Q4.

Simeon Gutman of Morgan Stanley asked about the assumptions behind the second-half comparable sales guidance, questioning if there were any signs of a consumer slowdown or if the outlook was simply cautious. He also sought clarification on Q2 merchandise margin expansion and the medium-term outlook for the SG&A expense leverage point.

Answer

President & CEO Lauren Hobart stated there are no signs of a consumer slowdown, highlighting broad-based growth across all key segments. CFO Navdeep Gupta added that the guidance range reflects the dynamic macro environment. Gupta confirmed Q2 gross margin expanded by 33 basis points, with merchandise margin up 18 basis points, driven by assortment quality and favorable mix. He reiterated that the business can achieve SG&A leverage on a low single-digit comp.

Simeon Gutman questioned the durability of the strong comparable sales growth given the 1-3% full-year guidance, and asked for an assessment of Nike's brand health and distribution strategy.

Answer

President and CEO Lauren Hobart attributed the conservative guidance to lapping tougher comparisons in the second half of the year, while affirming the business has strong momentum and a resilient consumer. Regarding Nike, she expressed confidence in the partnership, the upcoming product pipeline, and Nike's ability to effectively segment products to minimize channel overlap.

Simeon Gutman asked about the construction of the 2025 EBIT margin guidance, specifically the interplay between SG&A investment and gross margin expansion, and sought clarification on the increased CapEx for House of Sport stores.

Answer

CFO Navdeep Gupta explained that the guidance reflects strategic SG&A investments in areas like GameChanger and DICK'S Media Network, whose benefits are realized in the gross margin line. He confirmed the higher House of Sport CapEx is due to the strategic decision to purchase some real estate, given strong landlord interest and access to premier locations. CEO Lauren Hobart added that the company is investing from a position of strength to capture long-term market share.

Simeon Gutman inquired about the inventory position, asking if it's tracking to plan for year-end despite a slow start to cold weather, and questioned the future P&L structure regarding SG&A leverage versus gross margin investment.

Answer

President and CEO Lauren Hobart explained the inventory increase was a conscious, strategic decision to be well-stocked in key items for the holiday season and to support an earlier spring transition in warmer climates, expressing confidence in the Q4 outlook. CFO Navdeep Gupta confirmed inventory is in line with expectations, noting clearance levels are down, and stated the focus is on driving strong top-line and bottom-line growth, which may involve an interplay between gross margin expansion and strategic SG&A investments like RFID technology to position for 2025.

Simeon Gutman asked how DICK'S is maintaining customer engagement as key brands proliferate into other retail channels, and questioned the performance trajectory of House of Sport locations beyond their initial 12-month period.

Answer

President and CEO Lauren Hobart stated that customer engagement is at an all-time high, driven by a unique store experience, effective marketing, and the ability to provide complete head-to-toe outfitting for both performance and lifestyle. Regarding House of Sport, she confirmed the stores continue to perform very well, increasing customer dwell time and attracting significant interest from mall landlords, which provides access to premier retail locations.

Simeon Gutman asked about the potential for Agentic AI to supercharge Walmart's e-commerce growth, highlighting unique advantages, and sought an outlook on consumer performance for the holiday season in Q4.

Answer

Doug McMillon (CEO) emphasized Walmart's advantages in breadth of assortment, proximity for delivery speed, everyday low prices, and physical assets, combined with multimodal, personalized, and contextual technology. John Furner (President and CEO, Walmart U.S.) detailed the capabilities of 'Sparky' (digital agent), forward-deployed inventory, and using AI for reordering nudges and catalog accuracy. Steph Wissink (SVP of Investor Relations) added that transactional data helps predict baskets, citing the successful Corridon Listo trial in Chile. John David Rainey (EVP and CFO) noted consistent consumer behavior in Q4, with some moderation in lower-income households, but overall optimism for holiday shopping, while mentioning the impact of maximum fair pricing legislation on the pharmacy business in January.

Simeon Gutman asked about the potential for Agentic AI to supercharge Walmart's e-commerce growth, highlighting unique advantages, and sought insights into consumer performance for the holiday season based on Q3 and early Q4 trends.

Answer

CEO Doug McMillon emphasized the advantages of broad assortment, proximity to customers, delivery speed, and everyday low prices, supported by advanced technology for a multimodal, personalized, and contextual shopping experience. President and CEO, Walmart U.S., John Furner, highlighted the 'Sparky' digital agent, physical assets, and data-driven nudges for reordering. SVP of Investor Relations Steph Wissink mentioned international trials like 'Corridon Listo' in Chile for predictive ordering. EVP and CFO John David Rainey noted consistent consumer environment, with some moderation in lower-income households, but overall optimism for holiday shopping, while also mentioning the upcoming impact of maximum fair pricing legislation on the pharmacy business.

Simeon Gutman of Morgan Stanley asked about the extent to which temporary factors are masking underlying profitability and whether Walmart's AI initiatives are already accelerating top-line and margin gains.

Answer

President, CEO & Director Doug Mcmillon stated that AI is not yet lifting top-line sales but the roadmap is exciting. He affirmed the strength of the business mix flywheel (marketplace, advertising, membership). EVP & CFO John David Rainey added that despite cost pressures, the underlying business is strong, citing significant growth in advertising and membership, and expressed confidence for the second half of the year.

Simeon Gutman questioned why Walmart isn't leveraging its strong position to invest more aggressively for growth in the current environment, rather than focusing on balancing investment with margin expansion.

Answer

CEO Doug McMillon responded that the company's current guidance positions it to be 'appropriately aggressive' while still aiming to grow profit faster than sales, a long-term goal. CFO John David Rainey added that the diversification of income streams, such as the 15% growth in membership and 50% growth in advertising, provides the flexibility to invest in the business while still delivering on profit growth objectives.

Simeon Gutman asked why Walmart isn't investing even more aggressively to accelerate growth, given that e-commerce incremental margins are strong at 11%.

Answer

CFO John David Rainey responded that the company is striking the right balance between investment and margin expansion. He emphasized that recent investments in technology and supply chain automation are already driving the strong bottom-line results. Rainey stated that while future margin opportunities exist, the company is focused on building for the long term, which requires continued, balanced investment rather than over-focusing on a single quarter's performance.

Simeon Gutman asked about the top-line acceleration in Q3, questioning if it was due to temporary factors like storms or an underlying inflection in the business driven by merchandising, marketplace, or membership.

Answer

CEO Doug McMillon described the underlying momentum as consistent with prior quarters, with storms providing a small lift. CFO John David Rainey concurred, clarifying that the timing of Flipkart's Big Billion Day event added about 60 basis points to Q3 growth, which will create a headwind in Q4, but otherwise, the business performance is very consistent.

Simeon Gutman from Morgan Stanley followed up on tariffs, asking about the effectiveness of the six-point plan, the chance of minimal impact in Q4 or Q1, and whether industry prices would revert if IEEPA tariffs were invalidated.

Answer

Laura Alber, CEO, reiterated that the company is not immune to tariffs and expects a sizably different impact in Q4 compared to Q3, as reflected in guidance. She emphasized focusing on the current tariff environment and the potential positive impact of a reduced India tariff. Jeff Howie, CFO, highlighted the timing factor for merchandise margins and the substantial impact of the 53rd week in Q4 2024 on year-over-year comparisons.

Simeon Gutman revisited the topic of tariffs, asking about the likelihood of their impacts being more minimal than currently anticipated in Q4 or Q1, given the beneficial six-point plan and favorable elasticities. He also questioned whether industry and retail prices would revert if IEEPA tariffs were invalidated.

Answer

CEO Laura Alber clarified that the company is not immune to tariffs, emphasizing that the Q4 impact will be sizably different from Q3, as reflected in their guidance. She stated that they are focused on providing value in the current tariff environment and are not speculating on the impact of potential IEEPA invalidation or subsequent price changes. CFO Jeff Howie reiterated that delayed effective dates and front-loaded inventory benefited Q3, but Q4 will see a substantially larger tariff impact, which is embedded in the guidance, and reminded about the 53rd-week impact on year-over-year comparisons.

Simeon Gutman of Morgan Stanley asked if the company had anticipated comps improving throughout the year and sought clarification on whether tariff mitigation costs were short-term expenses or capitalized costs affecting future margins.

Answer

President and CEO Laura Alber affirmed that returning to growth is the company's top priority for the year and that they expect to outperform the market. Executive Jeff Howie clarified that the mitigation costs were short-term expenses taken in the quarter for aggressive actions like halting shipments. He explained these actions are expected to pay back in future quarters as they sell through inventory that was brought in before tariffs took effect, reinforcing their confidence in the annual guidance.

Simeon Gutman asked a two-part question regarding the expected shape of comparable sales growth for the year and for a clarification on how 'tariff mitigation costs' are impacting the P&L.

Answer

CEO Laura Alber affirmed that returning to growth is the company's top priority and that they expect to take market share for the full year. CFO Jeff Howie explained that the mitigation costs were short-term Q1 expenses from aggressive actions like halting shipments. He expects these costs to pay back as the company sells the tariff-free inventory it pulled forward.

Simeon Gutman asked a two-part question about the expected shape of comps for the year and for clarification on whether tariff mitigation costs were expensed in the quarter or capitalized.

Answer

President and CEO Laura Alber addressed the first part, stating that returning to growth is the company's top priority and they expect to take market share. EVP and CFO Jeff Howie answered the second part, clarifying that the mitigation costs were short-term expenses expensed in Q1 for actions like halting shipments, which will provide a payback in future quarters as tariff-free inventory is sold.

Simeon Gutman of Morgan Stanley asked if the company had anticipated comps improving throughout the year prior to the strong Q1 results, and sought clarification on whether tariff mitigation costs were expensed or capitalized.

Answer

President and CEO Laura Alber affirmed that returning to growth is the company's top priority and that they expect to outperform the market. CFO Jeff Howie clarified that the mitigation costs were short-term expenses expensed in Q1 related to aggressive actions like halting shipments, and he expects a payback in future quarters from the tariff-free inventory that was pulled forward.

Simeon Gutman posed a strategic question about the structural opportunity for higher product margins, especially as the company returned to positive comps without margin degradation, and the interplay between price and product margin.

Answer

CEO Laura Alber responded that the company views tariffs as an opportunity due to its scale, in-house design, and supply chain capabilities. She detailed strategies like shifting production from China, increasing U.S. manufacturing which offers speed-to-market advantages, and implementing targeted price increases on select items. Alber stressed that competitiveness is based on design and quality, not just price, and expressed confidence in outperforming rivals.

Simeon Gutman inquired about the full-price selling strategy, asking if the mix of full-price sales is accelerating and whether there is a ceiling to this approach.

Answer

CEO Laura Alber reaffirmed the company's commitment to minimizing promotional pricing while still taking necessary markdowns on clearance items. She stated that regular-priced comps are improving and that as the company laps periods of heavier promotions, the year-over-year comparisons and business trends will become clearer and more stable.

Simeon Gutman of Morgan Stanley questioned if the company was reconsidering its promotional strategy and asked about the remaining runway for margin benefits from supply chain and transport efficiencies.

Answer

CEO Laura Alber stated the company is 'absolutely not' changing its non-promotional stance, focusing instead on product innovation. CFO Jeff Howie confirmed that significant year-over-year margin benefits from lapping pandemic-era ocean freight costs will dissipate in the second half. He added that benefits from the shift to full-price selling also begin to annualize, leading to guidance for flat back-half operating margins versus 2023.

Simeon Gutman asked a two-part question regarding the shape of the year for comps and for a clarification on 'tariff mitigation costs,' questioning if they were capitalized or expensed.

Answer

President and CEO Laura Alber addressed the growth outlook, stating that returning to growth is the company's top priority, and they expect to take market share for the full year. EVP and CFO Jeff Howie clarified that the tariff mitigation costs were short-term expenses taken in the quarter for aggressive actions like halting shipments. He noted these actions will pay back later, as the company has front-loaded inventory at zero tariff, supporting their decision to reiterate guidance.

Simeon Gutman from Morgan Stanley asked a two-part question regarding the shape of the year for comps and for a clarification on whether 'tariff mitigation costs' were capitalized or expensed in the quarter.

Answer

President and CEO Laura Alber affirmed that returning to growth is the company's top priority and they expect to take market share. EVP and CFO Jeff Howie clarified that the mitigation costs were short-term expenses taken in Q1 related to aggressive actions, which he expects will pay back as they now hold tariff-free inventory.

Simeon Gutman inquired about the slightly lower outlook and algorithm, seeking confirmation that the core business expectations remain unchanged and whether the algorithm adjustment reflects structural, tactical, or prudent considerations. He also asked about the increasing number of stores in the market, Valvoline's expansion strategy, cannibalization rates, and if any markets are avoided due to competitor presence.

Answer

President and CEO Lori Flees confirmed confidence in the 4%-6% same-store sales range, attributing the algorithm change to the increasing percentage of new stores in the network and a return to more moderate inflation levels post-COVID. She explained Valvoline's analytical approach to new unit additions, including expected transfers from existing stores, and noted that the competitive environment remains consistent with no markets being avoided due to competitors, given the fragmented nature of the preventative maintenance market.

Simeon Gutman inquired about the slightly lower outlook for Valvoline's core business, asking if the algorithm change reflects structural or tactical shifts, or a prudent approach to guidance. He also questioned the impact of increasing store capacity and competition on cannibalization rates and market entry decisions.

Answer

President and CEO Lori Flees clarified that the same-store sales guide is the main difference, confident in the 4-6% range for FY2026, attributing the change to the increasing percentage of new stores in the network and a return to moderate inflation. She added that Valvoline analyzes demographics and competition for new units, precisely predicting cannibalization, and does not avoid markets due to competitors given the fragmented quick lube channel.

Simeon Gutman from Morgan Stanley questioned the one-third transaction, two-thirds ticket mix for same-store sales, asking if it could become more balanced. He also inquired about the ramp-up performance of immature stores, specifically their oil changes per day.

Answer

CFO J. Kevin Willis responded that he expects a more balanced ticket-to-transaction mix as newer stores mature and if the inflationary environment moderates. CEO Lori Flees added that the Q3 transaction mix was negatively impacted by the Easter holiday shift. Regarding new stores, Flees stated that their performance ramps are incredibly consistent with projections, delivering on expected mid-to-high teens returns on invested capital.

Simeon Gutman sought clarity on the baseline run-rate for same-store sales in the second half and questioned the reasons for the performance gap between franchise and company-owned store comps.

Answer

CFO Mary Meixelsperger advised against a simple run-rate projection, highlighting factors like lapping prior initiatives and the upcoming summer drive season, while reaffirming the 5-7% full-year guidance. CEO Lori Flees explained that the comp spread was primarily due to the timing of pricing actions by franchisees, who have independent pricing authority, rather than a fundamental operational difference.

Simeon Gutman asked for clarification on the term "substantially in line" regarding Q1 results and questioned if the company is being conservative with its full-year guidance given the strong start to the year.

Answer

CFO Mary Meixelsperger affirmed the results were indeed substantially in line with internal expectations, with minor variances. She expressed cautious optimism for the year, suggesting potential upside towards the top end of the guidance range but reiterated comfort with the current range. CEO Lori Flees added that consensus estimates might have been lower due to the timing of the latest refranchising transaction.

Lauren on behalf of Simeon Gutman at Morgan Stanley asked about the competitive landscape for quick oil changes, differences in opportunities between new and existing markets, and whether Valvoline has a target for its franchise mix.

Answer

CEO Lori Flees clarified that competition within the quick lube segment is stable, but promotional pressure is increasing from outside the category (e.g., tire shops) to drive traffic, which can impact new customer acquisition. She stated that expansion opportunities remain strong across all market types. Flees also confirmed that the company does not have a specific franchise mix target, but is focused on accelerating franchise growth with strong partners to expand the network.

Simeon Gutman questioned Lowe's perspective on a potential 'treading water' housing scenario, characterized by lower new home prices, an aging homeowner demographic, and affordability issues, contrasting it with Lowe's observed bright spots. He also asked about Lowe's strategy for the medium to larger pro segment, including supply chain integration, essential categories, and cross-selling with the broader Lowe's asset base.

Answer

Marvin Ellison, Chairman and CEO, acknowledged elevated mortgage rates but emphasized the healthy financial state of homeowners and $33 trillion in home equity, suggesting HELOCs could drive future discretionary remodel projects due to the 'lock-in effect.' Brandon Sink, EVP and CFO, noted that while mortgage rates remain elevated, potential Fed rate cuts could lower HELOC rates, stimulating delayed projects. Marvin Ellison reiterated confidence in the small to medium pro strategy, driven by MyLowe's Pro Rewards, product offerings, and a competitive credit portfolio. He confirmed intentions to leverage FBM for fulfillment and connect FBM's 40 million pro customers to complementary Lowe's products, noting FBM's countercyclical commercial business as a key advantage.

Simeon Gutman asked for Lowe's reaction to the 'bear case' housing scenario where the market remains stagnant longer due to affordability issues, new vs. existing home prices, and the age of homeowners. He also followed up on Lowe's strategy for the medium to larger pro, asking about supply chain separation, essential categories, and cross-selling with the broader Lowe's asset base.

Answer

Marvin Ellison (Chairman and CEO) and Brandon Sink (EVP and CFO) acknowledged elevated mortgage rates but emphasized the healthy financial position of homeowners with $33 trillion in equity ($11-$13 trillion tappable). They suggested the 'lock-in effect' could drive demand for HELOCs for discretionary projects, viewing potential future rate reductions as a stimulus. Marvin Ellison reiterated the focus on the small to medium pro, leveraging MyLowe's Pro Rewards, product assortment, competitive credit portfolio, and FBM for fulfillment, noting FBM's countercyclical commercial business as a strength.

Zach on behalf of Simeon Gutman at Morgan Stanley asked if the comp sales inflection in July signaled a broader turn in the home improvement market or was primarily due to weather. He also inquired about the strategic rationale for the pivot into building products distribution with the ADG and FBM acquisitions.

Answer

EVP & CFO Brandon Sink clarified that Lowe's is not expecting a macro inflection and that the second-half outlook is based on gradual improvement and share gains from its Total Home strategy. President, CEO & Chairman Marvin Ellison explained the acquisitions are an evolution, not a change, in strategy. He stated that Lowe's is positioning itself to capitalize on the future housing market recovery, particularly in new construction, by acquiring capabilities to serve large pro customers, a segment where Lowe's previously had strategic deficits.

Simeon Gutman questioned if the full-year sales guidance framework had changed since the December analyst day due to recent volatility. He also asked about the flexibility of the company's Perpetual Productivity Improvement (PPI) initiatives and investment plans if the market proves weaker than expected.

Answer

CFO Brandon Sink confirmed the guidance framework is 'roughly the same' but now incorporates recent weather pressures and the lapping of a strong 2024 hurricane benefit. CEO Marvin Ellison added that the strategy is to outperform the market regardless of the environment. Regarding flexibility, Sink stated there is 'definitely some flex' in the $1 billion PPI plan for 2025, which can be adjusted based on market conditions, but management is confident in the current plan and margin outlook.

Simeon Gutman questioned why the modest Q4 storm-related sales benefit wasn't translating to higher EBIT dollars and asked about the drivers behind the strong Pro sales growth and which segment, DIY or Pro, would lead a market recovery.

Answer

EVP and CFO Brandon Sink clarified that significant margin pressures from the storms were isolated to Q3. Chairman and CEO Marvin Ellison attributed the high single-digit Pro comp growth to the Total Home Strategy, including brand expansion, improved service, and digital enhancements. He expects Lowe's to continue gaining Pro share, while a broader market recovery will likely be led by big-ticket DIY and do-it-for-me projects.

Simeon Gutman inquired about the relationship between comparable sales and operating leverage for the remainder of the year, and questioned the strategic rationale and growth prospects of the Artisan Design Group (ADG) acquisition.

Answer

EVP and CFO Brandon Sink outlined the financial outlook, expecting roughly flat comps in the first half and a 1% lift in the second half driven by strategic initiatives. Chairman and CEO Marvin Ellison described the ADG acquisition as an opportunistic move to enter the highly fragmented, $50 billion new home construction market, a segment poised for growth. He clarified it complements the Total Home Strategy without altering their disciplined capital allocation philosophy. Brandon Sink added that ADG generated $1.8 billion in sales in 2024 and is expected to be accretive to EPS in fiscal 2026.

Simeon Gutman inquired about the relationship between comparable sales and operating leverage for the remainder of the year, and asked about the strategic rationale for acquiring Artisan Design Group (ADG) to target larger Pro customers.

Answer

CFO Brandon Sink detailed the comp sales outlook, expecting a flat first half and 1% growth in the second half, driven by company initiatives. He reaffirmed the full-year operating margin guide of 12.3% to 12.4%. CEO Marvin Ellison explained that the ADG acquisition is an opportunistic move to enter the new home construction market, a $50 billion TAM, and serve a new cohort of Pro customers. Sink added that ADG had $1.8 billion in 2024 sales and is expected to be accretive to EPS in fiscal 2026.

Simeon Gutman asked about the possibility of a margin reset for reinvestment, similar to 2016/2017, and whether that strategy could be ruled out. He also inquired about the most urgent gaps in Target's capabilities and what the leadership team is most excited about addressing in the near term.

Answer

Michael Fiddelke, Chief Operating Officer, stated that while a significant Q4 holiday season is ahead, Target is committed to making necessary investments for merchandising authority and an elevated experience. He highlighted efficiencies found in fulfillment market tests and capital investments in new stores, remodels, and technology. Rick Gomez, Chief Commercial Officer, added insights on the Merchant Roundtable evolution and the role of technology in fostering creativity. Jim Lee, Chief Financial Officer, noted the added benefit of new stores expanding Target's fulfillment footprint.

Simeon Gutman asked about Target's approach to margin investment, specifically whether a significant margin reset, similar to 2016/2017, is being considered to fund future growth initiatives, or if the current investment plan is deemed sufficient.

Answer

COO Michael Fiddelke stated that specific details for next year would be unpacked after Q4, but emphasized commitment to investments for merchandising authority and elevated experience, fueled by internal efficiencies like optimized store fulfillment models. He highlighted increased capital investments for technology, supply chain, and store experience (remodels, new stores) as areas with strong expected returns. CCO Rick Gomez added that the Merchant Roundtable evolution and technology integration are key to faster, data-driven decisions and creativity.

Simeon Gutman from Morgan Stanley noted the call's focus on internal factors for the turnaround and asked for a perspective on the split between internal versus external drivers. He also asked if the new CEO accepts the current financial plan or reserves the right to reevaluate it.

Answer

Incoming CEO Michael Fiddelke acknowledged both external pressures, like consumer inflation, and the internal need to improve execution and deliver a superior guest experience. He emphasized that a retailer must be nimble and that while the team feels good about the current full-year guidance, they are always evaluating opportunities and will remain flexible to chase growth.

Simeon Gutman of Morgan Stanley asked about the evolution of the company's long-term EBIT margin target, which was previously stated as 6%, and questioned if the current outlook implies a higher rate of reinvestment into the business.

Answer

CFO James Lee explained that the focus is on continuous productivity to fuel investment and maximize profit dollar growth, driven by accretive platforms like Roundel and Target Plus, and tailwinds from shrink reduction. CEO Brian Cornell, EVP Cara Sylvester, EVP Richard Gomez, and COO Michael Fiddelke elaborated on the company's long-standing and ongoing investments across marketing capabilities, the $31 billion owned-brand portfolio, store remodels, and supply chain technology.

Simeon Gutman asked for quantification of the unique costs impacting Q3, their split between gross margin and SG&A, and their inclusion in Q4 guidance. He also questioned if Target's risk appetite would change given the cautious consumer response to newness.

Answer

COO Michael Fiddelke attributed profit pressure to sales deceleration in high-margin categories like Home and Apparel, and costs from pre-positioning inventory for the port strike. CFO Jim Lee specified that higher general liability and healthcare costs accounted for about 1% of the SG&A increase. CEO Brian Cornell emphasized playing the 'long game,' highlighting strong traffic growth of 2.4% (10 million incremental transactions) and digital growth of nearly 11% as signs of consumer engagement that justify continued investment.

Simeon Gutman inquired about the short-term outlook for the fourth quarter, specifically how the inclusion of GMS, a lighter third quarter, and anticipated lower fourth-quarter revenue would impact EBIT dollar shortfall and deleverage, asking if there were specific expenses tied to GMS.

Answer

Richard McPhail, Executive Vice President and Chief Financial Officer, detailed the fiscal year guidance revision, attributing 20 basis points of operating margin impact to GMS (including transaction expenses), noting deleverage from decreased comp sales, and highlighting SRS's flat Q3 comp despite roofing market pressure. Ted Decker, Chair, President, and CEO, further explained that the sales pressure was primarily due to a lack of storm activity, particularly in October, and ongoing consumer uncertainty and housing pressure, which disproportionately impacted home improvement demand. He noted that the underlying business comp, adjusted for storms, was consistent at about 1% in Q2 and Q3.

Simeon Gutman asked about the short-term fourth-quarter outlook, specifically regarding the inclusion of GMS, the EBIT dollar shortfall, and the expected deleverage.

Answer

Richard McPhail, EVP and CFO, explained the fiscal year guidance revision, attributing 20 basis points of operating margin impact to GMS and transaction expenses, and further deleverage from decreased comp sales. He also noted SRS's flat Q3 comp due to roofing market pressure and the impact of the 53rd week in the prior year's Q4. Ted Decker, Chair, President, and CEO, clarified that the expectation for increased demand was based on anticipated interest rate reductions, not storms. He noted ongoing consumer uncertainty and housing pressure, with underlying business comps (adjusted for storms) remaining stable between Q2 and Q3.

Simeon Gutman sought clarification on the 'notable improvement in underlying demand,' asking if it signaled a true inflection in housing or was primarily driven by weather and market share gains. He also requested specific proof points on the progress of the Complex Pro initiative.

Answer

EVP & CFO Richard Mcphail attributed the improvement to the financial health of the homeowner but clarified the guidance does not assume a housing market turn, as customers are still deferring, not canceling, large projects. Chair, CEO & President Ted Decker added that the company believes it is taking share. EVP - Pro Michael Rowe provided proof points for the Pro ecosystem, highlighting improved on-time and complete delivery satisfaction, a double-digit spend lift from Pros using faster parcel delivery, and strong adoption of new trade credit and invoicing-on-delivery features.

Simeon Gutman questioned the comp sales guidance for the year, suggesting that current trends could support a better outcome and asking if the guidance reflects extra caution. He also requested details on the impact of the SRS acquisition, specifically regarding its trade credit program and the relative performance of its roofing, pool, and landscape businesses.

Answer

EVP and CFO Richard McPhail stated that while Q1 performance was strong, the company is only one quarter into the year and feels comfortable reaffirming the existing guidance. CEO Edward Decker added that the SRS acquisition is performing above expectations across all three of its verticals. He highlighted that SRS is now managing Home Depot's trade credit program, which is in the early stages of onboarding core Pro customers and is already showing accelerating comps with engaged Pros.

Simeon Gutman questioned if the full-year comp guidance was overly cautious given the strong exit rate from April and positive May trends. He also asked about the sales impact from SRS's order management and trade credit programs, and the relative strength of SRS's business verticals.

Answer

CFO Richard McPhail stated that while they feel good about the business, they are reaffirming guidance as it is only one quarter into the year. CEO Edward Decker added that SRS is performing above expectations and taking share in all three verticals. He highlighted the trade credit program as a key integration point, with thousands of Home Depot Pro accounts already onboarded, which is driving accelerated comps from those customers.

Simeon Gutman of Morgan Stanley questioned the conservatism of the 1% comparable sales guidance for fiscal 2025, given that a potential rebound in existing home sales could drive stronger demand. He also asked if each point of comp upside above 1% would translate to 10 basis points of margin leverage.

Answer

Chair, President and CEO Ted Decker acknowledged the health of the consumer but stated the company is not anticipating a significant rebound in housing turnover or a large decrease in mortgage rates in 2025. EVP and CFO Richard McPhail added that the 1% comp guidance reflects current run rates, pressure on large projects, and the inclusion of SRS. McPhail confirmed that 10 basis points of leverage per point of comp upside is a good estimate.

Simeon Gutman questioned the implied sales deceleration from Q3 to Q4, asking if it reflected conservatism or an assumption of less favorable weather. He also asked about the dynamic between tappable home equity and housing turnover, and when a 'remodel-in-place' trend might accelerate.

Answer

EVP and CFO Richard McPhail clarified that the Q4 outlook is not a fundamental deceleration but reflects caution in extrapolating Q3's significant weather benefit. CEO Ted Decker noted that general macroeconomic uncertainty has been a major deterrent for large projects. He believes that as this uncertainty fades, homeowners will utilize their substantial home equity, but the timing remains unclear.

Simeon Gutman asked for the company's hypothesis on what is hindering new guest acquisition, exploring factors like data analytics, marketing effectiveness, brand identity, or regional maturity. He also inquired about the breakdown of guest count versus ticket in the quarter and the ideal growth model for the business, specifically whether it requires positive guest count growth alongside price increases.

Answer

Chairman and CEO Chris Morris attributed challenges in new guest acquisition to the time taken to develop robust data analytics and effective marketing tactics. He highlighted the ongoing work with a new brand agency to inject new life into the brand, aiming for high-value acquisitions, with market impact expected in 2026. Regarding guest count versus ticket, Morris stated the company does not provide that level of granularity but emphasized a balanced approach focused on long-term sustainable traffic growth, complemented by smart ticket growth through price increases and incremental spending on services or retail products, rather than deep discounting.

Simeon Gutman asked for management's hypothesis on what is hindering new guest acquisition, considering potential regional, marketing, or market maturity factors. He also inquired about the balance between guest count and ticket growth, and the ideal model for the business to achieve sustainable growth.

Answer

Chris Morris, Chairman and CEO, attributed challenges in new guest acquisition to the time required to develop robust data analytics and effective marketing tactics, noting that recent efforts are now gaining traction. He also highlighted ongoing work with a new brand agency to refresh the brand identity for high-value acquisitions, expected to impact 2026. Morris stated that the company does not provide granular breakdowns of guest count versus ticket but emphasized a balanced approach focused on long-term sustainable traffic growth coupled with smart ticket growth, achieved through price increases, add-ons, and targeted messaging to drive incremental spending, rather than deep discounting.

Asked to rank the priority of four key areas (marketing, franchisee execution, waxer consistency, value proposition) and for a diagnosis of the root causes behind underperforming franchises.

Answer

The executive confirmed the priorities are marketing and franchisee execution first, followed by waxer consistency, with consumer value being less of a concern. Underperformance stems from a combination of issues related to rapid past growth, including poor locations and insufficient franchisee support, which are now being addressed with a new, more rigorous playbook for center openings.

Asked for an update on core guest behavior, the outlook for this guest in a weaker macro environment, and specifics on recent cost savings and their continuation.

Answer

The core guest remains very stable and loyal in both spending and frequency, with the main opportunity being in new and lapsed guests. Recent cost savings were primarily from better negotiations on product costs. Modest gross margin expansion to ~74% is expected in 2025, suggesting continued cost benefits.

Simeon Gutman asked if Wayfair's current mid-to-high single-digit top-line growth signifies an inflection point post-technology investments and industry normalization. He also inquired about the potential impact of paid search evolving towards 'agentic' models on Wayfair's advertising line.

Answer

Niraj Shah, Co-founder, CEO, and Co-Chairman, referenced the long-term potential discussed at the 2023 analyst day, expressing confidence in compounding benefits. He described the agentic shift as very early, anticipating paid search may transform into 'paid services' and organic search into new 'organic answers,' emphasizing Wayfair's partnership approach with media properties and AI companies. Kate Gulliver, CFO and Chief Administrative Officer, highlighted compounding share gains from initiatives and the macro context.

Simeon Gutman asked if Wayfair's business has reached an inflection point for sustained mid-to-high single-digit sales growth, considering the completion of technology investments and industry normalization.

Answer

Niraj Shah (Co-founder, CEO, and Co-Chairman) referenced the August 2023 analyst day, reiterating Wayfair's bullish outlook for meaningful double-digit revenue and EBITDA growth driven by compounding benefits from volume and technology deployment. Kate Gulliver (CFO and Chief Administrative Officer) added that current share gains are compounding due to initiatives like replatforming completion, tech advancements, loyalty programs, and Wayfair Verified, acknowledging the flat to slightly down macro category context. Gutman also inquired about predictions for paid search evolving towards agentic models and its potential impact on Wayfair's advertising line. Shah acknowledged the early stage of agentic search but noted the rapid growth of chatbots. He suggested that paid search might evolve into different forms of paid services, and organic search into new organic answer surfaces. He emphasized Wayfair's history of partnering with media properties (Google, Meta, Pinterest) and its current close collaboration with AI/chat LLM companies, leveraging its 2,500-person technology organization to optimize for these new platforms.

Simeon Gutman from Morgan Stanley asked about the potential for consumer 'sticker shock' from tariff-driven price increases and the company's contingency plans. He also questioned the risk of a competitor moving a vendor's production faster, potentially disadvantaging Wayfair on price.

Answer

CEO Niraj Shah highlighted that Wayfair is better positioned than in 2019 due to a vastly expanded global supplier base and more advanced logistics capabilities. He also noted that with the company's tech replatforming largely complete, resources can now focus on growth-driving features. CFO Kate Gulliver added that Wayfair's more efficient P&L provides greater flexibility to manage the environment while growing EBITDA dollars. Niraj Shah argued that Wayfair's platform model and integrated logistics are generally faster at adapting than traditional retail models.

Simeon Gutman asked about the potential for pent-up demand to revive the home furnishings category if housing turnover remains weak. He also sought to understand the company's posture for 2025, questioning if Wayfair would prioritize aggressive market share gains at the expense of more significant EBITDA dollar growth.

Answer

CEO Niraj Shah stated that while there are signs of pent-up demand, Wayfair's strategy does not depend on a category rebound, focusing instead on taking share from a large, fragmented market. Regarding the 2025 outlook, both Niraj Shah and CFO Kate Gulliver emphasized that market share initiatives and profitability are interrelated. Investments are made based on the profit dollars they generate, and this is done in concert with maintaining strict cost discipline to grow absolute adjusted EBITDA dollars.

Simeon Gutman asked if the Q3 sales guidance fully reflects the expected order pickup from the gross margin investment. He also probed the full-year EBITDA outlook, asking if simply doubling the first-half result is a reasonable expectation.

Answer

CFO Kate Gulliver affirmed that the Q3 guidance accounts for the gross margin investment, which is enabling share gains in a challenging market. Regarding the full year, she reiterated the commitment to grow adjusted EBITDA by more than 50% year-over-year, driven by expense control, but did not provide a specific dollar forecast.

Simeon Ari Gutman followed up on DIY deferral, asking if it's purely price elasticity or also related to the timing of price movements, and questioned the company's investment posture regarding elevated SG&A per store, accelerated store growth, and its approach to operating margin.

Answer

CEO Brad Beckham explained that DIY deferral is modest, not across the board, and not always directly tied to tariff-driven costs, with strength still seen in maintenance categories. He noted no material trade-down in good, better, best product tiers. President Brent Kirby stated no fundamental shift in operating margin approach, attributing elevated SG&A to inflation and investments in operating posture and team support. Brad Beckham added that O'Reilly balances SG&A management with service levels and will continue disciplined investments in technology, teams, and supply chain.

Simeon Ari Gutman asked if DIY deferral is primarily price elasticity or timing of price movements, and about O'Reilly's investment posture regarding elevated SG&A per store and operating margin.

Answer

Brad Beckham (CEO, O'Reilly Automotive) explained it's early to definitively attribute DIY deferral solely to price elasticity, noting it's not across all categories or directly tied to tariff-driven costs, and no trade-down is observed. Brent Kirby (President, O'Reilly Automotive) stated no fundamental shift in operating margin approach, with recent SG&A increases partly due to inflation and investments to strengthen operating posture. Brad Beckham (CEO, O'Reilly Automotive) added that they are pleased with internal SG&A management and will continue disciplined investment in technology, teams, and supply chain.

Simeon Gutman from Morgan Stanley asked about the current level of upward pricing pressure from tariffs compared to a few months ago and questioned the mathematical guidance for SG&A, which suggests a tapering of dollar growth in the second half of the year.

Answer

President Brent Kirby and CEO Brad Beckham explained that while the consumer is pressured, the industry remains rational, and the current pricing pressure is in line with their initial expectations. EVP & CFO Jeremy Fletcher clarified the SG&A guidance, noting it includes a comparison benefit in Q4 and reflects a commitment to investing for long-term market share gains, even if it pressures short-term results.

Simeon Gutman from Morgan Stanley inquired about the current level of pricing pressure from tariffs compared to a few months ago and asked about the drivers behind the SG&A forecast for the second half of the year.

Answer

President Brent Kirby and CEO Brad Beckham explained that while the tariff situation is unprecedented, the industry is behaving rationally, and the pricing pressure is in line with initial expectations. CFO Jeremy Fletcher noted the SG&A forecast reflects a Q4 comparison benefit and ongoing investments to support top-line growth, a sentiment echoed by CEO Brad Beckham, who emphasized a focus on long-term market share gains over short-term expense management.

Simeon Gutman asked if O'Reilly is considering ramping up SG&A spending or using pricing to aggressively gain market share amid the current environment, and also questioned if inventory strategy would change to capitalize on potential demand increases.

Answer

Executive Brad Beckham stated the company is focused on managing the current environment rather than initiating a new SG&A spending cycle, noting they were somewhat disappointed with Q1 SG&A performance but are maintaining full-year guidance. He confirmed there are no plans to strategically invest in price. Regarding inventory, President Brent Kirby and Brad Beckham affirmed they will not change their strategy, continuing to invest in having the best parts availability, which they see as a core competitive strength.

Simeon Gutman from Morgan Stanley asked for the basis of management's confidence that industry headwinds are "short-lived" and questioned how market share gains are factored into future guidance.

Answer

CEO Brad Beckham explained that confidence stems from historical precedent, where the industry has consistently rebounded after periods of economic uncertainty like election years. CFO Jeremy Fletcher clarified they are not yet seeing granular data pointing to a recovery but are positioned to capitalize on it when it occurs. Fletcher also confirmed that their expectation to outperform the market is a core component of their guidance process.

Simeon Gutman of Morgan Stanley requested a hypothesis on the primary drivers of the quarter's success, asking to weigh the impact of product trends, price simplification, and improved execution.

Answer

CEO Winnie Park attributed the strong performance to a 'flywheel effect' combining three key factors: a curated assortment with compelling newness, strong end-to-end execution leading to better in-stocks and inventory flow, and a price simplification strategy that enhanced the shopping experience for both customers and store crew.

Simeon Gutman of Morgan Stanley inquired about the company's pricing strategy, including price simplification and elasticity, and how tariff mitigation efforts are reflected in the back-half guidance.

Answer

CEO Winnie Park explained that mitigation involves vendor diversification, assortment changes, and price adjustments on about 15% of SKUs, with 80% of units remaining at $5 or below. COO Ken Bull added that the guidance assumes any benefit from price hikes will be offset by unit degradation, leading to margin erosion. Both confirmed mitigation efforts are embedded in the guidance.

Simeon Gutman requested a breakdown of the 2025 comparable sales guidance into traffic and ticket, and asked if tariffs were a net positive to comps. He also asked if the labor model could be adjusted to drive higher throughput, referencing past comments about leaving sales on the table.

Answer

CFO Kristy Chipman provided a quarterly cadence for comps but declined to break down the traffic and ticket components due to the dynamic nature of tariff mitigation efforts. CEO Winnie Park noted they are evaluating the labor model to drive sales. COO Ken Bull clarified that the Q4 'sales left on the table' comment was related to inventory challenges from chasing product, not suboptimal labor levels.

Simeon Gutman inquired if the sequential sales improvement was uniform across different store age cohorts and markets, and if there was any pattern to which stores performed best.

Answer

Interim CEO Ken Bull responded that the performance improvement was relatively consistent across the store base. He noted that both comparable stores and new stores performed well, with new store productivity exceeding expectations. He stated that while individual store results vary due to factors like cannibalization, the positive trend was seen broadly across the chain as Q3 progressed.

Simeon Gutman of Morgan Stanley questioned the decision-making behind the moderated 2025 unit growth target, asking why the company didn't cut growth more deeply to focus on operations and whether the current plan reflects a stabilization in the business.

Answer

Interim President and CEO Kenneth Bull clarified that the moderated growth number was chosen after a deep dive into the real estate pipeline to ensure strong returns and selectivity. He emphasized the primary driver was to avoid over-taxing the organization and to maintain focus on the turnaround initiatives, rather than it being a signal of business stabilization.

Simeon Gutman from Morgan Stanley asked for the key drivers behind the expected comparable sales acceleration in the second half and the underlying assumptions for the Pro and DIY segments.

Answer

CFO Ryan Grimsland attributed the H2 comp lift primarily to easier year-over-year comparisons and improving two-year trends, rather than a major underlying shift. Grimsland stated that Pro business strength is the key driver, while the company remains cautious on the DIY consumer's response to price elasticity from tariffs. CEO Shane O'Kelly added that improved 'time to serve' and assortment are also boosting the Pro business.

Simeon Gutman asked about the expected mix of DIY versus DIFM performance within the full-year comp guidance and whether Q1 results have altered that outlook. He also inquired about the drivers of gross margin and SG&A, noting that guidance seems appropriate despite potential upside from cost savings.

Answer

EVP and CFO Ryan Grimsland confirmed that the year is playing out as expected, with DIFM (Pro) driving performance while DIY remains pressured. CEO Shane O’Kelly added that the company is focused on controlling what it can in DIY through availability, marketing, and loyalty programs. Grimsland reiterated that gross profit growth, driven by cost-outs and cycling prior-year headwinds, will be the main driver of operating income improvement, and the full-year guidance already incorporates these various puts and takes, including potential tariff impacts.

Simeon Gutman questioned the drivers behind the 2027 7% EBIT margin target, asking about the mix of gross margin versus SG&A leverage, and the strategic thinking behind setting a firm long-term goal.

Answer

CFO Ryan Grimsland detailed that the 7% target is based on achieving a mid-40s gross margin rate and a sub-40% SG&A rate, driven by COGS improvements and productivity gains. CEO Shane O'Kelly added that the goal was set after a year of evaluation and is seen as a reasonable trajectory that provides internal accountability, supported by major foundational changes like the Worldpac sale and store closures.

Representing Simeon Gutman of Morgan Stanley, an analyst asked why this turnaround plan will succeed when past margin goals have been missed. He also inquired whether the current sales decline is due to industry weakness or market share loss and asked about the path back to positive comps.

Answer

CEO Shane O'Kelly distinguished this plan by highlighting his team's 'say-do ratio,' citing the successful Worldpac sale, supply chain consolidation, and other decisive actions taken over the past year. He attributed recent sales softness to a pressured DIY consumer but noted the Pro business showed accelerating 2-year comp trends. The path to growth involves capturing the eventual DIY rebound and executing a multi-faceted strategy to better serve Pro customers.

Simeon Gutman of Morgan Stanley inquired about the potential industry-wide price inflation from tariffs and how it compares to historical rates. He also asked about Acushnet's confidence in its premium customers' ability to absorb higher prices across the economy.

Answer

David Maher, President & CEO, explained that pricing actions have been selective and more focused on gear, footwear, and apparel, while the US-based golf ball manufacturing provides some insulation from tariffs. He noted it's too early to compare the current situation to historical inflation due to the dynamic tariff landscape. Maher emphasized that for Acushnet's premium-focused consumer, any price increase must be justified by a clear performance improvement, a principle they carefully adhere to.

Simeon Gutman inquired about the strategic process for Topgolf, asking if the recent CEO change alters the likelihood of a sale versus a spin-off, and questioned the updated financial impact of tariffs on second-half guidance.

Answer

President & CEO Chip Brewer clarified that while the Topgolf CEO change makes a spin-off impractical in 2025, the strategic process considering both a spin and a sale remains active. He noted that improving sales trends are beneficial for all potential outcomes. Brewer also confirmed the estimated full-year tariff impact has increased from $25 million to $40 million, which is now factored into the company's updated guidance.

Asked about the growth runway for the managed care business and the strategy for achieving positive customer traffic in the cash-pay segment.

Answer

The company is pleased with low double-digit growth in managed care and is targeting a 50% mix for this segment. For the cash-pay segment, which is shrinking due to a shift to managed care, the company is revamping its marketing and CRM strategies to drive traffic, and noted the segment is already comping positive when combining traffic and ticket.

Simeon Gutman of Morgan Stanley inquired about the potential run-rate for average ticket growth and whether the revenue increase was primarily driven by optimizing managed care benefits or by growth from self-pay customers.

Answer

Executive Christopher Laden explained that National Vision is pleased with the current ticket acceleration and sees further runway for growth, as it has not yet led to any degradation in customer conversion or Net Promoter Scores. He clarified that the growth is a result of both introducing more premium products that appeal to managed care customers and enhancing the overall experience for the entire customer base, including progressive lens and outside Rx customers.

Simeon Gutman of Morgan Stanley inquired about the sustainability of the current average ticket growth rate and whether it could accelerate further given ongoing mix changes. He also asked for a breakdown of revenue growth drivers between managed care and self-pay customers.

Answer

Executive Christopher Laden confirmed strong satisfaction with the ticket acceleration seen in Q4 and Q1, stating that the company has not yet reached a point of diminishing returns regarding price elasticity and conversion rates, suggesting further runway for growth. He clarified that growth is being driven by both the optimization of managed care plans and increased spending from self-pay customers who are responding positively to new, premium product introductions.

Simeon Gutman asked about the sources of core EBIT improvement for 2025, seeking to understand the split between business operations and corporate overhead reduction, and the comp level required for segment margin expansion.

Answer

CFO Melissa Rasmussen stated that a 'substantial portion' of the EBIT improvement comes from the $12 million SG&A takeout, with further upside expected from new initiatives. She noted that while historically a mid-single-digit comp was needed for leverage, they are now taking actions to achieve leverage on a lower comp, with America's Best being the key profitability driver.

On behalf of Simeon Gutman, Lauren asked about the drivers behind the Q4 comparable sales guidance, specifically what the low and high ends of the range contemplate. She also inquired about the outlook for SG&A leverage into 2025, given the expected headwind from incentive compensation.

Answer

CFO Melissa Rasmussen explained that the midpoint of the comp guidance reflects current trends, while the high end assumes an improved macro environment and traction from initiatives. The low end reflects a potential deterioration in macro conditions. Regarding SG&A, she confirmed that the reset of incentive compensation will be a significant headwind in 2025, after being a tailwind in 2024.

Simeon Gutman from Morgan Stanley asked about the ideal mix between closeout and everyday items to ensure product consistency, and whether stronger comps would be driven more by value perception or direct price investment.

Answer

President and CEO Jason Potter explained that while a few hundred everyday items are critical, the vast majority of the assortment consists of thousands of opportunistic products, which is core to the model. On driving comps, he emphasized that value is a combination of price, quality, and service. He clarified that recent test store success was driven by merchandising and the shopping experience, not by lowering prices, with the goal of improving both customer loyalty and profitability.

Simeon Gutman asked if the softer April trend was driven by traffic or basket, and questioned if the language around the restructuring plan's cash costs had changed and if it impacted guidance.

Answer

CEO Jason Potter attributed the softness to the basket, not traffic, and suggested it was an execution-related issue. CFO Chris Miller clarified the restructuring costs, noting the guidance range was tightened to $59-$61 million to include 5 more store closures, but confirmed this does not impact the full-year adjusted profitability guidance.

Simeon Gutman of Morgan Stanley requested a timeline for when the company's systems issues will be fully resolved and asked for examples of the insightful questions new CEO Jason Potter is asking that are prompting deeper analysis.

Answer

Chairman Eric Lindberg stated that 2025 is the 'completion year' for the systems conversion, with the goal of having all necessary tools for efficient inventory management restored. He gave examples of CEO Jason Potter's questions, which focus on the customer trip, in-store execution from an operator's perspective, and ensuring data integrity. CEO Jason Potter added that he is in a 'learning mode' to gather information and sees significant upside potential.

Simeon Gutman pressed for a clearer link between the systems issues and the weaker value proposition, questioning why the issue wasn't caught sooner since independent operators are on the front lines of relative value.

Answer

Interim President and CEO Eric Lindberg took direct ownership, stating, 'We did this to ourselves.' He explained that the company made a strategic error by pricing for margin to recover from a weak Q1, just as competitors were lowering prices. The system's lack of visibility hindered the central team's ability to see and react to the problem quickly, and operators, who share in gross profit, were also focused on margin.

Lauren, on for Simeon Gutman, asked about strategies to drive engagement in the softer hair care category and requested a breakout of the implied Q4 comparable sales guidance between the SBS and BSG segments.

Answer

President & CEO Denise Paulonis addressed the softer Care category by explaining that the company is refining its tactics, including a focus on performance marketing, single-item promotions over quantity discounts, and leaning into value messaging like 'skip the salon.' For the Q4 outlook, Paulonis stated that the guidance implies sequential top-line improvement in both the Sally Beauty and BSG businesses, assuming a consistent macro environment. She expects momentum to be fueled by innovation in hair color at Sally and new launches like Unite at BSG.

Simeon Gutman asked about quarter-to-date business trends, sought confirmation that no tariff impact was included in the back-half margin guidance, and inquired if any geographic markets provided a control case for performance without the impacts of flu or weather.

Answer

President and CEO Denise Paulonis confirmed that performance has improved quarter-to-date in Q3, particularly in the BSG segment as flu impacts subsided, though she remains cautious on the consumer outlook. She also confirmed that no material tariff impact is expected in the current fiscal year due to inventory positioning. Regarding control markets, she stated the flu was broad-based, but the impact of other events like wildfires could be isolated, noting that overall store closure days were up notably year-over-year.

Simeon Gutman asked about the sustainability of margin expansion, questioning if top-line growth would need to accelerate as benefits from initiatives like Fuel for Growth potentially taper, in order to maintain EBIT growth.

Answer

CEO Denise Paulonis affirmed confidence in achieving mid-single-digit operating margin growth, stating the top line is built to withstand consumer shifts while strategic initiatives drive growth. CFO Marlo Cormier emphasized that the Fuel for Growth program is building an ongoing efficiency 'muscle' and is on track to deliver its targets through 2026 and beyond, suggesting the benefits are sustainable and not peaking.

On behalf of Simeon Gutman, an analyst named Zach inquired about the current retail pricing environment and the trends in product costs.

Answer

President and CEO Denise Paulonis described the pricing environment as moderate, with modest increases in Average Unit Retail (AUR) and no significant price hikes from vendors. She stated that product costs are 'quite in control' as inflation has moderated. She also noted that the company has limited exposure to potential tariffs from China, as less than 10% of its product is sourced from there, and mitigation plans are in place.

Simeon Gutman of Morgan Stanley inquired about the breakdown of traffic versus ticket for the Take 5 segment and the outlook for its profitability in the second half of the year.

Answer

President & CEO Danny Rivera stated that Driven Brands does not disaggregate traffic and ticket but noted both are performing well, contributing to the 7% same-store sales growth, driven by non-oil change revenue and strong attachment rates. EVP & CFO Mike Diamond added that while there is some quarterly variability, the company is pleased with the mid-30s margin for Take 5 and considers it a sustainable and realistic full-year target.

Simeon Gutman inquired about the Take 5 Oil Change segment's EBITDA margin, which contracted slightly despite strong same-store sales, and asked about the profit outlook for the Franchise Brands segment if its sales softness persists.

Answer

EVP and CFO Michael Diamond explained that Take 5's margin pressure from repair, maintenance, and rent expenses was anticipated. He stated that for the Franchise Brands segment, while there are fewer cost levers, its stability provides consistent cash flow, and management remains confident in its long-term trajectory despite near-term softness in the discretionary Maaco brand.

Simeon Gutman of Morgan Stanley questioned the consensus 2026 comparable sales forecast of 4%, asking for management's reaction given the macroeconomic environment, tariffs, and the maturation of new stores. He also asked about the performance spread between new and mature stores.

Answer

CEO Tom Taylor stated it was too early to comment on 2026 forecasts, citing ongoing uncertainty in the housing market but also noting that the company is actively pursuing growth through new products and enhanced design services. CFO Bryan Langley confirmed that the new store maturation 'waterfall' effect continues to be a positive driver, although the performance gap between new and mature stores has compressed slightly. Tom Taylor added that stores opened in the last three years have significant ramp-up potential when the market improves.

Simeon Gutman of Morgan Stanley asked about the rationale for reducing the new store opening plan to 20 units and the criteria for potential further cuts. He also inquired about the drivers of the quarter-to-date sales pickup in Q2 and why the top-line outlook was lowered despite plans for price increases.

Answer

CEO Tom Taylor explained that reducing the store count to 20 was a prudent first step, with the flexibility to cut further if business deteriorates beyond the low end of their guidance. He attributed the Q2 trend improvement to broad-based strength in both transactions and ticket. Taylor and CFO Bryan Langley noted that while price increases historically boost sales, they are being cautious with the outlook due to unpredictable consumer behavior and general demand concerns in the current economic environment.

Simeon Gutman of Morgan Stanley questioned how the company can maintain SG&A discipline without adding costs back as sales recover. He also asked about the housing market assumptions underlying the 0% to 3% comp guidance for fiscal 2025.

Answer

CFO Bryan Langley explained that 45% of store costs are variable, primarily labor, which can be flexed with transaction volume. With 75% of stores having room for adjustment, they can manage costs efficiently. CEO Tom Taylor added that ongoing investment during the downturn prevents the need for catch-up spending. For guidance, Taylor stated they assume a benefit from maturing stores and a stable, not rebounding, housing market. Langley projected sequential comp improvement throughout the year.

Simeon Gutman of Morgan Stanley inquired about Floor & Decor's outlook, asking what management's description of the environment 'grinding higher' implies for the pace of store openings and investment strategy. He also asked for clarification on whether the rate of change in existing home sales is more critical for a business recovery than reaching a specific normalized level.

Answer

CEO Tom Taylor confirmed the plan for 25 new stores in 2025 remains, but with flexibility to adjust based on market conditions. He stated that as existing home sales turn positive, Floor & Decor's business trajectory should improve. President Trevor Lang added that the company is actively reducing new store CapEx and operating costs to ensure good returns even in a muted environment.

Simeon Gutman of Morgan Stanley inquired about the second-half comparable sales outlook, asking for the expected mix of traffic and ticket and any specific drivers for transaction growth in the second quarter.

Answer

Executive VP & CFO Kurt Barton responded that Tractor Supply expects solid transaction growth to continue in the second half, driven by consumable sales and customer growth. He noted the average ticket will benefit from a shift from deflation to inflation, leading to a balanced contribution from both ticket and transactions for the anticipated stronger second-half comp sales.

Simeon Gutman asked about the breadth of the positive comparable transaction growth, inquiring about its distribution across geographies and between mature and immature stores.

Answer

CEO Harry Lawton responded that the comp transaction growth in Q4 was widespread across both categories and geographies, with stronger performance in areas affected by weather. He emphasized that this growth is a key differentiator for the company. Lawton also noted that new stores are performing in line with expectations, driving incremental transactions from new customers, though this is not included in the comp base.

Simeon Gutman asked about the company's pricing strategy evolution, vendor conversations on central buying, and the SG&A run rate, including the impact of union contracts.

Answer

CEO Susan Morris described the pricing strategy as an iterative shift to a 'modified high-low' model, supported by new data tools and deep vendor engagement. President & CFO Sharon McCollam stated that anticipated union wage increases are factored into the guidance. She noted that about half of the Q1 SG&A rate improvement came from eliminating prior-year merger costs, with the rest driven by productivity initiatives like offshoring back-end functions.

Asked about the specifics of the new pricing strategy, how it's being communicated to vendors, and the SG&A run rate, including the impact of new union contracts.

Answer

The new pricing strategy is a 'modified high low' approach that is iterative, not a one-time event, and involves deep engagement with vendors to collectively grow units. The SG&A outlook already incorporates anticipated union wage increases. Productivity gains from new ways of working, such as offshoring functions, are helping to offset wage pressures.

Simeon Gutman requested an assessment of Albertsons' market share performance, excluding pharmacy, and asked if there is a perceived correlation between the rise in GLP-1 drug usage and declining food unit consumption.

Answer

CEO Vivek Sankaran stated that to gain overall market share, Albertsons must accelerate its growth to better compete with faster-growing mass and club retailers. He acknowledged that the significant growth of GLP-1s could be a contributing factor to lower food volumes, stating it's an impact that is 'hard to ignore.'

Pedro Gil, on behalf of Simeon Gutman at Morgan Stanley, asked for more detail on May's performance and consumer health, and questioned why gross margin guidance was unchanged despite a severe tariff scenario.

Answer

CEO Steven Lawrence attributed May's choppiness to consumer pressure but highlighted positive catalysts like the Jordan launch and new store tech rollouts. EVP & CFO Earl Carlton Ford IV explained that gross margin guidance is maintained due to proactive inventory pull-forwards at pre-tariff prices and a strategic shift of sourcing out of China. Lawrence added that in a high-tariff scenario, the primary impact would be on consumer spending and sales volume, not necessarily margin rates, due to various mitigation strategies.

Simeon Gutman from Morgan Stanley asked about the implied SG&A per store for fiscal 2025 and the performance and cash flow trends of mature 'base' stores.

Answer

CFO Carl Ford indicated SG&A will deleverage slightly under 100 bps at the midpoint, driven entirely by growth investments. CEO Steven Lawrence added that base stores have seen sequentially improving trends, and the focus is on turning them positive with new brands and tech. Ford emphasized that cash flow remains strong and was up year-over-year in fiscal 2024 despite negative comps.

Simeon Gutman from Morgan Stanley inquired about the confidence level embedded in the Q4 guidance, given the strong start to the holiday season. He also asked for an update on the performance of the 2022 vintage stores relative to the rest of the chain.

Answer

CEO Steve Lawrence stated that the Q4 guidance of -4.5% at the midpoint contemplates the compressed holiday calendar and that the company is tracking in line with its internal forecast. Regarding new stores, Lawrence confirmed that the 2022 vintage continues to comp positively, and the performance spread relative to the total company remains consistent with previous quarters.

Simeon Gutman questioned if the comp performance spread between new and mature stores has changed between Q1 and Q2. He also asked if the strong gross margin performance this year could be precluding potential gains in 2025.

Answer

CEO Steve Lawrence responded that the comp spread between new and existing stores was roughly the same from Q1 to Q2. CFO Carl Ford addressed the gross margin question, stating that this year's performance does not preclude future gains. He noted that overcoming the Georgia DC productivity headwind should provide a benefit next year, and the company remains confident in its long-range plan for margin expansion.

Simeon Gutman from Morgan Stanley inquired about the average unit retail (AUR) specifically within the '3.0' multi-price stores and asked for clarification on whether the Transition Service Agreement (TSA) costs related to the Family Dollar sale will be fully reimbursed.

Answer

CEO Michael Creedon stated that the company only discloses the chain-wide AUR of $1.35 and does not break it out by store format. CFO Stewart Glendinning explained that all costs for services provided to Family Dollar under the TSA, including salaries and benefits, will be fully reimbursed. He also reiterated the long-term corporate SG&A target of approximately 2% of revenue post-separation.

Simeon Gutman inquired about the long-term operating philosophy for the standalone Dollar Tree business, specifically asking how management will approach margins. He questioned whether they would reinvest to keep margins down for competitive purposes or allow them to expand.

Answer

CEO Mike Creedon stated he is excited about the standalone opportunity and sees a very attractive multi-year algorithm with strong margins. He noted that the company has been in a heavy investment mode for several years (CapEx, wages, hours) and believes these investments, combined with the multi-price strategy, position the business to manage well and drive profitability over the long term.

Simeon Gutman asked about the long-term business philosophy for the standalone Dollar Tree, specifically regarding its margin strategy and whether the company plans to reinvest heavily, potentially keeping margins down, or allow margins to expand in the current competitive environment.

Answer

CEO Michael Creedon outlined a vision for a compelling long-term growth algorithm with strong margins, driven by new stores and operational clarity. He stated that the company has already been in a heavy investment cycle (CapEx, wages) and that these investments, along with multi-price flexibility, position the business to manage costs and drive strong multi-year results.

Simeon Gutman followed up on the multi-price comp lift, asking if the decline from 5.1% to 3.3% was an apples-to-apples comparison and whether it was caused by slowing in older conversions or less impact from newer ones.

Answer

Interim CEO Mike Creedon clarified it was not an apples-to-apples comparison. The 5.1% figure was specific to Q1 conversions' performance in Q2. He reiterated that performance improves over time and the lower aggregate Q3 lift was due to a different mix of conversions (fewer high-impact 1.0 to 3.0 conversions) and a less responsive geographic mix in the Midwest compared to prior conversions in California.

Simeon Gutman inquired about the timing and pace of the multi-price rollout at Dollar Tree, asking why it couldn't proceed faster and whether labor is a constraint. He also asked about the selection criteria for the first 1,600 stores that were converted.

Answer

COO Mike Creedon explained that the rollout pace is determined by two main factors: the internal team's bandwidth, which necessitates using third-party labor, and the supply chain's capacity to process and distribute the new multi-price products to stores. He noted that while they are slightly behind the original schedule, the primary challenge in well-executed stores is keeping up with strong customer demand.

Simeon Gutman inquired about the multi-price rollout, asking about the timing, the reasons it cannot be accelerated, whether labor is a constraint, and the selection criteria for the first 1,600 converted stores.

Answer

COO Mike Creedon explained that the rollout pace is determined by two main factors: the internal team's bandwidth for execution alongside other projects, and the supply chain's capacity to process and distribute the new multi-price merchandise to the stores. He noted that when the execution is done correctly, the primary challenge becomes keeping the popular new items in stock due to high customer demand.

Lauren Ng, on behalf of Simeon Gutman from Morgan Stanley, inquired about underlying business fundamentals, beyond weather, that contributed to the Q2 comp weakness and asked about the inventory purchasing strategy for the second half.

Answer

CEO Jason McDonell attributed the top-line softness primarily to weather, highlighting strong underlying fundamentals evidenced by a 174 basis point improvement in conversion rate, driven by a 620 basis point year-to-date increase in 'Never Out' SKU in-stocks. Regarding inventory, McDonell emphasized a 'precision inventory mindset' focused on asset utilization and working capital improvement to pay down debt, rather than a purely defensive posture. Interim CFO Tony Iskander added that optimizing on-hand inventory helps mitigate tariff impacts.

Representing Simeon Gutman of Morgan Stanley, an analyst asked for evidence that the recent positive comp inflection is sustainable for the upcoming pool season, unlike potential "false positives" in the past. She also inquired about the reasons for continued weakness in the DIY segment and any signs of a return to growth.

Answer

CFO Scott Bowman pointed to encouraging signs like the strength in core chemicals and improving trends in discretionary categories like hot tubs. CEO Jason McDonell added that non-discretionary performance improved from -8% a year ago to +2%. For the DIY segment, McDonell acknowledged traffic is the key opportunity, while conversion is up. He expressed confidence that improved in-stock levels and new marketing initiatives under a new marketing SVP will help drive DIY traffic.

Simeon Gutman asked for a breakdown of the -8.3% comparable sales between ticket and traffic and questioned how the pause in store openings affects the long-term unit growth outlook.

Answer

CFO Scott Bowman clarified that the comparable sales decline was primarily driven by lower traffic, similar to recent quarters. He explained that the pause on new store growth is a near-term measure to prioritize debt paydown and focus on core execution, but the long-term opportunity for unit growth remains. CEO Jason McDonell added that the immediate focus is on driving organic growth by leveraging existing competitive advantages.

Simeon Gutman of Morgan Stanley asked for a reconciliation of the flat full-year gross margin outlook, given the revised lower sales forecast, Q1 occupancy deleverage, and a $10 million tariff impact with no planned price increases. He also inquired about new space productivity and the performance of mature stores.

Answer

SVP of Finance Ryan Brody explained that the company is up against easier comparisons in the second half of the year and has been pleased with the results of the volume discount program initiated in October. He acknowledged the guidance implies a high single-digit negative demand comp in the back half, reflecting a continuation of the choppiness seen since April. He also noted that new store productivity figures can be skewed by the timing of openings versus when deliveries flow through.

An analyst on for Simeon Gutman asked for more detail on the significant Q1 adjusted EBITDA deleverage and how the promotional cadence is planned for Q1 given higher inventory levels.

Answer

An Arhaus executive identified the two biggest drivers of Q1 deleverage as showroom occupancy costs and strategic investments. Jennifer Porter, CMO, added that the Q1 promotional strategy is in line with 2024's approach but advised analysts to be aware of calendar shifts for key holidays like Easter, which can affect the timing of promotional periods.

Simeon Gutman questioned the conservative comp sales guidance for the remainder of the year, given the strong Q1 results, and inquired about the company's free cash flow philosophy and use of cash for debt repayment.

Answer

CFO Jedidiah Gold explained the guidance reflects caution due to the uncertain consumer environment, potential tariff impacts, and a moderation in April trends. He noted that while member growth and revenue per member outlooks are stable, the retail sales forecast has been lowered. Regarding cash flow, Gold stated the company's model is roughly cash flow neutral for the year, with excess cash from a moderated new build plan being used to pay down debt.

Simeon Gutman sought to understand the 2025 comp guidance, asking if December's performance was a better run-rate and whether inflation or competition was a bigger headwind for retail. He also inquired about a competitor's bankruptcy, location overlap, and if benefits from industry rationalization are included in the outlook.

Answer

CFO Jed Gold clarified the 2025 guidance assumes a mid-single-digit decline in retail, which is an improvement from 2024 but a step-down from the weather-aided Q4. CEO John Lai added that competition is a slightly bigger headwind than inflation for retail. Lai stated there is little location overlap with the bankrupt competitor, so no immediate impact is expected, and any benefits from broader industry rationalization are not factored into the guidance as it will take time to materialize.

Simeon Gutman asked about the stickiness and retention of customers in the new Titanium membership tier and whether there is a performance difference in comparable sales between markets with high and low penetration.

Answer

Executive John Lai described the Titanium membership as 'amazingly sticky and strong,' with no degradation observed after promotional periods. He added that performance has been evenly distributed across all markets, regardless of penetration levels, which he attributed to the universal appeal of the car wash service.

An analyst on behalf of Simeon Gutman asked for early reads on the productivity of the Big Lots stores acquired in late 2024 and inquired about any notable impact from the timing of the Easter shift on Q1 comps.

Answer

Executive Robert Helm noted that it's too early for definitive color on the Big Lots stores that just opened in February but results are exciting so far. He also explained that the later Easter shift elongates the spring selling season, which should ultimately be favorable for the company, especially given the recent improvement in weather.

Zach, on behalf of Simeon Gutman, asked about the 14% inventory growth, which outpaced sales, questioning if it was due to a pull-forward of holiday product or in anticipation of potential tariffs.

Answer

CFO Robert Helm clarified that there was nothing significant to call out, explaining that the inventory growth reflects a multi-year effort to catch up relative to unit growth. He expressed confidence in their inventory position, stating they are 'locked and loaded' with deals for the holiday season.

Simeon Gutman asked about the gross margin implications of the seasonal and toy mix in the second half of the year and sought clarification on which categories negatively impacted Q2 margins. He also asked if the company is seeing any signs of a strained consumer.

Answer

CEO John Swygert clarified that the Q2 margin pressure came from lower-margin room air (air conditioners) and consumables, and that the higher-margin seasonal and toy categories in Q3/Q4 are not expected to be a drag. Executive Vice President and COO Eric van der Valk stated that the only sign of consumer weakness is in big-ticket categories like flooring and mattresses, a trend that has persisted for a couple of years. John Swygert added that this consumer stress is precisely why Ollie's value proposition is winning.

Simeon Gutman from Morgan Stanley sought clarification on the Q2 comp guidance, asking to reconcile the strong current run-rate with the cautious outlook, and asked if Q1 gross margin performance exceeded internal expectations.

Answer

CFO Robert Helm clarified that the Q2 comp is running in line with guidance for the lower end of the 1-2% range, with strong core performance being offset by soft seasonal sales due to weather. He also confirmed that Q1 gross margin was slightly better than planned, driven by favorable deal flow and lower-than-expected shrink.

Simeon Gutman asked for a breakdown of the planned 25-30 new clubs between infill and new markets, and at what point the accelerated store openings would stop causing SG&A deleverage.

Answer

EVP, Strategy and Development, Bill Werner explained that SG&A deleverage from new openings will likely persist during the ramp-up phase but should stabilize and turn to leverage once the company reaches a steady, consistent cadence of openings over several years. He also noted that new clubs are already contributing significantly to growth, with comparable sales tracking at 2-3 times the rate of the overall chain.

An analyst on for Simeon Gutman of Morgan Stanley asked for the expected preopening expenses in Q4 due to accelerated club openings and whether vendors are helping fund the Fresh 2.0 initiative.

Answer

CFO Laura Felice projected Q4 preopening expenses to be around $15 million. CEO Robert Eddy clarified that while vendors are supportive partners in Fresh 2.0, the primary margin pressure comes from higher in-club labor costs for handling fresh products, an investment the company deems worthwhile for driving long-term member loyalty and traffic.

Zach on behalf of Simeon Gutman at Morgan Stanley asked for more color on expected preopening expenses in the fourth quarter due to accelerated unit growth. He also inquired whether vendors were helping to fund the investments related to the Fresh 2.0 strategy.

Answer

CFO Laura Felice projected Q4 preopening expenses would be approximately $15 million, reflecting the faster pace of new club openings. Chairman and CEO Bob Eddy clarified that while vendor partners are supportive of Fresh 2.0, the primary margin pressure comes from higher in-club labor costs for handling fresh items, not vendor funding. He stressed this investment is crucial for driving member loyalty and overall store traffic, which provides a significant long-term payback.

Simeon Gutman of Morgan Stanley asked how much of the increased investment in the second half of the year is a reaction to the current environment versus addressing areas of prior under-investment. He also questioned if this signals a change in the company's long-term margin posture.

Answer

CEO Robert Eddy described the strategy as both 'offense' (proactively growing perishables and accelerating assortment changes for long-term gain) and 'defense' (reacting to price-sensitive consumers). He emphasized that most of the pressure comes from deliberate choices. Regarding long-term margins, he explained that the company reinvests gains from initiatives like their retail media network and category management process back into the business to strengthen the franchise, rather than targeting a specific margin level for any single quarter.

Simeon Gutman asked about market share gains, particularly in non-food categories, and inquired about the potential ceiling for higher-tier membership penetration.

Answer

CEO Bob Eddy stated that BJ's is gaining share in both food and non-food categories like electronics, as well as significant share in fuel. Regarding membership, he said the goal for higher-tier penetration is over 50%, compared to the current level of just over 40%. He highlighted the impressive sequential growth of over 100 basis points in the quarter, even with a recent fee increase, as proof of the value proposition's strength.

Simeon Gutman of Morgan Stanley asked for an assessment of market share gains in non-food categories and for visibility on the ultimate potential for higher-tier membership penetration, which recently surpassed 40%.

Answer

CEO Robert Eddy confirmed share gains across both food and non-food, including in GM categories like electronics and significant gains in fuel. He stated the long-term goal for higher-tier penetration is over 50%, driven by a strong value proposition like gas discounts. He noted the impressive sequential growth in this metric despite a recent membership fee increase.

Simeon Gutman asked about market share performance in non-food categories and the long-term potential for higher-tier membership penetration.

Answer

Chairman and CEO Bob Eddy stated that BJ's is gaining share in both food and non-food categories, including electronics, despite softer general merchandise comps. He linked strong fuel share gains directly to the higher-tier member value proposition. The ultimate goal for higher-tier penetration is over 50%, up from the current 41%, and he highlighted the impressive 100+ basis point sequential growth in Q1 as a sign of strong momentum.

Simeon Gutman asked for an assessment of market share gains in non-food categories and for visibility on the ultimate potential for higher-tier membership penetration, which recently surpassed 40%.

Answer

CEO Bob Eddy confirmed share gains across both food and non-food, including in electronics and fuel. For higher-tier membership, he stated the long-term goal is 'somewhere over 50%,' noting significant headroom remains. He was impressed by the strong sequential growth of over 100 basis points, highlighting effective offers and execution.

Simeon Gutman from Morgan Stanley asked about the mix of infill versus new market locations in the upcoming 25-30 club openings and at what point the new store ramp will be large enough to generate SG&A leverage.

Answer

EVP, Strategy and Development, William Werner explained that SG&A leverage from new clubs is expected once the company reaches a steady cadence of openings, such as 10-12 per year for several consecutive years. He noted that while they are currently in a ramp-up phase causing slight deleverage, new clubs are comping at 2-3 times the chain average, already beginning to contribute positively to the overall company comp.

Lauren, on behalf of Simeon Gutman at Morgan Stanley, asked whether the strong 1.9% domestic comp was driven more by strategic initiatives, weather, or industry improvement, and sought clarity on the gross margin outlook for 2025 given freight costs and inflation.

Answer

Executive Philip Daniele attributed the strong comp to a combination of favorable winter weather and improved execution on key initiatives, noting good momentum for the second half. CFO Jamere Jackson added that while the accelerating Commercial business creates some margin drag, strong merchandise margin performance is more than offsetting it. He also cautioned about a difficult LIFO comparison in Q3.

Simeon Gutman of Morgan Stanley asked about the outlook for operating income growth if the current sluggish macro environment persists and questioned how potential tariffs might impact pricing strategy.

Answer

CFO Jamere Jackson expressed confidence in improving comps, strong gross margins, and disciplined SG&A management to support operating income. Executive Philip Daniele added that the company has diversified its supply chain over the last decade to mitigate tariff impacts and expects the industry to remain disciplined on pricing.

Simeon Gutman of Morgan Stanley inquired about the expected timing for the reacceleration of AutoZone's commercial sales growth and the underlying drivers of its gross margin strength.

Answer

CEO Philip Daniele responded that commercial sales improvement will be progressive and sequential, driven by enhanced inventory assortments and improved customer service, rather than a sudden snapback. CFO Jamere Jackson added that gross margin strength comes from strong merchandising efforts, and while pricing has been muted due to low inflation, they anticipate a return to historical ticket growth trends.