In first-quarter fiscal 2019 earnings released on May 23, BJ's Wholesale Club Holdings (NYSE:BJ) provided evidence of continued momentum by reporting moderate revenue growth and a jump in net profitability. Shares of the membership-based warehouse shopping club gained 5% in the two trading sessions following the report; they've now appreciated 21% since the company's late June 2018 initial public offering.

As we break down the past three months, note that all comparable numbers refer to the prior-year quarter.

BJ's Wholesale Club: The raw numbers

Metric Q1 2019 Q1 2018 Year-Over-Year Growth
Revenue $3.14 billion $3.06 billion 2.6%
Net income $35.8 million $14.1 million 153.9%
Diluted EPS $0.26 $0.20 30%

EPS = earnings per share. Data source: BJ's Wholesale Club.  

What happened with BJ's Wholesale Club this quarter?

A couple shopping in a warehouse club store smile as they place items in their cart.

Image source: Getty Images.

  • Comparable club sales excluding gasoline improved by 1.9%. Comps for general merchandise (TVs, home, apparel, etc.) jumped 9%, but this progress was offset by 1% comps growth in the edible and non-edible grocery categories. 
  • Net sales rose 2.5% to $3.07 billion, while membership fee revenue increased 8% to $73.4 million -- a record result.
  • BJ's Wholesale Club achieved double-digit growth in the number of customers that enrolled in the company's higher-tier memberships.
  • Gross margin improved by 30 basis points to 18.3% because of the company's category profitability improvement program.
  • Operating margin increased 10 basis points to 2.2%.
  • While operating income of $70.7 million increased 9.4%, net income and earnings per share rose more substantially over the prior year. This performance is due to the company's refinancing of term loans and asset-based lending facilities in the third quarter of fiscal 2018, as well as the reduction of total debt by nearly $1 billion (to $1.5 billion) since the end of the third quarter of 2018. Combined, these actions reduced current-quarter interest expense by 39% to $27.8 million, boosting net income in turn. 
  • The discrepancy between the 150%-plus jump in net income and the milder 30% rise in EPS stems from the company's higher issued share count in the current period following its IPO last year. 

What management had to say

Investors in wholesale shopping clubs like BJ's and larger competitor Costco often grapple with the threat that online commerce poses to the physical club store business model. Within a larger discussion on strategy during the earnings conference call, CEO Chris Baldwin described how the company is protecting its market share from e-commerce competitors -- namely, by enhancing its own online ordering capabilities:

We've also started to streamline the buy-online-pick-up-in-club feature by enabling members to check in for pickup in our app eliminating the need to wait online. Importantly, a significant number of BOPIC shoppers buy additional items once they're in the club. We also started to update an improved convenience feature that allows people to scan and pay for in-club purchases within our app.

This new test builds on our earlier pilot program and plays on the unique advantage of the club store environment, where every item is directly scannable with the UPC code. In-club stores shoppers do not need to weigh articles and print and scan their own labels for items such as fresh produce. While our current test is still quite small this is a potentially transformational change for us. We'll continue to learn from the ongoing tests as we work to provide a more convenient seamless shopping experience for our members.

Looking forward

BJ's Wholesale Club maintained its fiscal 2019 outlook alongside its earnings release. The company anticipates full-year sales of $12.9 billion to $13.2 billion, which, at the midpoint, will represent a flat result in comparison with fiscal 2018 sales of $13 billion. This advance is predicated on comps growth of 1.5%-2.5%.

As for earnings, BJ's intends to achieve adjusted EBITDA of $590 million to $600 million and notch diluted EPS of $1.42-$1.50 in 2019. At the midpoint of the projected EPS range, the organization will increase earnings by 39% over the $1.05 in diluted per share earnings recorded in fiscal 2018.

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