Discount membership club retailer BJ's Wholesale Club (NYSE:BJ) reports fiscal third-quarter 2019 earnings before markets open on Thursday. Shares of the chain have tracked those of larger warehouse competitor Costco lately, having appreciating 30% in the last 12 months versus Costco's 32% ascent. Below, let's take a brief look at essential items that are likely to inform shareholders' reaction to BJ's filing.

"Merchandise" comparable-club sales

As with other brick-and-mortar retailers, comparable- or same-store sales counts as one of the most critical numbers in BJ's Wholesale Club's quarterly reporting. In Q2, BJ's merchandise comparable-club sales (i.e., comparable sales excluding the contribution from gasoline sales) rose by 1.6%. In the first two quarters of the year, the company's merchandise "comps" have increased in total by 1.7% as strong sales of seasonal items and gift cards have offset weakness in groceries, which have been weighed down by a dip in frozen foods sales.

BJ's doesn't issue quarterly guidance, but its full-year outlook anticipates merchandise comps growth of 1.5%-2.5%. To hit the high end of this range, the company's comps would need to meaningfully accelerate in the last two quarters of the year. But given positive investor reactions in the first two quarters to results that fell comfortably between 1.5% and 2%, a continuation of the current pace will likely be viewed as a net positive by shareholders.

A man in a hurry pushes a shopping cart in a club warehouse store.

Image source: Getty Images.

Adjusted earnings versus projections

To take the pulse of earnings strength, observers will check that adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are on track to hit management's full-year target of between $590 million and $600 million. BJ's has generated adjusted EBITDA of $277 million in the first six months of the year, or about 47% of the full-year goal at its midpoint. While this may seem slightly off pace, it should be noted that BJ's traditionally enjoys a strong fourth quarter, which includes the year-end holiday season. Following a recent trend, adjusted EBITDA should land somewhere between 4% and 5% of revenue in the third quarter.

The membership growth trend

Compelling membership fee income has proved one of the drivers of BJ's stock surge year to date.  The company implemented a membership fee increase in January 2018, and it's continued to enjoy a boost throughout calendar 2019 from staggered customer renewals, as well as from new member acquisitions. Membership revenue increased 7% year over year to $148.1 million in the first half of 2019.

In BJ's Wholesale Club's fiscal 2018 annual report, management pointed out that membership revenue equaled "approximately half" of adjusted EBITDA during the year (48.9%, by my calculations). So far this year, membership revenue has played an increased role in earnings, equaling 53.4% of adjusted EBITDA over the first two quarters. Look for membership revenue to continue its annual growth rate of roughly 7% in Thursday's report. 

Updates on store expansion

With annual revenue of $13 billion, BJ's is roughly 1/12th the size of gargantuan warehouse club leader Costco. However, BJ's operates in just sixteen states and is primarily concentrated in New England. In this core market, its stores outnumber Costco's by 3 to 1.

To continue to plumb its geographical niche, BJ's store expansion strategy entails expanding south, primarily within Eastern Seaboard states like Virginia, North Carolina, and Florida, while eyeing more cautious development westward through an initial foray into eastern Michigan. The company is also intent on launching new stores in New England in locations that won't cannibalize existing sales.

BJ's entered the third quarter having opened one store during the fiscal year, bringing its club total to 217 units. Management's stated goal is to open four to five stores in fiscal 2019, within a larger drive to expand by 15 to 20 clubs in the five-year period that includes the current year. This week, BJ's will celebrate two new grand openings in Michigan.

Expect management to discuss these openings, while providing an update on two projected early 2020 store launches in Pensacola, Florida; and Chesterfield, Michigan; which should complete the company's current-year unit additions goal. Along with moderate comps growth, executing on an aggressive store opening schedule will be critical for BJ's in 2020 as it seeks to build on 2019's financial and share price success.

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