If last quarter, BJ's Wholesale Club (NYSE:BJ) realized the virtue of meeting its own expectations, the warehouse club shopping chain encountered a less-than-virtuous reception in the markets after lowering full-year guidance in its fiscal third-quarter 2019 earnings report released Thursday. Let's delve into the company's filing below, keeping in mind that all comparable numbers that follow refer to those of the prior-year quarter.

The headline numbers

Metric Q3 2019 Q3 2018 Change
Revenue $3.23 billion $3.22 billion 0.3%
Net income $55.1 million $54.4 million 1.3%
Diluted EPS $0.40 $0.39 2.6%

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

Essential highlights from BJ's Wholesale Club's third quarter

  • Comparable sales excluding gasoline, which the company refers to as merchandise comparable club sales, increased by 1.1%, a deceleration from the 1.7% cumulative growth rate of the first two quarters of the year.
  • Membership fee income continued to expand briskly, rising 7% to $76.5 million.
  • Gross margin improved by 70 basis points to 19.1%. After removing the effects of gasoline sales and membership fees, merchandise gross margin rose by 50 basis points.
  • Selling, general, and administrative expenses (SG&A) crept up by 30 basis points as a percentage of sales, to 15.8%.
  • Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) improved by 3.8% to $154.1 million, but, similar to the company's merchandise "comps," this result fell short of the 4.8% growth rate set in the first half of the year.
  • BJ's announced a new stock-repurchase program, effective immediately, allowing for the purchase of $250 million worth of its common stock by January 2022. BJ's didn't repurchase any shares during the quarter and has bought back $67.3 million of its stock on the open market year to date.
A row of shopping carts in front of a large window.

Image source: Getty Images.

Revisions to the full-year outlook

BJ's Wholesale Club made several adjustments to its full-year fiscal 2019 earnings guidance on Thursday. The company revised its revenue expectation from a range of $12.9 billion to $13.2 billion to a single target of $12.9 billion. This implies a soft fourth quarter, as full-year revenue will fall below last year's $13.0 billion mark, even though the current-year top line has outpaced 2018's results by 1.3% through the first three quarters of the year.

Merchandise comparable club sales growth is now anticipated to fall between 1.3% and 1.5% versus the company's prior expectation of 1.5% to 2.5% annual comps expansion. As I discussed in my earnings preview, investors were likely expecting comps growth of 1.5% to 2% in the third quarter. The missing of this target, coupled with a significant reduction in the full-year comps outlook with one quarter to go, likely contributed to negative investor sentiment on Thursday.

The warehouse operator also crimped expected adjusted EBITDA for fiscal 2019, from between $590 million and $600 million to a new band of between $585 million and $592 million.

In BJ's earnings press release, CEO Chris Baldwin focused on the positive aspects of the quarter, including higher gross profitability and the future return of capital to shareholders:

We delivered solid margin improvement and continued earnings growth in the third quarter. We remain focused on executing against our strategic plan and transforming our business to be well positioned for the long-term. The board's decision to authorize a stock repurchase program reflects the strength of our cash flow and confidence in our growth strategy and long-term outlook.

Margin expansion in a grocery and household items business is always welcome, as are significant share repurchases. Nonetheless, shareholders were taken aback by the sudden deterioration in sales at year-end, especially given the company's steady quarterly results since its initial public offering in June of 2018. Consequently, shares of the consumer staples investment wilted as much as 8% in mid-morning trade on Thursday.