Like many discount retailers such as Costco and Big LotsBJ's Wholesale Club (NYSE:BJ) has enjoyed a strong sales and earnings boost from the coronavirus pandemic. With consumer budgets tightened and non-essential competitors forced to close their doors, BJ's saw its second-quarter results handily beat previous records.

For investors wondering if its good fortune will last long term or fade along with the coronavirus, there are some positive signs and also a few cautionary notes.

BJ's Wholesale Club exterior.

Image source; BJ'S Wholesale Club Holdings.

Red-hot results tempered by expenses

BJ's Wholesale posted some impressive results for its fiscal second quarter (ended Aug. 1), surpassing the analyst consensus on both the top and bottom lines.

Adjusted earnings of $0.77 per share were up 97.4% year over year, while revenue of $3.95 billion represented 18.2% growth. Digitally-enabled sales blazed a trail as the channel exploded over 300%, pushing comparable-sales growth (excluding gasoline) to 24.2% overall. The company had plentiful free cash flow in the first of half of the fiscal year at $654.8 million, providing liquidity for operations and the flexibility to respond to unexpected events.

But expenses also ticked up, muting some of these record gains or even canceling them out. For example, the increased cost of beef due to COVID-19 outbreaks at meatpacking plants, along with transport disruptions and extra shipping costs, caused merchandise gross margin to remain flat even while other metrics were growing.

Selling, general, and administrative expenses rose from $511.9 million in the prior-year quarter to $590.8 million, a 15.4% jump. BJ's said this hike resulted from COVID-19 as well, including extra costs for security, safety measures and equipment, hazard pay and bonuses to keep workers motivated, and similar costs. Gasoline sales also plunged as people cut back on travel with the drop sufficient to reduce comps from 24.2% to 17.2% when figured into the equation.

COVID-19 effects vs. strategy improvements

Scores of companies that were positioned to profit during the pandemic saw a windfall in the first half of 2020, but many of these businesses are also seeing their profits tail off to some degree as normal shopping habits return. Is BJ's one of them?

CEO Lee Delaney and other executives provided some insight during the earnings call. The initiatives BJ's took include greatly strengthening its digital wing, especially the appliance, home improvement, and telemedicine segments. Marketing and services were aimed at an influx of younger members, emphasizing personalization and once again leveraging digital platforms and apps to do so.

During the earnings call, Delaney highlighted these efforts, "We grew digitally enabled sales by more than 300% and made dramatic progress rolling out new digital services." Looking ahead, he added, "The initial response for members has been encouraging. We will move aggressively to add infrastructure in our clubs to handle these rapidly growing offerings." These initiatives mesh with broader machine learning and AI marketing trends, which (together with personalized content) can boost sales by up to 20%, according to research from Gartner.

BJ's also added several new categories of products to take advantage of high current demand while rapidly cleaning out older inventory. The company's freshly minted same-day grocery delivery service, which appeals to shoppers sheltered at home, is another example. COVID-19 drove the rollout of this feature, but its convenience could continue fueling sales post-pandemic. CFO Bob Eddy noted the strong effect of same-day delivery on the company's profits, "About three-quarters of the Q2 growth in digitally-enabled sales was driven by same-day delivery and buy online, pickup in club, or BOPIC."

The Foolish perspective

Although BJ's outstanding performance was undoubtedly driven by market conditions stemming from COVID-19, that wasn't the sole reason. Management used the rising profits and extra cash flow for rapid, effective changes to its business. These include digital growth, personalized marketing, new product categories, and a strong foray into healthful foods, all of which should pay off regardless of COVID-19 developments.

Looking more closely at the company's financials, the company has used the influx of cash to effectively reduce its debt, improving its ability to invest in fresh opportunities and expand promising initiatives. As Eddy pointed out during the earnings call, "Our balance sheet has been dramatically transformed in the past year," a trend that has allowed management to pay down debt by $500 million so far in 2020, bringing its net debt-to-adjusted EBITDA ratio to just 1.4. At the end of the fiscal second quarter, BJ's had approximately $170 million in cash on hand.

Eddy said the company's most urgent goal is now growth, and its positive balance sheet will enable BJ's to "fully fund all growth initiatives" and "to ensure that we have the appropriate capital structure that would enable the company to succeed over the long-term and maximize shareholder returns."  In part, these upbeat statements may simply be expected during any earnings call. However, the company's actual capital allocation, shrunken debt, and growing cash flows appear to support management's optimistic view. They also provide objective confirmation of its execution as the company made good use of the tailwinds provided in 2020.

BJ's Wholesale Club is not the biggest name in its sector, but it is poised to exit the current crisis as an even stronger business, and that makes it worth a look for Fools interested in retail stocks

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.