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Are Investors Right to Be Skeptical of BJ's Wholesale Club?

By Rhian Hunt - Mar 12, 2021 at 6:48AM

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Some sizzling fourth-quarter results were initially met with negativity by investors.

Membership-only discount retail company BJ's Wholesale Club Holdings (BJ 3.19%) reported outstanding fourth-quarter performance across many metrics last week. Comparable club sales, digital sales, income, adjusted EBITDA, and earnings all saw double-digit or even triple-digit growth percentages year over year.

Yet stock traders responded by immediately bidding BJ's share price down. Is this a warning sign, or is the company worth investing in?

Here's why the facts may support a bullish outlook.

What BJ's results look like

In its fourth-quarter fiscal 2020 results, BJ's Wholesale Club reported impressive growth in a number of metrics: 

Metric

Q4

Gain (YOY)

Fiscal 2020

Change (YOY)

Net sales

$3.86 billion

13.7%

$15.09 billion

17.1%

Membership fee income

$86 million

11%

$333 million

10.2%

Adjusted EBITDA

$204.5 million

36.1%

$581.6 million

47.4%

Adjusted EPS

$0.70

75%

$3.09

111.6%

Comparable club sales

N/A

15.9%

N/A

21.3%

Digitally enabled sales

N/A

168%

N/A N/A

Source: BJ's Wholesale Club corporate reports

Overall, BJ's beat Wall Street analyst consensus estimates in earnings per share (EPS) while missing somewhat on revenue. EPS scored an approximate 6% positive surprise, while revenue fell just short of estimates but still rose year over year.

Driven by COVID-19, expenses in the selling, general, and administrative (SG&A) category rose for both Q4 and all of fiscal 2020. Q4 SG&A expenses of $593.3 million represent a 10.7% jump year over year, while the full year's $2.33 billion in expenses rose 13% compared to 2019. BJ's noted the higher outlay originated from "costs associated with the coronavirus pandemic, including wage increases, bonuses, safety, and protective equipment and other operational costs, such as security."

Is the lack of guidance worrisome?

Following the report, BJ's stock price fell 1.09% by market close the same day. It fell another 1% in after-hours trading. The stock price has recovered somewhat since then, but its value is still hovering near six-month lows. Traders seem to have reacted negatively to BJ's decision not to offer 2021 guidance because of continued uncertainty from COVID-19.

Those considering whether to invest in the wholesale club company might wonder if the market was right to be skeptical about BJ's apparent lack of confidence. Additionally, while share prices are currently at almost their lowest level in the past six months, they are still very close to all-time highs.

A BJ's Wholesale Club membership counter with a customer signing up.

Image source: BJ's Wholesale Club.

The $39.10 per-share price BJ's stock closed at on March 5 is well above the previous historic peak of $30.66 registered on Sept. 3, 2018, shortly after its IPO, and even higher than more typical prices of $22 to $27 per share. The question of whether the company can manage significant growth above its current level, especially with the pandemic slowly winding down, is an important one for potential investors.

During the March 4 earnings conference call, BJ's CFO Bob Eddy provided more detail on the future. Eddy remarked that the company tentatively expects boosted demand through 2021's first six months, a situation he said "would imply high-teens double-digit stacked costs in Q1." He went on to note "we expect to give up some of the sales gains experienced in 2020 that resulted from increased consumption of food at home" but that accurate figures are impossible to even guess at. Membership growth is expected to be anywhere from flat to approximately matching a pre-coronavirus pace for the year.

While these expectations don't suggest upcoming runaway growth, Eddy went on to detail how the extraordinary pressures of COVID-19 drove the development of higher "membership quality" and business model efficiency in BJ's operations. Some of the points he highlighted include:

  • A 20% rise in memberships.

  • Improved membership renewal rates, ranging from a 200 to 1,700 basis point rise depending on membership type.

  • Digitally enabled sales more than 500% higher than at its IPO.

  • Four clubs opened in 2020, six openings planned for 2021, and 10 per year thereafter.

  • A debt-to-adjusted-EBITDA ratio that dropped from approximately three times to one time since 2018.

  • The company is branching out into other categories such as large appliances, cellphones, and home improvement, or strengthening an existing presence there.

Assessing BJ's future prospects

Investors were likely cautious both about the lack of 2021 guidance and about the possibility of the company's growth losing momentum in the post-COVID economy. The question facing those investing in consumer discretionary stocks is whether the caution is warranted, or if BJ's is still worth considering for your portfolio.

A BJ's Wholesale Club exterior.

Image source: BJ's Wholesale Club.

While BJ's could see growth notch downward somewhat as people increase in-person shopping amid vaccine rollouts, the company didn't simply ride the pandemic wave without improving its position.

Its greatly improved debt-to-adjusted EBITDA ratio is a particularly bright spot in its situation. Deleveraging from over three times to slightly more than one time shows its executives are giving thought to building in the strength and flexibility of their business. The strong improvement in the balance sheet means BJ's will have plenty of cash for investing in operations, adjusting to changing conditions, building up successful areas of the company, making stock buybacks, building out physical locations, or even making opportunistic acquisitions.

With an important slice of revenue coming from paid memberships, the boosted membership numbers and greater renewal rate will help BJ's maintain its gain and build more growth moving forward. Any temporary slowing of sales may well be offset by lowered costs due to no longer needing to deal with the pandemic, while the improved efficiency, greatly boosted digital presence, and expansion into new product categories are likely to drive more sales going forward.

Finally, the company is trading at approximately 12.5 times earnings, indicating it is hardly overvalued. While short-term fluctuations could make BJ's shares fall temporarily below their current level, the wholesale club has boosted its market share, improved its position and internal operations, and seems likely to see vigorous growth continue longer term. Overall, the latest quarterly and yearly report contains a lot of evidence pointing toward the company being a worthwhile pick for your portfolio, with its relatively low price now potentially representing a buying opportunity.

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