Shares of membership-based warehouse chain BJ's Wholesale Club (BJ +0.99%) were up 17.9% in May, according to data provided by S&P Global Market Intelligence. The stock was pretty cheap already going into the month -- and then the company reported strong financial results on May 23 that rallied investors.
The numbers for BJ's Wholesale's fiscal first quarter of 2024 weren't necessarily head-turning. Total Q1 revenue for the company was only up 4% year over year. And its earnings per share (EPS) slipped by $0.02 to $0.83. But both the top and the bottom line were better than what analysts had expected.
Q1 membership trends were particularly encouraging for BJ's Wholesale. Membership retention stayed strong at 90%. But members are also staying in the company's highest (more expensive) paid tier.
Some feared that members would trade down to cheaper options. However, 38% of members were in the highest tier in Q1, holding steady from the amount in the prior-year quarter.
NYSE: BJ
Key Data Points
As the final encouraging piece of news here, management for BJ's Wholesale reiterated its full-year financial guidance. The guidance implies same-store sales growth of 1% to 2%. And it also expects improvements to profitability compared to Q1. This was enough to cause the stock to rise.
The investing community celebrates
As a reminder, BJ's Wholesale has a business model that earns much of its profits from its memberships, not product sales. It sells a high volume of retail products at very low margins because it's trying to offer good deals. But its membership fees make up for the low-margin sales. This is why investors monitor membership trends so closely and why they were encouraged with Q1 results.
A bevy of analysts raised their price targets for BJ's Wholesale stock after looking through the Q1 numbers. One analyst for independent research firm Gordon Haskett was particularly bullish, calling it a "near flawless" report, according to The Fly.
Those are strong words, but it seems many investors share this belief, considering BJ's Wholesale stock was up so sharply during the month.
Is it a buy?
BJ's Wholesale expects to earn between $3.75 per share and $4.00 per share this year, meaning it trades around 22 times its forward earnings. That's not necessarily a screaming bargain, but it's a fairly reasonable valuation.
Investors shouldn't buy BJ's Wholesale stock only because they find it reasonably valued. Investors should also have a solid investment thesis for the long term.
I've noted that BJ's Wholesale makes the majority of its profits from memberships, and that's really the nucleus of an investment thesis here. The company needs its membership to increase, both by opening new stores and by driving membership at existing locations. It only has about 250 club stores and roughly 7 million members, which makes it one of the smaller membership warehouse chains.
Because it's small, membership growth appears achievable over the long haul for BJ's Wholesale. Investors just need to temper expectations, because growth does tend to be on the modest end of the spectrum.
