Company Reports

Despite operating amid a fiercely competitive retail industry in which price competition is pertinent and customer switching costs are virtually nonexistent, BJ’s Wholesale has managed to protect its position as a regional retailer along the East Coast. BJ’s is one of the few major warehouse club chains in the US, a business model that is predicated on stringently managing costs and driving strong sales volume per store. The firm attempts to keep its costs lower than nearby food retailers by maintaining a frugal store environment and operating a streamlined distribution process. For instance, BJ’s limits where possible the use of distribution centers and it stores large quantities of inventory on pallets located directly on the sales floor (we estimate BJ’s warehouses average about 100,000 square feet). The company also minimizes distribution complexity and enhances its procurement scale on select items by offering a limited assortment of just 7,000 stock-keeping units (or SKUs) per store, often in bulk quantities. This lands well below the typical 40,000 and 100,000 SKUs offered by supermarkets and mass retailers, respectively. Due to its strict cost management, BJ’s typically keeps its selling, general, and administrative expenses at around 14%-15% of sales versus about 20% for most traditional food retailers.

No-moat BJ’s Wholesale delivered solid second-quarter results that landed closely in line with our expectations. Comparable sales growth of 2.4% modestly outpaced our 2% forecast and was led by strong traffic gains as the firm continued attracting value-conscious shoppers to its warehouses. Notably, BJ’s comp growth exceeded annual food-at-home inflation, which has averaged about 1% for the past three months. Management noted that traffic has improved for 10 straight quarters and cited a 9% increase in membership fees, with the bulk of fee income growth appearing to stem from its existing store base. We were also encouraged to see an uptick in BJ’s premium membership penetration, which reached 39% of total members (up from 38% at the beginning of the year and 28% in early 2020). We think this bodes well for the firm’s ability to capture larger wallet share with its most loyal customers, which typically allocate more dollars to BJ’s. Despite the positive results, shares suffered a 7% decline as we surmise investors were looking for management to issue a more favorable outlook for the full year. Instead, management reiterated its guidance for fiscal 2024 that consists of 1%-2% comp growth and EPS of $3.75-$4.00, both of which are consistent with our forecast (we currently model 2% comp growth and EPS of $3.99). We don’t plan to materially alter our $63 fair value estimate. Shares currently strike us as significantly overvalued, and we encourage investors to wait for a better entry point.

Despite operating amid a fiercely competitive retail industry in which price competition is pertinent and customer switching costs are virtually nonexistent, BJ’s Wholesale has managed to protect its position as a regional retailer along the East Coast. BJ’s is one of the few major warehouse club chains in the US, a business model that is predicated on stringently managing costs and driving strong sales volume per store. The firm attempts to keep its costs lower than nearby food retailers by maintaining a frugal store environment and operating a streamlined distribution process. For instance, BJ’s limits where possible the use of distribution centers and it stores large quantities of inventory on pallets located directly on the sales floor (we estimate BJ’s warehouses average about 100,000 square feet). The company also minimizes distribution complexity and enhances its procurement scale on select items by offering a limited assortment of just 7,000 stock-keeping units (or SKUs) per store, often in bulk quantities. This lands well below the typical 40,000 and 100,000 SKUs offered by supermarkets and mass retailers, respectively. Due to its strict cost management, BJ’s typically keeps its selling, general, and administrative expenses at around 14%-15% of sales versus about 20% for most traditional food retailers.

We're initiating coverage of BJ's Wholesale Club with a $63 fair value estimate and a no-moat rating. BJ's maintains a regional footprint, with more than 240 stores located in densely populated cities along the East Coast. Akin to its larger warehouse club peers (such as wide-moat Costco and Sam's Club), the firm's business model is predicated on stringent cost management and operating efficiency. As such, BJ's maintains a frugal shopping environment designed to keep costs lower than its vast competitive set. For instance, the firm streamlines its distribution processes by limiting the use of distribution centers and storing large quantities of inventory on pallets located directly on the sales floor. The firm also builds procurement scale on select items by offering a limited product assortment of just 7,000 stock-keeping units, or SKUs, per store, well below the 40,000 and 100,000 SKUs that are typically offered at supermarkets and mass merchandisers, respectively.