Solid BJ's Earnings Could Be Spoiled By Weakening Retail Sales

About: BJ's Wholesale Club Holdings, Inc. (BJ)
by: MTS Insights

BJ's Wholesale Club posts another earnings beat but year-over-year revenue growth decelerated from 3.6 percent to 2.8 percent.

BJ's took steps to increase its digital footprint in 2018, but it still lags behind major retailers like Amazon and Walmart.

The most recent retail sales report suggests consumer spending might be weakening which could be trouble for BJ's as a retailer with little market share.

On March 6th, BJ’s Wholesale Club (BJ) came out with their 2018 Q4 earnings. The large U.S. retail company had been benefiting from the stock market’s broad-based rally at the beginning of the year before stalling in February. On earnings day, BJ reached its 2019 high of $28.11 but subsequently fell on intraday movement. At close on March 8th, investors price BJ stock at $24.75 breaching both the 50-day and 200-day simple moving averages. From a technical analysis view, sentiment appears bearish after testing resistance around $27. However, what does the recent earnings report have to say about the fundamental condition of the stock?

From Finviz

BJ’s Wholesale only recently returned to the public market in 2018. For that reason, the company has only 3 reported earnings. All three have been relatively tame with steady EPS growth and moderate surprises over Wall Street estimates of income and revenue. However, there was slightly softer year-over-year sales numbers. 2018 Q4 net sales growth was 2.8 percent compared to 3.6 percent and 4.3 percent in the quarters before. A similar trend was observable in year-over-year EPS growth (22.2 percent vs 56.0 percent).

A large part of BJ’s optimism came from its positive membership numbers. In the 2018 Q4 conference call, management reported that the company has reached a new all-time high of membership fees paid of $5.5 million as well as a new record renewal rate of 87 percent. These numbers came in even though the company increased the membership price at the beginning of the year. Solid membership numbers bodes well for BJ’s longevity as it shows that demand for the store is robust even in the face of a rising entry fee. However, it’s worth noting that the “subscription” model is one well known by younger consumers (a segment leadership is trying to attract), and if BJ’s can continue to communicate the value it provides over competitors, it can continue to succeed in a tough retail industry.

Another bright spot for BJ’s has been its substantial improvement in operating margin over the three quarters. 2018 Q4 operating margin came in at 3.22 percent, 40 basis points higher than the 2018 Q3 operating margin of 2.8 percent. Despite softer revenue growth, BJ’s executed successful cost cutting strategies to improve their profitability. CEO Christopher Baldwin attributes these improvements to the recent “assortment transformation” which sought to optimize the layout and structure of certain departments within the store. General merchandise comps were up 5 percent with positive comp growth in each individual division. The increased profit margin of 3.2 percent pulls it closer to the major retail competitors: Target (TGT) at 4.4 percent, Walmart (WMT) at 4.03, and Costco (COST) 3.43 percent.

However, if BJ’s wants to be a big competitor in the “new” retail industry, it will need to be more aggressive in the e-commerce arena. The company has recently established a “Buy Online, Pick Up In-Club” option to compare with Walmart’s strategy but has yet to release participation numbers. Investors should hope to see high double digit growth when that category starts getting reported. Otherwise, opportunities to grow revenue at an accelerated pace. Otherwise, BJ’s might have to settle for a retail subsistence as brick-and-mortar shopping threatens to fade away.

From Census Bureau

BJ’s revenue aside, recent retail numbers suggest there could be some tightening in demand in 2019. The December 2018 report came in a little late due to the government shutdown and showed that retail sales (excluding motor vehicles & parts & gasoline stations) fell 1.3 percent from November 2018. The disappointing numbers suggest that the U.S. consumer buckled down on excess spending in the holiday month, a period usually associated with excess. While retail sales were still up 2.2 percent year-over-year, that reported growth was half of the 4.4 percent year-over-year growth reported in November 2018. Since BJ’s has a membership fee and a smaller share of the retail market, any type of tightening in consumer spending will have an effect on the company.

The retail sector is extremely saturated. BJ’s earnings numbers have been solid for the first three quarters, but the most recent year-over-year revenue growth has shown signs of deceleration. Perhaps most optimistic is the record membership renewal rate that suggests consumers do find value in what BJ’s has to offer, especially after its new “assortment transformation” and attempts to go digital. Investors should focus on this number and membership incomes as it will be a leading indicator of revenue movement especially as retails sales start to weaken. At the moment, there are probably better retail picks like Walmart or Costco. Investors seem to agree as over the past 5 days, BJ trades 3.36 percent lower and Walmart and Costco trade 0.36 percent lower and 3.82 percent higher. For that reason, BJ should probably be rated at hold and potentially a sell if renewal rate numbers are negative next earnings.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.