BJ's Wholesale Club: Taking A Breather, Still A Long-Term Gem

Summary

• BJ's Wholesale Club Holdings, Inc. stock is in a consolidation phase, but long-term prospects remain strong.
• Sales and margins in Q2 showing positive trends, with net sales up 5.0% and gross margin expanding.
• Despite positive results, the stock price may dip due to unchanged guidance, with one critical exception you need to know about.
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Mina De La O

BJ's Wholesale Club Holdings, Inc. (NYSE:BJ) in our view is taking a breather. Some healthy consolidation, really. We think the long-term story remains intact, and future weakness is worth considering. For now, we remain at “hold,” but if the price dips into the $70s, it is worth considering.

As a reminder, if you do not have a BJ's club in your area, this is like a warehouse type store chain. The company operates hundreds of membership-only clubs in well over a dozen states. You may be familiar with larger players like Walmart Inc.'s (WMT) Sam's Club and Costco Wholesale Corporation (COST).

While this may be a smaller player on the field, BJ's is a slow and steady grower. Let it consolidate and then consider some buying. Operationally, the company is sound, though the company has seen increased costs with inflation and has largely passed that on to its consumers.

The company just reported Q2 earnings. In our opinion, the report was positive, though is being once again treated by the market as mixed, which we attribute to the lack of raising guidance despite slight beats on the top and bottom lines. Let us discuss the results.

BJ's Wholesale Club sales and margins

Anytime we examine the performance of any retailer, we care about trends in sales as well as margins, looking to see if they are contracting or expanding. Margin compression is almost always a negative, but can stem from either inventory promotions, higher costs, or both, generally speaking. But with retail, it's all about sales (and really comparable sales) and margins. When comps are negative, we almost always pass on the stock. That said, net sales for BJs were up from a year ago by 5.0% to $5.21 billion. This also beat the consensus estimates by $60 million, and was a sequential improvement from $4.92 million in Q1.

Comps are strong here. The sales increase was driven by yet another positive comparable sales figure. A lot of this is driven by fuel and the pricing there. Including gasoline, total comparable club sales were up by 3.1% year-over-year. If we back out the impact of gasoline sales, comparable club sales still increased by 2.4%. This is positive. Further, digitally enabled comparable sales growth through online/app sales were up 22.0% year-over-year, too. Sales are firing on all cylinders in our opinion. But what about those margins?

In terms of margins, we love to see expansion in these key metrics. Sales were up, which is usually positive for changes in gross margin and profit. But if margins are down, gross profit can fall even on higher sales. Gross profit increased to $883.4 million from $$880.0 million in the year ago quarter. Gross margin, looking at cost of sales to total revenues here, was 18.4%. Last year this metric was 18.1%, so there was some expansion here compared to last year. Gross profit increased to $956.6 million from $896.8 million a year ago. Merchandise gross margin rate, which excludes gasoline sales and membership fee income, also increased by 10 basis points versus last year. Stellar overall.

Now, it is worth noting that selling and administrative expenses also rose substantially to $750.3 million from $695.0 million a year ago. As such, income from continuing operations did rise. Income from continuing operations increased to $190.9 million compared to $184.0 million last year. Adjusted EBITDA increased by 4.9% to $281.3 million versus $268.1 million in Q2 2023. Perhaps unsurprisingly, net income also rose to $145.0 million compared to $131.3 million a year ago. On an EPS basis, earnings were better than expected by $0.08, hitting $1.09, up $0.10 from a year ago.

Forward view

So we have higher sales, and this quarter there was some margin expansion. In the sequential Q1, there was compression. For H1 2024, margins are down about 20 basis points. Now, with sales and EPS being better than expected, this is a positive.

However, what really had the Street looking at this as mixed, was that guidance was not increased despite the beat. So the outlook is unchanged. Comparable club sales, excluding the impact of gasoline sales, are seen increasing 1% to 2% year-over-year. Now here is one thing that was a bit hidden. Previously, merchandise gross margins are seen improving approximately 20 basis points year-over-year, while adjusted EPS is seen at $3.75 to $4.00 for the year.

While BJ's Wholesale Club Holdings, Inc. EPS was maintained, the margins were revised to be flat from last year. This is why the stock is down. It is not awful news, but explains why EPS was not raised despite two quarterly beats in a row. Overall, we think a correction to the $70s is where you can consider buying here.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in BJ over 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.