BJ's Wholesale Club (BJ 22.73, +2.90, +14.61%) is trading sharply higher after reporting
Q3 (Oct) earnings results last night. The company is an east coast warehouse
club operator that is similar to Costco (COST) and Sam's Club. In late June
2018 the stock re-entered the public markets in an IPO. The stock had traded
publicly until 2011, when it was acquired by two private equity firms with the
goal of turning around the struggling retailer.
Over the last two years, the company hired Chris Baldwin as a new CEO and made multiple senior management hires and changes. This new management team has implemented significant cultural and operational changes, including transforming how it uses data to improve member experience, instilling a culture of cost discipline, adopting a more proactive approach to growing its membership base and building an omnichannel offering.
Since pioneering the warehouse club model in New England in 1984, it has grown its footprint to 216 warehouse clubs spanning 16 states. In its core New England markets, which have high population densities, BJ operates almost 3x the number of clubs compared to the next largest warehouse club competitor. BJ has been expanding south and west. Just yesterday, BJ announced it will be expanding to Eastern Michigan, opening two new clubs in 2019 in the Metro Detroit area.
Turning to the Q3 (Oct) results, non-GAAP EPS rose 56% yr/yr to $0.39, which was a good better than market expectations. Revenue (ex-Membership fee income) rose 4.3% yr/yr to $3.15 bln, which was in-line with market expectations.
Same store comps increased +3.6%. Excluding gasoline sales, merchandise comps were +1.9%, roughly flat with the +2.0% comps in JulQ. This represented BJ's fifth consecutive quarter of positive merchandise comps. Membership fee income increased 10.1% to $71.4 mln. Turning to guidance for FY18, BJ upped its adjusted EPS guidance to $1.22-1.26 from $1.17-1.24. Revenue guidance was upped slightly to $12.65-12.75 bln from $12.60-12.70 bln. Merchandise comp (excluding gasoline) guidance was increased slightly to +1.9-2.1% from +1.8-2.1%.
On the call, management said that membership and renewal rate trends continued to exceed its expectations despite a fee increase instituted earlier in the year. BJ expects to report that year-end membership and renewal rates will be at historic highs. BJ is particularly pleased with the success it's having in re-engaging lapsed members as BJ has focused on reaching out to previous members and showcasing the chain's transformation.
As part of its transformation, BJ has improved its general merchandise assortment. Its apparel business continues to benefit from getting better at offering the latest trends and seasonal apparel at unbeatable prices. In Q3, apparel grew by double-digits. Earlier this year, BJ invested and improved TV signals to its clubs, allowing it to better display high-def 4K TVs. As a result, BJ saw strong TV growth in the quarter and clubs with the improved signal saw double-digit comp increases. This bodes well for a good Black Friday performance in TVs.
Earlier this year, BJ relaunched its health and beauty category with a more focused assortment and enhanced marketing. BJ reduced diapers, wipes, and training pants by approximately 30%. It used the freed-up space to create a convenient one-stop location of items including toys, baby food, car seats, and formula. This is a key category for many of BJ's newest members who are just starting families. The company has also been improving its omni-channel capabilities. Over the past year, BJ launched an app, digital coupons, buy online pick up in-club, same-day grocery delivery, and most recently, next-day tire installation.
In sum, this was BJ's second quarterly report since re-entering the public markets. Last quarter in JulQ, the stock saw a muted reaction, but investors are much more excited about the OctQ results. BJ notes that it's still in the very early stages of its transformation. But there was clear progress in OctQ. The stock has been under pressure since early September when it briefly traded above $32, it closed yesterday just under $20. That tells us investors were nervous about this OctQ report, but the numbers came in better than expected. The turnaround will take some time, but this report was a step in the right direction.
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