BJ's Wholesale Club Earnings Call

This report contains an analysis of the latest financial reporting from BJ's Wholesale Club - BJ. The earnings report is for the first quarter of 2024, and the report was shared on an earnings call on May 23, 2024.

Company Report & Outlook

Comp Sales Reporting in Q1 2024 Earnings Call

During BJ's Wholesale Club's Q1 2024 earnings call, the company reported the following regarding comparable (comp) sales:

Comp Sales Growth:

* Comparable club sales, excluding gas sales, grew by 0.6% in the first quarter. This performance was noted as particularly significant given the tough comparison to last year’s high inflation dynamics.

Traffic Contribution:

* Strong traffic was a major driver, contributing 3 percentage points to the comp sales in the quarter, maintaining a trend similar to the fourth quarter of the previous year.

Inflation and Unit Volume:

* Inflation was about flat during the quarter.

* There was growth in unit volumes, especially in the perishables, grocery, and sundries divisions.

Performance in Perishables, Grocery, and Sundries:

* The perishables, grocery, and sundries division experienced comp growth of over 1%.

* The strongest growth within this division was in perishables, particularly in unit volumes, led by categories such as fresh produce and dairy.

General Merchandise:

* The general merchandise segment delivered a slightly negative comp in Q1.

* Weather-sensitive categories had a significant impact, with about a 10-point variance in performance across markets with different weather conditions.

* Despite these challenges, specific categories like consumer electronics, apparel, and home textiles showed positive comp growth. Home categories, including home textiles, experienced nearly 7% comp growth, turning positive for the first time in a while.

Overall, BJ's Wholesale Club highlighted continued momentum and strong comp sales growth, supported by robust traffic, unit growth, and strategic initiatives despite a challenging retail environment.

Analysis

Current State of BJ's Wholesale Club

Membership and Market Share Growth:

* Membership Fees: The company saw robust growth in membership fees by 8.6% year-over-year.

* Market Share: Continued growth in market share, particularly in perishables, grocery, and sundries.

* Renewal Rate: Exceptionally strong at 90%.

* New Memberships: Growth was driven significantly by digital platforms.

Sales and Traffic:

* Comp Sales: Comparable club sales excluding gas grew by 0.6% in Q1 despite difficult comparisons due to last year's inflation.

* Traffic and Unit Growth: Strong traffic trends contributed positively to sales, with a noted increase in unit growth particularly in perishables like fresh produce and dairy.

* General Merchandise: Faced challenges due to weather-sensitive categories but reported positive comps in consumer electronics and apparel, with a notable 7% growth in home categories.

Digital Engagement:

* Digitally Enabled Sales: Continued double-digit growth in digital sales, with a 21% year-over-year increase in digitally enabled comp sales.

* Convenience Initiatives: Enhanced digital capabilities like buy online, curbside pickup, and inventory management improvements to further assist shopping convenience.

Gasoline Business:

* Traffic Driver: Gas promotions and value offerings drove traffic, leading to a 6% growth in comp gallons sold, outpacing the down-trending broader U.S. market.

* Profit Margins: Faced margin headwinds in Q1 due to rising costs, but expected to recover in Q2.

Financial Performance:

* Gross Margins and SG&A: Merchandise gross margin rate slightly decreased. SG&A increased year-over-year due to new openings and strategic investments.

* Overall Financial Health: Ended the first quarter with strong inventory management, balancing new unit growth and strategic investments.

Future Outlook

Strategic Priorities:

* Member Loyalty: Focus on increasing the quality and quantity of memberships, with an emphasis on high-spending, high-loyalty segments.

* Shopping Experience: Continuous improvement through initiatives like Fresh 2.0 to enhance the quality and selection of fresh produce.

* Digital and Convenience: Further development of digital tools to streamline shopping and increase member satisfaction.

* Footprint Growth: Aggressive expansion with 11 new clubs expected in H2 of fiscal 2024 in both new and existing markets.

Growth Projections:

* Comp Sales Guidance: Expect comp sales growth to range between 1%-2% for fiscal 2024 with improved performance in the back half of the year.

* Gross Margin Expansion: Anticipates a 20 basis point improvement in merchandise gross margin rate for the year driven by cost management and own-brand growth.

* Membership Fee Income: Although Q1 showed high growth, the company expects a moderate but steady increase throughout the year.

Industry and Economic Context:

* Consumer Sentiment: Acknowledgement of consumer discretion in spending and a focus on high value and essential items.

* Competitive Landscape: Awareness of competitive pricing actions but confidence in BJ’s intrinsic value proposition and strategic promotional efforts.

Guidance

The leadership team at BJ's Wholesale Club provided the following specific guidance for investors regarding their business:

* Comparable Sales: They expect fiscal 2024 comparable sales, excluding gas, to range from 1% to 2%. They anticipate an improving performance as the year progresses, with a particularly strong performance expected in the back half of the year.

* Inflation: They are assuming a slightly inflationary year, with a robust consumable business led by traffic, units, and market share.

* Membership Fee Income: The company noted that the year-over-year membership fee income increase of 8.6% in the first quarter will probably be the highest growth rate for the year. However, they anticipate it will continue to grow but at a more moderate rate.

* Merchandise Gross Margin: They forecast an improvement in the merchandise gross margin rate by approximately 20 basis points for fiscal 2024, driven by strong cost management and continued growth in their own brands.

* SG&A: Continued SG&A deleverage is expected as they invest in growth initiatives, particularly in unit growth as new club sales ramp up over a multi-year period. They are also lapping variable compensation tailwinds from fiscal 2023.

* Tax Rate: They are planning for an effective tax rate of approximately 28% for the remaining three quarters of the fiscal year.

* EPS Guidance: The company continues to expect to deliver adjusted earnings per share (EPS) in the range of $3.75 to $4.00.

* Expansion: BJ’s plans to open 11 more clubs in the back half of the fiscal year 2024 in both new markets like Louisville, Knoxville, Southern Pines, and Myrtle Beach, as well as existing markets like New York metro and Florida. They also mentioned ongoing investments into their existing footprint with upgrades and remodels.

* Gasoline Business: While the first quarter faced margin headwinds due to rising costs, they expect the gasoline business to recover somewhat in the second quarter. They remain confident in the overall profitability and growth potential of this segment on an annual basis.

This guidance provided the investors with a clear outlook on how BJ's Wholesale Club expects to perform financially in the coming months and outlined the strategic initiatives they are pursuing to ensure continued growth and return on investment.

Change Since Last Quarter

Comparative Analysis of BJ's Wholesale Club Earnings Reports

The recent earnings report shows continued growth in membership, digital sales, and market share, with a particular emphasis on digital engagement and convenience improvements. Challenges in general merchandise and gasoline margins were noted, but the outlook remains positive with strategic expansions and new club openings. The previous report emphasized membership growth and long-term value, with concerns about disinflation affecting perishables. Both reports highlight investments in digital capabilities and a steady focus on member loyalty and expanding the company’s footprint.

Analyst Response

Analysis

Key Topics from Analysts' Questions

* Membership Fee Income (MFI) Growth:

* Analyst: Peter Benedict (Baird)

* Topic: Why MFI growth is expected to step down after Q1 and whether BJ's leadership is considering increasing membership fees given the strong performance.

* Inventory and Merchandising Margins:

* Analyst: Peter Benedict (Baird)

* Topic: Efforts in getting inventory in line, its progress, and expectations for merchandising margins through the year.

* Promotional Environment and Pricing Actions:

* Analyst: Kate McShane (Goldman Sachs)

* Topic: Current promotional environment and how BJ's is addressing competitive pricing actions to maintain their competitive price gap.

* Discrepancy between MFI Growth and Club Growth:

* Analyst: Simeon Gutman (Morgan Stanley)

* Topic: Drivers behind the high MFI growth and its sustainability, especially with new club openings throughout the year.

* New vs. Existing Member Spending:

* Analyst: Simeon Gutman (Morgan Stanley)

* Topic: Comparison of spending habits across different product categories between new and existing members.

* New Market Clubs Performance:

* Analyst: Robby Ohmes (Bank of America)

* Topic: Performance of new market clubs versus expectations and reasons behind any observed differences.

* Fresh 2.0 and Coolers Initiative:

* Analyst: Robby Ohmes (Bank of America)

* Topic: Details about the Fresh 2.0 initiative and the impact of placing coolers at the front of clubs.

* General Merchandise and Seasonal Categories:

* Analyst: Chuck Grom (Gordon Haskett)

* Topic: Dynamics within the general merchandise segment and the impact of seasonal categories, including services and ancillary products.

* Gross Margin Expansion Drivers:

* Analyst: Chuck Grom (Gordon Haskett)

* Topic: Future drivers of gross margin expansion including inventory management, SKU rationalization, and own brand efforts.

* Gasoline Segment Profits:

* Analyst: Greg Melich (Evercore ISI)

* Topic: Decline in gas profit margins and expectations for improvement.

* Impact of Credit Card Transition:

* Analyst: Greg Melich (Evercore ISI)

* Topic: Effects of last year’s credit card transition on current margins, overall sales, and SG&A.

* Monthly Sales Trends:

* Analyst: Michael Baker (D.A. Davidson)

* Topic: Monthly sales trends within the quarter and their relationship to comp expectations throughout the year.

* Income Cohort Performance:

* Analyst: Edward Kelly (Wells Fargo)

* Topic: Performance of different income cohorts, especially the improvement in spending among lower-income members.

* Unit Improvement and Own Brands:

* Analyst: Chuck Cerankosky (Northcoast Research)

* Topic: Unit sales improvement indicating overall club performance and impact of own brand sales on comps and margins.

Key Themes

Here are the key terms and phrases used by the BJ's Wholesale Club executives in the earnings call:

* Membership fee income (MFI) - This refers to the revenue BJ's earns from membership fees, which is a key driver of their business.

* Comparable club sales/comps - This measures the sales growth at stores open for at least 13 months, excluding the impact of gas sales.

* Perishables, grocery and sundries - This is a key division of BJ's business focused on food and everyday household items.

* General merchandise - This refers to the non-grocery/household items like electronics, apparel, home goods etc.

* Fresh 2.0 initiative - This is a program to improve the quality, selection and presentation of BJ's produce offerings.

* Own brands (Wellsley Farms, Berkley Jensen) - BJ's private label brands which they are focused on growing as they offer higher margins.

* Digitally-enabled sales - Sales driven through online/app ordering and services like curbside pickup.

* Merchandise gross margin - The profitability on the merchandise BJ's sells, excluding the gas business.

* Strategic priorities - The four key focus areas for BJ's: member loyalty, unbeatable shopping experience, value convenience, and footprint growth.

The executives highlighted the company's strong membership growth, gains in market share, improvements in merchandising, and continued investment in digital capabilities as key drivers of their business performance.

Financial Reporting Summary

* Net Sales: Approximately $4.8 billion, growing 4% over the prior year.

* Comparable Club Sales: Up 1.6% year-over-year, led by gallons sold.

* Merchandise Comp Sales (excluding gas sales): Increased by 0.6% year-over-year and by 6.3% on a two-year stack.

* Digital Sales: Digitally enabled comp sales for the first quarter grew 21% year-over-year and 40% on a two-year stack.

* Membership Fee Income (MFI): Grew 8.6% to approximately $111.4 million.

* Gross Margins:

* Merchandise gross margin rate (excluding gasoline) decreased by approximately 50 basis points year-over-year.

* Expected merchandise gross margin rate improvement of approximately 20 basis points for fiscal 2024.

* SG&A Expenses: Approximately $721.8 million, with a year-over-year increase attributed to new unit growth and other investments.

* Adjusted EBITDA: $236.4 million for the first quarter.

* Effective Tax Rate: 24.4% for the quarter.

* Adjusted Earnings Per Share (EPS): $0.85, flat year-over-year.

* Inventory: Ended the first quarter with inventory about flat year-over-year.

* Net Leverage: Ended the first quarter with 0.6 turns of net leverage.

* Share Repurchases: 405,000 shares for $30.2 million, with $159 million remaining under the current authorization.

* Guidance for Fiscal Year 2024:

* Comp sales, excluding gas, expected to range from 1% to 2%.

* Merchandise gross margin rate expected to improve by approximately 20 basis points.

* Effective tax rate of approximately 28% for the remaining three quarters of the fiscal year.

* Adjusted EPS expected in the $3.75 to $4 range.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit theearningscall.substack.com