BJs Wholesale Club Holdings Inc. (BJ-$43.10, NYSE) Reports New Membership Growth of 630,000 for the 3rd Quarter of 2020.

New market penetration appears to be quite successful in Michigan.

The company is now guiding towards potential new store openings in 2021 throughout the chain; a minimum of 6 stores and potentially up to 10 are envisioned. This would represent a store growth rate of 2.7% and as much as 4.5%. The projected store opening growth rate, if accurate, may be 2X that of Costco for 2021.

Given the comparative sales performance and the significant free cash flow being thrown off from operations, management seems interested in growing the store base at an even faster pace, provided that real estate can be found. BJs, to date, prefers to lease locations whereas Costco prefers to buy sites and develop. Costco also prefers to build stand-alone sites; BJs looks for sites with key tenants adjacent to the store.

There are two drivers, in my opinion, of the investment thesis on membership club operators such as Costco, Sam’s Club (wholly owned by Walmart) and BJs.

1. Given my interpretation of US population density maps, there does not appear to be the slightest bit of saturation in the United States for this retail format. At the present, I estimate that a minimum of 400 viable locations for the big box membership retailers presently exist. Costco has slowed its US store opening growth rate significantly; the company intends to build out new international markets to the point that economies of scale may lead to margin improvements overseas. Sam’s Club, in contrast, has not grown its store base by any appreciable amount in the last several years; they purged roughly 10% of its store base, through closures, a few years back. This suggests that a very large market still exists for the BJs format to penetrate. A potential doubling of the BJ’s store base over a ten year period, given the slowdown in openings by competitors is entirely doable.

2. I believe that the retail market is demonstrating a bifurcation in its major formats; Covid-19 may have sped up a trend well underway. No longer can customers simply appear at every physical store, be able to walk in and procure whatever they wish, whenever they wish; products supplied to no-fee formats might be lower in quality or be scarce in supply. Are shortages a temporary blip in modern consumer retail, or are they, in fact, a new reality based upon the segmentation of the consumer base? I have my own suspicions.

If I was a retail analyst, I’d be predicting a continued expansion of the membership model, well beyond the current small list. Do you want “presorted first-grade lumber that is flat and crack free? Do you want the top of the line roofing shingles? Do you want plank flooring made in the USA free of toxic glues? Then join the Home Depot Prime Membership Club….sometime in 2021”. Consumer products manufacturers increasingly covet the membership retailers; it is just smart business. Membership stores purchase the highest quality SKU first; ONLY when they have taken as much product as may be consumed, do manufacturers then ship to other retail formats where certainty of payment may be questionable, shelf placement fees reduce profit margins and manufacturers are forced to absorb a portion of shrinkage, due to theft, in retailer agreements. Every retailer in the USA, and likely beyond, is working through their SKU, sorting through the most desirable and most scarce items, to determine how those items might be bundled into an annual membership package. If they aren’t, then the marketing executive at those corporations need to be let go.

In order to obtain supply certainty or access higher quality products and services, a large percentage of consumer households have ALREADY PROVEN the viability of retail membership models. Consumers are increasingly accustomed to paying annual fees for Amazon Prime memberships, Netflix memberships, Disney streaming and are unperturbed when it comes to holding multiple paid memberships for, more or less, similar offerings. Why wouldn’t this also apply to big box consumer retailers?

BJs, by way of example, within an 18 month timeframe, increased the overall paid membership base by exactly 20%. True, a 20% 18 month customer growth rate lacks the appeal of blistering increases posted by media companies such as Netflix; however, BJs’ increase, in a supposedly stodgy consumer retail category, seems to be an emphatic rebuttal of the “physical retailers are dead” obituaries put forth by many in the professional investment industry. The growth in new memberships reported by BJs, and the demographic skew of the new members (largely millennials) implies that the format of BJs is catching on with the younger consumer.

With almost 3 decades of history supporting the success of membership clubs, this seems to be a clear secular trend and an accelerating one at that. Most analysts are presently predicting this to be the peak in the trend. I’ll only note that determining peaks, when still climbing and not yet seeing the summit, is nothing more than guesswork. If they are wrong, it could imply that the potential number of viable locations suitable, for large format consumer suppliers such as Costco, BJS and Sam’s Club, may be almost 100% larger than the current total US store count. Alternatively, this could also mean that ultimate profitability, per retail location, may be higher than previously estimated.

BJ’s market capitalization is well below the minimum valuation required to be included in the many large cap indexes. The threshold price is about $72 per share, given the present number of shares outstanding, before the company would be deemed a smallish large cap retailer.

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