BJ’s Wholesale Club fiscal results demonstrate the true earnings potential of a membership club unburdened of stubborn and prideful marketing policies employed by the largest player in the membership retail space; policies that mandate the current market cap leader perpetually lose hundreds of millions annually on hot dogs & rotisserie chickens, endure tens of millions annually in losses for vanity stores located in China and suffer almost a billion annually of margin loss via retail gasoline subsidies for California residents.
Gross margins of 17.2% are the stuff that Costco shareholders can only dream of. Operating income rose to 4% of gross revenues. EBITDA in Q2 was $273.6 million and equaled a 5.4% net margin rate.
Fiscal 2022 guidance was raised by 8% at the low point, 9.2% on the average and 10.8% on the high end. Net adjusted earnings beat the street high end estimates by 10.4% and beat the street average estimate by a whopping 29.2%.
Annualized EBITDA looks quite capable of surpassing $1 billion in 2022, which will set records. This may better enable the valuation proposition of the common shares to, sooner rather than later, move beyond the $10 billion market cap, which is essential to support institutional buyers that require a company to be a large cap for inclusion into their portfolios.
Once the cap weight threshold is surpassed, BJ’s has the potential to be discussed by more investors as a compelling growth story.
The business model of BJ’s deserves attention from both investors and analysts: in the membership retail space, gross and net margins are clearly best in class.
Costco’s market cap is roughly 1X estimated fiscal 2023 sales, and those sales generate a gross margin of just a little better than 10%. Were BJs to ultimately be awarded a market cap similar to that of Costco; with an annualized revenue for 2022 of almost $20 billion, sporting a 68% higher gross operating margin than Costco, suggests the potential exists for a BJ’s market cap far in excess of the current valuation.
BJ’s does not own its portfolio of retail locations, differing from Costco. To me, that is the only pushback favoring Costco on an apples for apples comparative basis. Yet, should not ownership of the physical real estate, thereby eliminating hundreds of millions as a minimum, to as much as $2 billion globally, in annual lease charges; should these savings not result in Costco margin improvement on the opex column vs BJs?
The new store expansion program, given the profit increases reported by BJs, could lead to an acceleration of the 2023 plan.
It is feasible to envision BJ’s opening up as many new location in the next year as will Costco globally; at the very least certainly more than Costco intends to open in the United States. Costco expansion is deliberately slow, almost glacially so; the corporate preference at Costco seems to be that existing stores are crammed so full of customers, to the point that shopping becomes less than an experience, more something to be endured. While this should be optimal for margins, counter-intuitively in the case of Costco, due to visitations solely to overload on margin sapping loss leaders, it is not.
Provided that locations can be sited, there is no capital constraint preventing up to 20 new BJ’s warehouses commencing development for 2023.
There is also the matter of a lack of a dividend payout by BJ’s.
A growth oriented business, determined to punch above its weight, sporting good gross margins well above the cost of capital, better serves shareholders by applying operating cash flow towards expansion. BJs recently spent close to $376 million to add a logistic and cold storage business to the operation, over and above the 11-12 new store store locations planned for 2022. The cold storage division should be completely integrated and paid off later this year; this will free up capital for an acceleration of new store footprints, in the US south, heading into 2023; at least that’s what I envision.
Costco, in comparison, prefers to hold cash on account, pay a nominal regular dividend and once or twice a decade, offer up a special one-time dividend, rather than accelerate the warehouse footprint. Maybe with such unimpressive operating margins, that’s not an unwise decision.
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