BJ’s Wholesale, the third largest and fastest growing membership wholesale retailer in the United States, reported a fiscal result that indicates the benefits of an inflationary tailwind for any company selling a disproportionate percentage of groceries in their revenue mix.
For the 4th quarter ended January 28th, 2023 revenues were reported at $4.93 billion, up 13.1% from the $4.36 billion in the prior year. Gross margins were 18.32% in Q4, up marginally from 18.29% in the prior year. Q4 EBITDA margin was 5.5%, up from 5.25% in Q4 2021. Net income increased by 20.7% and on an EPS basis, with a lower share count, was reported at $.95 per share vs $.80 per share in the prior year’s fiscal quarter.
For fiscal 2022, revenue by 15.9%, operating income grew by 19.5%, EBITDA increased by 18% and net income grew by 20.3%. EBITDA surpassed $1 billion for the first time in corporate history.
The fiscal 2023 forecast indicates a slower expected level of growth ahead.
BJ’s is guiding for same store sales growth of 4%-5%, below my expected level of core inflation. However, gross margins are expected to improve by as much as 40 basis points which suggests that overall margins may advance by 7.3% overall in 2023. Reading between the lines, the forecast increase in margins, coupled with below normal sales growth overall, suggests that BJ’s management is banking on further reductions in discretionary item purchases (electronics, jewelry and clothing) during 2023, which will be more than offset by grocery margin pickup.
Capex is anticipated to grow by 21.6% over 2022, a year in which BJ’s opened up 11 net new membership warehouses, (237 vs 226 in 2021).
In 2022, BJ’s applied capex towards the building of a new corporate office and worked to integrate the acquisition of the Burris cold storage facilities. With virtually all of the new capex plan for 2023 destined to be invested in warehouse locations, I expect as many as 13-14 new proposed locations may ultimately be announced in the coming year. 5 new proposed locations have been noted in the first three months of 2023. On a percentage basis, this warehouse growth plan in the United States exceeds the planned square footage growth proposed at either Costco or Sam’s Club. BJ’s fiscal year differs from the calendar year, and in calendar 2023, a total of 8 locations have thus far been either opened or proposed.
Recently, BJ’s caught Costco napping by opening their first location in the greater Nashville, TN area.
The region is highly coveted by Costco and was considered to be one of their strongholds in the US southeast. Greater Nashville, for the past dozen years, has consistently been the 4th fastest growing metropolitan region of the US, behind Austin, Orlando and Raleigh-Durham. But, the company dropped the ball by withholding expansion capital and dithering on growth plans. Costco takes roughly 2x to as much as 3X the time to acquire land and build a warehouse as does BJ’s. The reason lies in the corporate policy of Costco to attempt to extract concessions from municipal governments in the form of discounted sites, preferential zoning and/or tax concessions; typically Costco demands all of the above. These negotiations sometimes drag out for years prior to any breaking of ground. Costco has been thrashing out details on a new Henderson warehouse with Tennessee local officials, for the past 7 years, without so much as a final agreement signed. The corporate policy of Costco with cities and communities is: “you need a Costco more than Costco needs you“.
In contrast, BJ’s, with a much higher profit margin earned on sales, has the ability to enter new markets without grinding down local politicians on potential subsidies. A second Tennessee location has subsequently been announced and BJ’s management feels that up to 6 Tennessee warehouse may be opened up as quickly as locations can be sourced. Were Costco to operate the per capita number of stores in Tennessee as they do in California, adjusted for per state income levels, there should presently be a total of 20 Costco warehouses in Tennessee; yet only 6 locations exist in the state. In summation, Costco took the region for granted, was far too heavy handed with local negotiations on proposed sites and now Nashville is fully up for grabs.
BJ’s will also enter the Alabama market in 2023.
Madison, Alabama is the first proposed location in that state and this location will set the stage for full expansion into metropolitan Huntsville.
The membership warehouse market is heating up and some players are getting quite testy.
Sam’s Club is currently the largest US membership warehouse operator, to the surprise of certain investors. Sams’s Club has reported 3 consecutive years of double digit digit revenue growth, all coming via store sales as no new warehouses were built for more than 5 years. On the heels of that success, Sam’s Club has announced a capital plan to grow the US store count by about 30 new locations in the coming three years. BJ’s, in the coming 36 months, has the determination, the forecast cash flow and a nimble management prepared to open up as many as 45 new locations.
Costco, in contrast, had shifted focus from US expansion to overseas expansion. Costco management recently indicated that a minimum of 15 locations per country are required prior to any economies of scale kicking in. What then, is the shareholder benefit underscoring Costco’s decision to operate a solitary location in remote Iceland, an island nation with less than 400,000 persons that cannot justify even a second warehouse, while leaving the 4th fastest growing metropolitan region in the United States woefully understored?
With lower same store growth rates in the US than either of the competing players, Costco finds itself in a completely uncomfortable situation; at present, the company is the slowest growth US warehouse retailer on a same store sales basis. They don’t like it one bit, but with the lowest reported gross margins and net margins of the three membership warehouses, Costco lacks the capital to continue international expansion, while increasing domestic expansion, without levering the balance sheet.
Whereas Costco, the high cost warehouse operator, dithers, BJS continues to forge ahead.
BJ’s customer base is considerably younger than the competing membership warehouses and it would seem, based upon the demographic skew, that the BJ’s format captures a sector of the population overlooked by Costco and Sam’s Club.
The product mix skews more towards groceries at BJ’s than either Costco and Sam’s Club and groceries represents the current and only sweet spot in consumer retal. BJ’s is much smaller, but after accounting for the size differential, fiscal reports confirm that BJ’s both outgrows and out-earns the two larger membership warehouse operators on a relative basis. As a result, the third largest warehouse company has the ability to invest far greater capex than peers in new stores, relative to its size. Additionally, BJ’s gets far more bang for its capex buck than Costco. In 2023, Costco reports a potential spend of as much as $1.8 billion in the USA, yet may not open up as many new stores on this capital budget as will BJ’s, who has a planned spend roughly 1/4 the amount.
Finally, as 90% of the SKU at BJ’s comes from North America, the retailer does not require as much working capital be held on account vs competitors buying the Chinese TEUs of merchandise, much of which gets ordered in the prior fiscal year. Inventory turns at BJ’s, on average, faster than 1x monthly and that permits more cash to be available towards corporate expansion, share purchase buybacks or other accretive projects.
For now, the company continues to punch above its weight class and has recently landed a rather serious blow to the glacially slow expansion plan of a much larger competitor. Investors should not dismiss BJ’s as a Costco wanna-be. I consider it to be a far better run business on almost every metric out there; the only difference lies in the absolute size of one to the other. And, for the first time ever, the analytical group tuning into the Q4 conference call for BJ’s started to coalesce around that assessment.
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