BJ’s Wholesale Club Holdings, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

A warehouse club chain operating primarily in the Eastern United States, offering a curated selection of merchandise through a membership model.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: BJ’s Wholesale Club (BJ) operates as a membership-only warehouse club, primarily concentrated in the Eastern United States. They provide a variety of merchandise, including groceries, electronics, home goods, and apparel. Unlike traditional retailers, BJ’s charges a membership fee for access to its stores and online platform. Their business model is based around selling bulk quantities at lower prices than regular retailers. They aim to enhance the customer experience by offering unique options such as free pick-up, curbside pickup, and same day delivery.

The company is currently shifting from a reliance on traditional store sales to a larger omnichannel presence. As such they’re improving their online experience.

Revenue Distribution:

  • Merchandise Sales: The majority of BJ’s revenue is derived from the sale of merchandise, which spans grocery, health and beauty, general merchandise, and home goods.
  • Membership Fees: A significant revenue component comes from membership fees charged to customers.
  • Credit Programs: They also generate revenue from credit offerings and other financial services.
  • Gasoline Sales: In a number of locations, BJ’s also offers gas stations, contributing to their overall sales revenues.

Industry Landscape: The retail industry is currently experiencing a number of challenges, including shifts in consumer shopping habits toward online purchases and economic uncertainty that is impacting consumer spending. The pandemic and increased inflation have affected supply chains and the cost of goods, which retailers, like BJ’s, have had to navigate.

In the warehouse club segment, competition from other big-box retailers, notably Costco and Sam’s Club, remains high. However, there is a sizable segment of the population who uses warehouse stores.

The industry is becoming more omnichannel in nature with consumers expecting easy online ordering combined with the ease of in-person shopping.

Competitive Landscape:

  • Costco: Costco is the largest warehouse club chain by a wide margin, with an international presence and a generally higher average spending per customer.
  • Sam’s Club: Walmart’s version of the warehouse model, primarily located throughout the US.
  • Traditional Retailers: These include Walmart, Target, grocery stores, etc.
  • Online Retailers: E-commerce companies like Amazon and others which are often competitors to retail companies.
  • Regional Players: Some niche retailers can have a regional presence

What Makes BJ’s Different: While they may have similar products as other companies, they’re focused on providing a more targeted selection of products, specifically geared towards the needs of their member base. Their focus on having a membership base allows them to collect data on consumers shopping habits and use that to inform purchasing decisions. They focus on driving innovation in convenience for members through a growing omnichannel presence.

Financials (Deep Dive):

  • Profitability: BJ’s has seen decent returns and profitability in the last several years, but their margins are quite low when compared to competitors in other sectors. Their margins have also been affected by supply chain disruptions, inflation, and promotional activities.

  • Revenue Trends: For the first 13 weeks of fiscal 2024 (ended May 4, 2024), net sales increased to $4.9 billion versus $4.7 billion in the same period last year.

Membership fee income continues to grow and is $99.1 million compared to $94.1 million last year, indicating continued growth in the subscriber base.

Their membership renewal rate is 90%, highlighting the stickiness of their core customers.

  • Income Statement: Their operating income has improved compared to last year, at 132.4 million vs 127.9 last year. Their net income has also had a significant increase in the 13 week period to $112.4 million vs $61.7 million last year. This is an amazing improvement, but keep in mind the context of the year.
  • Balance Sheet: Current assets of 3.8 billion vs total liabilities of 4.3 billion. Equity value is roughly 4.7 billion.
  • Cash Flow: From the latest quarter report, the operating cash flow of the business decreased quite dramatically, and the net cash used in investing activities was significantly higher than previous year. There was also a big amount of financing activities, that could indicate that they borrowed money for either acquisitions or to maintain operations.

Moat Analysis:

  • Brand Recognition: BJ’s has a recognizable brand in the regions where they operate. This name recognition has helped them in acquiring new customers and maintaining a loyal customer base.
  • Location-Based Economies of Scale: This is more so for their traditional stores, than their online presence, since they’re concentrated on the East Coast, which creates an advantage for them.
  • Customer Switching Costs They have a customer base that needs to pay a membership fee yearly, this creates a switching cost because their customers don’t want to pay to use competitors. However, other big warehouse retail chains like Costco and Sam’s Club have many more members than BJ’s and a more recognizable name. As such, their moat is weaker than the larger competitors.

Moat Rating: 2 / 5 While BJ’s has some advantages, including a solid membership model and location advantages, these advantages are not particularly hard to replicate, and have less overall strength than other, larger players in the industry. Thus, a narrow moat rating seems appropriate. It doesn’t have a great network effect, nor the intangible assets to put it at a better rating.

Risks to the Moat and Business Resilience:

  • Increased Competition: The warehouse retail landscape is fiercely competitive, and new players or strategies by existing players could erode BJ’s market share.
  • Changes in Customer Spending: Economic downturns or a shift in consumer spending habits could significantly reduce demand for bulk purchases, and therefore the company’s revenues and earnings.
  • High Debt Level: A high level of debt can put the business at risk if interest rates increase or they have trouble making payments.
  • High Inventory: The company relies on high inventory turnover, which leaves them open to market volatility. If they cannot sell merchandise for their value, that will greatly hurt their profits.
  • Supply Chain Issues: The company is vulnerable to supply chain disruptions, which could disrupt its operations, especially if it relies on a limited number of suppliers or international sourcing.
  • Technological Disruption: Rapid changes in technology can make the company’s offerings or systems obsolete.
  • Inflation and Pricing: The company is also vulnerable to changing consumer prices, and may not be able to pass those increases on to their customers.
  • Membership Fees: Increasing the cost of membership could lead to reduced membership, if the cost outweighs the value of the membership.

Business Resilience: BJ’s has demonstrated resilience through a clear brand and a focus on high-value products, creating loyalty among its core membership. But the risk of the business still remains high due to reliance on consistent economic factors and lack of a true differentiated offering. * It’s well-established in their market, making it less likely they will go out of business, even in a downturn. But they are still vulnerable to competition. * They have a large distribution network making it very hard for other to fully compete. * They’ve created brand loyalty through their membership system. * Their finances have been generally healthy, despite being in a competitive environment. However their growth is rather low compared to other industries.

Understandability Rating: 2/5 BJ’s business model is pretty straightforward for the average person, as most understand what a warehouse club does. However, a more detailed understanding requires more expertise and a closer inspection of their financial and operational metrics. As such, they have several intricate supply systems, a unique customer base, and a complex relationship between their physical stores and their digital presence. The different components of cash flow and how they affect profitability also adds complexity. This means an understandable rating of 2/5.

Balance Sheet Health: 3 / 5 BJ’s overall financial position seems stable, with a manageable amount of debt relative to its equity. The high amount of short-term liabilities versus assets means the company can have a harder time during short-term volatility. As such, a 3 out of 5 seems appropriate.