BJ’s Wholesale Club Holdings, Inc. (NYSE:BJ) operates several hundred membership-only clubs in well over a dozen states. When you hear “membership club,” you likely immediately think of large players like Walmart Inc.’s (WMT) Sam’s Club and Costco Wholesale Corporation (COST). What we have in BJ’s is a slow and steady grower. With a strong market, BJ’s stock has melted up. The company has seen increased costs with inflation and has largely passed that on to its consumers.
The stock is a quality hold here in our opinion, though we are hesitant to suggest committing new money in this tough macro environment for consumers and with the market at its all-time highs. We think a correction, however, would be a good buying point, on the order of 10%-plus.
The company just reported Q1 earnings. In our opinion, the report was positive, though is being contextualized as mixed due to the lack of upping its guidance despite slight beats on the top and bottom lines. Let us discuss the results.
Sales and margins
When we look at the earnings of any retailer, we care about trends in sales as well as margins, looking to see if they are contracting or expanding. All about sales and margins. Perhaps most importantly, we always look at comparable sales. When they are negative, we almost always pass on the stock. That said, net sales were up from a year ago by 4.2% to $4.92 billion. This also beat the consensus estimates by $50 million.
This was driven by a positive comparable sales figure. A lot of this is driven by fuel and the pricing there. Including gasoline, total comparable club sales were up by 1.6% year-over-year. If we back out the impact of gasoline sales, comparable club sales still increased by 0.6%. This is positive, even if not overwhelmingly so. Digitally enabled comparable sales growth through online/app sales was up 21.0% year-over-year, too. We view this as positive.
In terms of margins, we love to see expansion in these key metrics. Sales were up, which is usually positive for changes in gross margin and profit. But if margins are down, gross profit can fall even on higher sales. Gross profit increased to $883.4 million from $$880.0 million in the year ago quarter. This was a mixed result because it suggests that although total gross profit was up, it is clear that this minimal increase suggests margins contracted some. Indeed, the merchandise gross margin rate, which excludes gasoline sales and membership fee income, decreased by 50 basis points.
Further, selling and administrative expenses also rose substantially to $721.8 million from $689.3 million a year ago. As such, income from continuing operations fell to $146.8 million compared to $172.1 a year ago. Adjusted EBITDA decreased by 6.0% to $236.4 million versus $251.5 million in Q1 2023. Perhaps unsurprisingly, net income consequently fell to $111.0 million compared to $116.1 million a year ago. On an EPS basis, earnings were better than expected by $0.02, hitting $0.85, flat from a year ago.
Forward view
So we have higher sales, but a softening margins rate. The earnings dip was expected and was less so than anticipated. On a per-share basis, they were flat because the company was repurchasing shares. But with EPS being better than expected, this is a positive. However, what really had the Street looking at this as mixed, was that guidance was not increased despite the beat. To that, we say while it was a beat, it was minimal.
So the outlook was unchanged. Comparable club sales, excluding the impact of gasoline sales, are seen increasing 1% to 2% year-over-year. Despite margin contraction here in Q1, merchandise gross margins are seen improving approximately 20 basis points year-over-year, while adjusted EPS is seen at $3.75 to $4.00 for the year. This is another reason we are not buyers. At the midpoint would be a contraction from $3.96 per share for fiscal 2023.
When you factor in the impact of consumer sentiment that is likely to weaken with the many ongoing pressures of high interest rates, massive credit card debts, expensive gas, housing costs that are through the roof, and the fact that student loan repayments are underway, we remain neutral about BJ’s Wholesale Club Holdings, Inc. stock here. We believe a correction of 10% plus would be a place to consider long-term entry.
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