After several years of robust growth, the pandemic tailwinds, and many articles from us the market has finally caught on to the fact BJ's Wholesale Club (NYSE:BJ) is a buy. Not only is it well-positioned within the big-box membership club industry but it is also a value compared to its peers.
Trading at only 20X its earnings with the latest pop to new highs the stock is cheap relative to Walmart (NYSE:WMT) at 22X and Costco (NASDAQ:COST) at 43X earnings. Even Pricesmart (NASDAQ:PSMT), which is focused on emerging markets in Latin America and the Caribbean, trades at a higher multiple so it’s no surprise to us to see shares moving up strongly now.
The Q3 results were strong but there’s more, cash flow and free cash flow are fueling a buyback program that we see helping to drive this stock up another couple of multiples if not more.
BJ’s Wholesale Club Gains Momentum
There are several factors underpinning growth at BJ’s including the company’s efforts to attract and retain new customers. The $4.26 billion in revenue is a testament to those efforts, rising 14.2% on a YOY basis to beat the Marketbeat.com consensus by 840 basis points. Revenue gains are driven by broad-based strength in all categories that resulted in a 13.1% comp versus last year and a 27.7% comp versus 2 years ago. X-fuel, comp sales are up 24% versus two years ago and aided in large part by digital activity. Sales through digital channels rose 44% YOY and that is versus a triple-digit gain last year. In the two-year stack, digital sales are up 244%.
"We are proud of delivering another strong quarter," said Bob Eddy, President and Chief Executive Officer, BJ’s Wholesale Club. "Our business accelerated during Q3 on broad based strength, and we saw growth in all of our divisions, with acceleration in traffic and ticket, growth in digitally-enabled sales and conventional sales, all underpinned by strong membership statistics in both new and tenured members. Our growth flywheel is spinning faster than it has in a long time, and we look forward to continue building on that momentum."
Moving down, the company experienced some margin compression but much less than expected. The hit to gross margin was less than 50 basis points and more than offset by revenue strength. The hit to operating margin is attributable to higher wages and compensation, a good thing in our opinion since it is aiding growth. Regardless, the $0.92 in GAAP earnings and $0.91 in adjusted earnings both beat the consensus by a dime and led the company to initiate a buy-back program.
BJ’s Wholesale Club Initiates Capital Return Program
BJ’s Wholesale Club has yet to pay a dividend but it is returning capital in the form of a buy-back plan. The buy-back plan is a surprise and was announced with the Q3 results. The allotment is worth $500 million to investors, about 6% of the pre-release market cap, and is slated to begin immediately. In our view, this allotment is the first of several to come and may foreshadow a dividend.
The Technical Outlook: BJ’s Sets New High
Shares of BJ’s Wholesale Club rocketed up more than 12% in the wake of the Q3 results and we think this is just the beginning of a much larger move. The action is confirming support at the short-term moving average and accompanied by a strong signal in the MACD. The stochastic is still lagging but is set up to confirm what we see as a strong trend following signal in the MACD. Price action may consolidate at or near the new highs but we expect to see the uptrend in prices continue. Simply looking at it from the valuation standpoint, Costco is the most directly comparable stock and it is trading more than twice the value.
