Q2 Upside pointing to more (BJ)
BJ’s Wholesale Club reported Q2 EPS of $1.06, well above consensus expectations of $.80. The upside was driven by a better top line and margins. SSS were 7.6% ex. fuel vs. consensus expectations of 4.2%. Revenue grew 22% YOY, EBITDA grew 24%, and EPS grew 29%.
Grocery, sundries, and perishables SSS grew 8% with positive unit growth. General merchandise SSS grew 4%. Inflation added 9% to the comp. Digital sales grew 47%. Traffic was positive. Comp gas gallons were up 18%. Historically one-third of members visit inside the store when getting gas. The gasoline offering due to the compelling savings for members is better tied to membership than driving traffic. Membership fee income grew 11% with count growth of 6%. Spend per member grew across all income cohorts.
Gross margins contracted 50bps to 15.2% due to supply chain costs, inflationary pressure, and to a lesser extent markdowns in general merchandise. Own brand penetration rose 200bps to 25%. The acquisition of the perishable DCs added $90M of the $343M growth in inventory. 50% of the remaining growth in inventory was to support new store growth and improved in-stock levels, 40% was due to cost inflation, 10% was due to general merchandise. BJ’s did increase promotions in some general merchandise items to respond to competitors’ markdowns in order to be competitively priced. SG&A grew 8.5% YOY due to higher labor costs and the acquisition of the DCs.
Management raised EPS guidance to $3.50-3.60 from $3.25. The guidance for SSS was raised to 4-5% from LSD%. Gross margin contraction is expected to narrow over the next two quarters.
We are modeling upside to the raised guidance from sales and margins. We added BJ to our long list a month ago. Warehouse clubs are taking share in the current environment. BJ’s is opening more stores this year than it did in total between 2016 to 2020. In our Black Book we showed how the traffic trends at new stores support the opening plans. BJ has an underleveraged balance sheet at less than 1x. The company is accelerating store growth, but we expect to see more share repurchases in the future.
Wine sales slow in July (VWE, NAPA)
Domestic wine sales increased 12% YOY in the 12 months ended July. For just the month sales grew 7% in July YOY, decelerating from 9% in June. Off-premise wine sales decreased 2% YOY in July. Volumes were 2% below sales. The YOY declines in the off-premise channel are narrowing as the industry compares against more normalized activity last year. DTC shipments decreased 18% in July, but for the 12 month period increased by 7%. The on-premise channel has the strongest growth rate for wine due to the base effects, but that too has slowed recently with the comparisons.
Produce volumes fall (KR, ACI, APPH)
In the five weeks ended July 31, the price per unit across all food and beverages in the IRI measured retail channel increased 13.3%, accelerating from 12.3% in June. In July, inflation was 15.3% in the center of store and 12.6% for perishables. Fresh produce prices were up 8.5% per unit and 9.5% per pound. In comparison, shelf-stable fruit prices were up 16.1%, shelf-stable vegetable prices were up 15.1%, and frozen fruits and vegetable prices were up 16.6%. Fresh fruit units decreased 5.1% YOY in July while vegetable units decreased 4.7%. Compared to 2020 fruit units decreased 5.7% and vegetable units decreased 9.3%
For the past year fresh fruit and vegetable sales have had a wide gap in performance, but in Q2 and July sales for both have been up about 4%. Fresh vegetable sales increased 4.4% in July with volume down 4.4%. Fresh fruit sales increased 4.2% in July with unit sales down 5.1%.
Tomato sales decreased 0.1% in Q2, improving from a 4.8% decline in Q1. Sales in July improved further with a 2.6% increase in dollars and 1.2% decrease in pounds. Avocado sales increased 9.9% YOY in July, with the average price per pound 29.5% higher.
Fresh vegetable unit sales are a good proxy for at-home meal consumption because it is not often saved and fruit has a tendency to be discretionary and spontaneous purchases. Lower shrink in the fresh produce department from higher sales velocity was one of the largest tailwinds for grocers’ gross margins during the pandemic.
