BJ’s Wholesale (BJ) is one of the three big US wholesale clubs. It’s the runt of the litter at $15bn in sales vs Sam’s (WMT) at $64bn and COST at about $125bn. The stock is up over 100% vs pre-covid levels as the business was a huge winner in the pandemic benefitting from the combination of consumer’s stocking up on essentials, trip consolidation toward’s bulk buying, and long lines at top competitors driving easy share wins. This meant a big step up in comps, margin upside, and EPS more than doubling vs 2019. As we progress through 2021 and into the re-opening phase, we think BJ will be facing share losses, revenue declines, cost deleverage, and downward earnings revisions meaning up to 35% downside risk for the stock.
2021 Setup is Bearish
With 1Q21 sales likely seeing help from stimulus, we have upside to street EPS expectations in our model, coming out at $0.60 for the first quarter. After that we think the trouble starts as we see notable EPS downside in the middle quarters of the year. In 2020, BJs saw comps (ex gas) accelerate 20pts to 21.3% from 1.3% in 2019. Amid the pandemic, shoppers wanted to consolidate trips, stock up on consumables, and buy in bulk. However, given the store capacity restrictions many municipalities had in place, that meant huge lines during peak times for the likes of the industry leader Costco, as well as Sam’s Club. Some shoppers shifted some trips to BJs to avoid the lines, meaning new customer wins at the same time core customers were also shopping more at the store. On recent calls management has highlighted new customer wins, elevated spending by new customers, and higher retention. All of which can be explained by the mismatch of warehouse club shopping availability relative to elevated demand levels. As we see continued vaccine rollouts, reduced restrictions, and more normalized consumer shopping patterns, we expect the strong tailwinds BJs has been riding will turn into headwinds. If we look at the online interest growth spread for BJs vs Costco, we can see how interest was up significantly more than COST in the pandemic peak, but has recently just inflected to relative underperformance vs COST.
As we look more closely at the BJ fundamentals, we should keep in mind that BJ is much more of a grocery retailer than COST. BJs has about 75% grocery and another ~10% gas, leaving little left for general merch categories, like apparel, where we expect some consumption snap backs in 2021. Gas prices are trending to be up 15-30% in the coming months, which will help headline comps, but won't mean much in the way of EPS upside. Gross margins were up 90bps in 2020, which is a little too good for a wholesale club and outperforming Sam’s and Costco. We suspect the company was opportunistic on pricing given the traffic tailwinds we’ve highlighted. We expect BJ to give back at least half of those gross margin gains in 2021 via inflationary pressures combined with more normalized competitive dynamics and cost deleverage. Also, the elevated online penetration levels will remain, and whether fulfilled at the store or via 3p delivery are more expensive methods of fulfillment than customers pulling items off the shelf themselves. BJ’s disclosed about $150mm in Covid related SG&A costs, though we only expect about $50mm of that could be recouped this year, given the biggest portion ($80mm) is for labor increases, which competitively we think is hard to remove, plus key states for BJ (like NY, MA, and NJ) are all seeing step ups in their already elevated min wage rates. Also, the pandemic isn’t over, so many cleaning and sanitization procedural costs ($35mm in 2020) remain in place.
Valuation
Valuation is where BJs gets somewhat tricky. The bull case is that it is a cheap COST. Though this is kind of ridiculous as COST carries a premium multiple given its proven track record of some of the best and most consistent comp growth trends in retail. Both have around LSD unit growth potential, but BJ’s has a weaker customer profile and much more grocery merch mix. So COST may trade around a 30x+ P/E, but grocery stores are more in the Low DD P/E range. For BJs, its historical (since 2018 IPO) peak is around 19x, its trough, 12x. On street numbers it's currently trading at 17x P/E and near an all-time low FCF yield of 4.8%. We’ve got EPS coming in at $2.38 about 10% below consensus in 2021, and 15-20% downside to TAIL numbers. As we hit the rate of change slowdown and negative EPS revisions, we think the stock likely trades more like a grocery store, down towards a P/E multiple in the low teens which gets us to a stock of $30-$34 or 20%-35% downside from current levels.
As for the Quad setup, BJ's doesn’t have a long enough public history for a quality Quad back test, but it's fair to think it would resemble that of a COST or WMT as being in the 'staple like' retail camp. That means the stock should underperform in Quad 2(as it has been), and outperform in Quad4. Though we think the risk on earnings and valuation means the stock risk is to the downside regardless of the expected Quad inflection here in mid 2021. If you like pairs, we’d match it up with our favorite Quad4 Long DLTR.
