BJs Wholesale Club (NYSE: BJ) Offers Safety and Growth

BJs Wholesale Club NYSE: BJ, a warehouse club chain, has been one of the most consistent performers across 2020. During the stock market carnage of mid-February to mid-March, BJ shares barely dipped before quickly recovering.

As a warehouse club chain, BJs is somewhat recession-proof to begin with. Add in the restaurant closures forced by the pandemic, and BJs, which derives around 85% of its merchandise sales from grocery goods, becomes a beneficiary of the current environment.

BJs surged more than 20% in one day after it reported Q1 2020 results in May. Shares have spent the past six weeks in a tight consolidation between $33 and $38 a share. Yesterday, shares started to edge out of that base.

Let’s look at the numbers behind BJs recent success and see if shares are still a good value.

Q1 2020 Earnings

BJ shares soared on its most recent earnings report for a reason – the report was stellar all-around.

The chain’s merchandising sales comps increased by 27% yoy. Adjusted earnings per share came in at $0.69, blowing away estimates of $0.34 and the $0.26 recorded in Q1 2019. BJs numbers improved more than peers like Walmart NYSE: WMT and Costco NASDAQ: COST, indicating that BJs strength was not solely related to pandemic tailwinds.

A second wave of the pandemic positions BJs for continued strength. But BJs is doing something else to ensure that some of its pandemic gains will stick.

New Membership Growth

BJs has a membership business model – its customers can sign up for a $55 or $110 12-month membership to gain access to BJs amazing value. While it’s possible to shop at BJs without a membership, prices are much higher for those that don’t sign up.

The pandemic has been a boon for BJs membership growth; new member acquisition increased 40% yoy in Q1 2020.

During the Q1 earnings call, CFO Robert W. Eddy said, “We believe that new members will be easier to acquire in this environment, and we will invest considerably into membership acquisition and analytics. Further, the new members that joined this past quarter will result in benefits for this year and beyond.”

That last part is key – subscription businesses are sticky. Particularly ones with the type of value proposition that BJs offers. After a year of shopping with BJs, most of these members are likely to re-up with the company.

And BJs new membership growth has underscored another improving part of its business.

Digital

On its earnings call, BJs indicated that it was acquiring 10-12% of its members through digital channels in recent quarters. In Q1, that number increased to almost 30%.

And not only is BJs acquiring more members digitally, it is also servicing more customers through digital.

Digitally enabled sales remain a small part of BJs business, but grew a staggering 350% yoy, now representing 5% of merchandising comp sales. That number was 3% in Q4 2019 and 1.5% in Q1 2019.

BJs same-day delivery business was up more than 8x yoy. This bodes well for BJs as fast delivery is so important to today’s consumer.

Valuation

BJs is trading at a little under 17x projected 2020 earnings.

Early in Q1, BJs started to execute its stock buyback plan. However, when markets began to tank due to the pandemic, the company paused the stock buyback and focused on liquidity. As of the end of Q1, BJs has $133 million in cash and a funded net debt to an adjusted EBITDA leverage ratio of 1.9 times. A solid balance sheet and consistently positive free cash flow positions BJs well in the event of an unexpected slowdown.

To recap, there’s a lot to like with BJs:

• Reasonable valuation
• Benefiting from the “new-normal” environment
• Membership model increases the chances of pandemic gains sticking
• Digital penetration better positions the company for future success

Now, let’s turn our attention to the chart and look for an entry point.

Technicals

As mentioned earlier, BJs just started to edge out of a tight six-week consolidation. However, this was far from a powerful breakout.

First off, shares closed right around the highs of the base, whereas you’d like to see them clear this level by a few percentage points. Second, volume was right around the stock’s average.

Ideally, you’d like to see a high-volume breakout above $40 a share with shares closing near the high for the day’s range. That type of move would indicate that there is a good chance for another leg-up.

Another possible entry point is a pullback to the 50-day moving average, which may meet shares in the mid $30s.

That said, BJs is an excellent value at current levels. You should consider initiating a small position right now and looking to add to it when the chart gives you a nice entry point.