Does This BJs Wholesale Rally Have Legs?

BJs Wholesale Club NYSE: BJ reported its fourth-quarter earnings on Thursday, March 4 before the bell, and the numbers were excellent. Revenue increased 13.7% yoy to $3.95 billion, above analyst estimates of $3.93 billion. Comps rose 15.9% yoy, beating expectations for 15.8% growth. Adjusted earnings per share of 70 cents looked good against both the 40 cents reported in the year-ago period and the consensus of 67 cents.

Shares were on a five-session losing streak when the earnings were released, however, and dipped another 1.1% in the March 4 session. But investors quickly came to their senses, and shares have increased by a total of 12.8% in the seven sessions since.

The volatility is nothing new for BJs. Over the last seven months, shares have swung between $36 and $50, alternating between winning and losing streaks.

Anything can happen from here on out, but there is a good chance that we will see BJs trade higher over the next couple of months.

BJs Has Shown its Mettle

For full-year 2020, BJs delivered “industry-leading” comp sales growth of 21%. Costco NASDAQ: COST, a comparable company, recorded comp growth of just 13% yoy in its most recent quarter (its fiscal year doesn’t align with BJs), falling short of the growth BJs generated in its most recent quarter and the just-completed fiscal year. Costco, however, trades at 33.3x forward earnings, while BJs trades at 16.3x forward earnings.

Before we go any further, it’s important to note that BJs has benefited from pandemic-related disruptions. It remains to be seen if the company can continue thriving under a variety of operating conditions. Costco’s long-term track record justifies its premium valuation; one, or even a few quarters doesn’t change that.

But the gap shouldn’t be as big as it is.

The Data Suggests a Bright Future

Again, BJs has benefited from the pandemic; people have stocked up on food and household products over the last year.

On the Q4 earnings call, CFO Bob Eddy said, “Based on current pandemic trends and vaccination timelines, we expect consumer demand will remain elevated through the first half of the year when compared to pre-pandemic levels.” He added that as more people are vaccinated and start going out to restaurants, “We expect to give up some of the sales gains experienced in 2020 that resulted from increased consumption of food-at-home.”

That sounds bleak, but it looks like it will just be a temporary dip.

BJs’ member behavior indicates that the company’s long-term health is excellent. In Q4, BJs delivered an all-time high renewal rate of 88% for its tenured members.

The company’s digitally enabled sales increased by around 168% in the fourth quarter. BJs has actually recorded triple-digit e-commerce growth in every quarter over the last year. It’s tempting to shrug that off; a lot of companies are growing their digitally enabled sales at triple-digit rates, after all. But many of those companies have seen their in-store sales plummet at the same time. BJs’ digitally enabled sales and in-store sales have both been strong over the last year.

Reason for Optimism on New Members, But Be Realistic

Management admitted that it’s too early to talk about renewal rates for its new members, but their baskets in the fourth quarter were “approximately 19% larger than typical first-year members.” The new members are also using the app and other digital services at much higher rates than seen in the past.

Playing devil’s advocate:

• It shouldn’t be surprising that basket sizes are bigger. People are shopping less and buying more each time to limit exposure to COVID-19.
• It’s also natural for members to be more digitally engaged these days, because they don’t exactly have tons of alternatives.

There is reason for optimism. But it’s also important to temper expectations on the new member data.

How Should You Play BJs?

There is a good chance that BJs shares will be higher in 2-3 months, but finding a short-term entry point is a little more challenging. Shares are approaching the mid-$40s, where they face a lot of resistance from recent months.

The price action over the last two sessions is encouraging – shares have traded down before closing near the highs of the day.

But it might be best to look for a retest of the $36-38 range or a breakout above $46 a share on high volume.