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BJ’s Officials Laud Transformation Into Growth Mode

Q4 metrics dazzle but details on FY21 'noisy'
WGB Staff photo

Officials of BJ’s Wholesale Club are bullish on the company’s long-term prospects, saying advances in nearly every area of its business in fiscal 2020 has taken the membership warehouse club to a new growth trajectory.

At the same time, officials reviewing the chain’s fourth and fiscal-year results this week were cautious about the near-term outlook, declining to issue financial guidance and urging the market to look past the “noise” as it cycles historic growth.

“We have truly transformed our business by every measure,” said CEO Lee Delaney in a conference call, according to a Sentieo transcript. “We are not the same company we were 12 months ago. Our underlying growth rate will accelerate as we benefit from long-term trends and continue to accelerate on our strategic initiatives. While the short-term COVID related uncertainties may create headwinds that temporarily mask these long-term gains, we will reset at a higher base and faster growth rate.”

While nearly all players in the food-at-home business posted record results during a year marked by COVID lockdowns and an associated shift to food consumed at home, few players did so as dramatically as BJ’s, which went public less than three years ago as a slow-growing and debt-heavy No. 3 U.S. warehouse chain. BJ’s, however, was especially prepared for the trends that awaited. It has big stores capable of heavier volume, a food-heavy assortment built for big-basket family stock-ups, a stream of membership-fee income that grew rapidly and digital capabilities that came to life when e-commerce subsequently took off and convenience grew in importance. It was also coming off a rare new market entry that had demonstrated such a thing could still be effectively done, and that has given the company confidence to accelerate new store growth.

All of those elements helped to make for what officials called “industry leading” results in the fiscal year, which ended Jan. 30.

In the quarter, BJ’s posted a 13.7% increase in both sales and total revenue finishing at $3.9 billion, with comparable-club sales climbing by 15.9%, excluding gasoline. Digitally enabled sales, primarily curbside pickup, increased by 168%. Net income of $95.9 million increased by 129.6%. Gross-profit margins climbed by 50 basis points behind what BJ’s calls its “category profit improvement,” or CPI assortment changes, and a mix of general merchandise sales.

Membership income grew by 11% during the fourth quarter to $86 million.

“The transformation of our company takes root here,” Delaney said. “We have unprecedented levels of total members, retention rate and membership quality. We saw growth in new members, renewals and favorable membership mix during the quarter.” Members rewed at an 88% clip, new members were retained at a better rate, and penetration of higher-tier memberships increased to 31%.

Adjusted EBITDA of $857 million, grew by 47%. “It’s hard to overstate the strength of this performance, but for just a bit of perspective, know that we started the year with a plan to do just over $600 million in adjusted EBITDA,” Delaney said. “Our team should be very proud.”

Free cash flow of $676 million over the year allowed BJ’s, in the meantime, to reduce debt-to-EBITDA levels by more than half.

Noisy and Hard to Predict

“While the coming year's financial results may be noisy and hard to predict, we have great momentum and are pivoting from a deleverage story to a story about growth,” said Bob Eddy, BJ’s CFO.

Eddy’s enthusiasm for getting this message to the market and the chain’s reticence around a detailed forecast played out in an exchange with one analyst that turned nearly testy as the analyst, Michael Baker of D.A. Davidson, poked for details on membership renewal and lapping big comps a year ago, and asked about the anticipated effects of comp-store declines this year on BJ’s cost structure.

Eddy responded by suggesting the company would be “nimble” in areas like labor management before adding: “I think … all these short-term questions are just noise. I think the thing that people should focus on is the long-term transformation of this business: more members, more sales, more margin. It should be structurally more profitable vs. 2019 as we go forward. And we'll invest behind all of those notions. We’re in a little bit of a weird period here, but the entire management team here is very bullish on the state of our company and how we will grow from here.”

Delaney confirmed press reports that the chain was looking to crack a new market—Pittsburgh—with multiple stores informed in part by its success pioneering new territory in Michigan two years ago. That event gave BJ’s confidence it had “cracked the code” on new market expansion that will help the chain backinto a growth mode, Eddy said. BJ’s opened one store in 2018, it will open six units this year and as many as 10 the year after that.

“We're applying some fairly advanced analytics to figure out what the right site selection looks like in the markets, [and] how we place ourselves in the right location with good distances and good demographics,” he said.

Of the Michigan units, he added: “We’ve opened with a much more aggressive and strong marketing. We have the right assortment from the start, we’ve got the right in-store environment from the beginning with our new signage package with the right layout. We’re enrolling far more people in the credit cards at opening with a really clear value proposition. We’ve got higher engagement with easy renewal, where essentially everyone in a new club joins easy renewal. And so that’s really all working for us.”

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