November 20, 2018 - 5:48pm EST by
2018 2019
Price: 19.83 EPS 1.25 1.74
Shares Out. (in M): 135 P/E 15.4 11.1
Market Cap (in $M): 2,685 P/FCF 12.7 11.5
Net Debt (in $M): 1,978 EBIT 396 422
TEV (in $M): 4,663 TEV/EBIT 11.77 11.05

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BJ's reported this evening and the stock is up after hours:

Company Description

BJ’s Wholesale Club is a warehouse club operator on the East Coast of the United States. They consistently offer 25% or more savings on a representative basket of manufacturer-branded groceries compared to traditional supermarket competitors. BJ provides an assortment focused on perishable products, general merchandise, gas and other ancillary services to deliver a differentiated shopping experience that is further enhanced by their omnichannel capabilities. BJ has over 5 million customers, 215 clubs and 134 gas stations located throughout east coast with a substantial amount in New England.



Capital Structure & Relevant Financial Metrics

    Coupon Maturity 11/3/18 EBITDAx
$950 Million Revolver (L+150) 4.153% 8/17/2023 389.4  
Term FILO (L+200) 4.653% 8/17/2023 50.0  
Term B (L+300) 5.653% 2/3/2024 1,533.9  
Capital Leases   8.000%   35.4 3.5x
Total Debt       2,008.7  
Cash       30.5  
  Net Debt       $1,978.2  
    Shares Price    
Equity Cap Class A 135.4 $19.83 2,685.2  
Total Equity Value     $2,685.2  
  Total Enterprise Value     $4,663.4 8.2x
  2017 2018 E. 2019 E. 2020 LTM
Revenues $12,350.5 $12,754.6 $13,000.3 $13,351.3 $13,146.5
EBITDA Margin 3.44% 4.09% 4.36% 4.43% 4.35%
Adj. EBITDA $425.4 $521.8 $566.8 $590.9 $572.3
CAPEX $114.8 $137.5 $164.0 $164.3 $155.2
Interest Expense $143.4 $196.7 $112.0 $108.0 $184.3
Taxes $28.0 ($28.4) $78.5 $86.0 ($29.4)
FCF $167.3 $187.6 212.2 232.5 $232.9
Earnings $44.7 $52.0 174.0 241.6 $131.5
EV/EBITDA 11.0x 8.9x 8.2x 7.9x 8.1x
P/E 60.1x 51.7x 15.4x 11.1x 20.4x
Price / FCF 16.0x 14.3x 12.7x 11.5x 11.5x
Revenue Growth 3.3% 1.9% 2.7%  
EBITDA Growth 22.7% 8.6% 4.3%  
FCF Growth   12.1% 13.1% 9.6%  

Business Overview

§  Membership Fees: 5 million memberships paying annual fees of $55 (79% of members and 62% of fees) or $110 (21% of members and 38% of fees). Total annual Membership Fees Represent 50% of EBITDA.

§  Sales: Groceries, general merchandise, gas and ancillary services. $12.5 billion revenue in calendar year ’17. 

§  2 private label brands: Wellsley Farms and Berkley Jensen. Over 2 billion in sales.


Investment Thesis

§  U.S. club sales channel is large and growing

-    Compound Annual Growth Rate of 4.5% since 2007 (projected CAGR of 4% through ‘22). This pace of growth exceeded that of the grocery and GAFO

-    Advantages of warehouse club model include

§  Membership fee subscriptions that provide stable cash flows

§  Comprehensive customer purchasing data, enabling operators to analyze customer spend more effectively and meet consumer demand

§  Low operating costs per square foot due to high inventory turnover, low club labor requirements and efficient distribution networks

§  Limited and bulk-sized SKUs, and a “no-frills” warehouse environment, which deliver a clear value proposition to consumers who are increasingly focusing on savings and price transparency

§  BJ’s has been focused on growing revenues and increasing margins to increase EBITDA, earnings & FCF

§  Revenue Growth accomplished by:

-    Growing Members per store, BJ’s currently averages approximately 24k members per store versus over 60k for Costco. 

-    Increase Spend per member – BJ’s has invested a tremendous amount to deliver technology driven improvements to its customer experience.

§  More focused advertising and marketing

§  Added technological amenities making shopping easier and more convenient (like Instacart and Express Scan)

-    Open New Stores.  While Private, BJ’s was focused on increasing margins and turning BJ’s into a smarter and better operator versus growing its footprint.  Large opportunity to grow its store base by selectively adding stores within its core East Coast region and by pushing west into middle America

§  Expects to grow 20 stores over next few years, looking at 3-5 store additions a year

§  Additional Margin Growth

-    Technology investments and store improvements should help increase its Customer retention rate

§  Retention has been increasing steadily over the last few years and is currently at a 86% renewal rate.  BJ’s expects to increase it to Costco’s 90’s renewal rate over next few years

-    Company has been focused on procurement savings and SG&A discipline which should slowly continue to increase margins

-    Over the last few years, BJ’s has eliminated a lot of its unprofitable sales. 

§  Suffered negative SSS over last few years, even as they grew EBITDA

-    Increasing amount of private label brand sales which have lower prices but much higher margins

§  Excellent Real Estate – BJ’s stores are in excellent areas. It creates a moat around their business in that it is difficult to replicate their footprint in the Northeast.  This is one of the reasons that Sam’s closed their stores in the Northeast.



§  A group of competitors including: Discount Retailers, Costco KR, WMT & TGT trade at

-    16.1x this year’s Earnings (range  8.9x – 40.0x)

-    14.8x next year’s Earnings (range  8.7x – 33.0x)

-    9.9x this year’s EBITDA (range  5.4x – 24.5x)


-    9.6x next year’s EBITDA (range  5.2x – 19.6x)

§  Valuation Scenarios:

-    Base scenario is BJ’s trade’s in line with comp group at 15.5x-16.5x Earnings and by Calendar Year End 2019 would trades between $26 and $27 a share

-    Bear scenario is that BJ’s is treated as a grocer and trades in line with KR at 7x EBITDA which equals $16 a share

-    Bull scenario is BJ’s trade’s at a slight premium to the comp group at 16x-17x Calendar Year 2019 Earnings (which is still at a steep discount to Costco which is at 26x next year’s earnings) and by Calendar Year End 2019 would trades between $29 and $31 a share



§  Reduced government food stamp spending: In Feb 18’, the government proposed reductions in food stamp program spending and changes in the program’s administration, including the provision of benefits to recipients in the form of government-purchased food items instead of electronic credits and disbursements that can be used to purchase food items (including at BJ clubs).

-    Food stamps accounted for 5% of BJ net sales in fiscal ’15-17.

§  Changes in lease accounting: Effective Dec ’18, FASB will require companies to capitalize most leases on their balance sheets by recognizing a lessee’s rights and obligations.

-    Unlike Costco and Sam’s club, who own most of their properties, BJ leases a substantial amount of their stores and warehouses.

-    Though this won’t impact cash flows, but will increase the total amount of debt 

§  BJ’s is a turnaround story, with an excellent management team.  Failure to execute the turnaround, or loss of key management personnel would greatly impair ability to growth

§  Sam’s Club recently closed in the Northeast.  Perhaps part of their recent revenue growth was caused by the onetime loss of a competitor and will not be repeated going forward


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


continued execution
reducing Debt to under 3x EBITDA, which will allow for capital return to shareholders

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