BJ's Wholesale Club Holdings Inc BJ S
October 12, 2022 - 3:58pm EST by
doctorK
2022 2023
Price: 73.00 EPS 3.44 3.20
Shares Out. (in M): 137 P/E 21.2 22.8
Market Cap (in $M): 9,969 P/FCF 42 44
Net Debt (in $M): 886 EBIT 679 632
TEV (in $M): 10,855 TEV/EBIT 14.7 15.8
Borrow Cost: General Collateral

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Description

 Thesis Summary

BJ has been one of the largest beneficiaries of the COVID driven stay-at-home boom and the deurbanization trend. 

o While much of this sales gain is likely to prove sustainable due to food inflation, a regression to the mean seems likely as tailwinds from trip consolidation and consumers working from home likely ease in a post-COVID world.

Perennial share donor prior to the pandemic

o Prior to the pandemic, BJ’s was a clear share donor and the company’s SSS ex. gas were negative in every year from 2013-2017. SSS only inflected to a positive LSD% rate in 2018-2019 when Wal-Mart moved to close several Sam’s Club stores in BJ’s core geographies

o BJ faces intense competition in what is historically a low growth industry

An important point here is that unless sales trends reaccelerate, the upside case in BJ (discussed below) is already priced in. 

o On Street numbers, BJ is already trading at peak multiple on what are likely peak earnings. 

o BJ is also trading nearly in-line with best-in-class staples retailer DG despite lacking the historical growth track record that DG has

While bulls point out that BJ’s unit growth is set to accelerate to 4-5% next year (in-line with best-in-class player DG), we are skeptical that this will be successful as BJ does not have a track record of successfully expanding outside of its core East Coast geography

BJ is overearning on fuel margins that are significantly elevated relative to history. We estimate that a regression to the mean in fuel profits in 2023 will represent a headwind to EBIT/EBITDA of nearly $90m on a base of $679m of 2022 EBIT i.e. a 13% headwind.

 

Valuation and Returns

 

NTM P/E: BJ historically traded at 17x NTM Street EPS vs. current 19x Multiple

EV/NTM EBITDA: BJ historically traded for ~9x vs. current 10.6x multiple

BJ is currently trading nearly in-line with best-in-class staples retailers DG and WMT despite having a historical financial profile that more closely resembles a conventional grocer.