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BJ's (BJ) Down 9.7% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for BJ's Wholesale Club (BJ - Free Report) . Shares have lost about 9.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is BJ's due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

BJ’s Wholesale Club Q2 Earnings Top, Digital Sales Rise

BJ’s Wholesale Club Holdings, Inc. registered a stellar performance in second-quarter fiscal 2020, wherein both the top and the bottom lines not only beat the Zacks Consensus Estimate but also grew year over year. The quarter marked the second straight sales and earnings beat. Notably, the company continued to witness strong comparable club sales. The metric gained from strength in the digital channel, given customers’ increased shift to online shopping amid coronavirus-led social distancing.

The operator of membership warehouse clubs reported adjusted earnings of 77 cents a share that surpassed the Zacks Consensus Estimate of 60 cents, and rose sharply from 39 cents reported in the year-ago period. The bottom line gained from solid top line growth, disciplined capital expense management and reduced interest expense.

BJ’s Wholesale Club generated total revenues of $3,954.1 million that increased 18.2% from the year-ago period and outpaced the Zacks Consensus Estimate of $3,746 million. While net sales jumped 18.4% to $3,871.6 million, membership fee income were up 10.4% to $82.5 million.

Let’s Delve Deep

Comparable club sales during the quarter under review rose 17.2%, following an increase of 19.9% in the preceding quarter. Excluding the impact of gasoline sales, comparable club sales surged 24.2% during the quarter, after increasing 27% in the preceding period. We note that digitally-enabled sales soared 300%, and added 6 percentage points to comparable club sales, excluding gasoline sales.

During the quarter gross profit grew 23.4% to $756.4 million. However, merchandise gross margin rate, which excludes gasoline sales and membership fee income, remained flat year over year. We note that decent sales performance in general merchandise business and continued execution of category profitability improvement, was offset by commodity cost inflation, primarily beef and distribution costs related with COVID-19.

Operating income surged 65.7% to $163.6 million, while operating margin increased 110 bps to 4.1%. Adjusted EBITDA rose 41.6% to $216.9 million, while adjusted EBITDA margin expanded 90 bps to 5.5%.

SG&A expenses rose 15.4% to $590.8 million from the year-ago period, however, as a percentage of total revenues, the same contracted 40 basis points to 14.9%. The year-over-year increase in SG&A expenses was due to costs associated with the ongoing pandemic, which include wage increases, bonuses, safety and protective equipment, and other operating expenses. Management expects to incur roughly $20-$25 million of incremental costs related to COVID-19 in the third quarter.

Other Financial Details

BJ’s Wholesale Club ended second quarter with cash and cash equivalents of $168.8 million, up from $29.1 million at the end of the prior-year quarter. Long-term debt decreased to $1,202.2 million from $1,540.6 million a year ago. Stockholders’ equity was $119.1 million. Management incurred capital expenditures of $47.8 million in the quarter under review. The company generated free cash flow of approximately $220.1 million during the quarter under review. Additionally, the company bought back $34.1 million worth of shares and paid down $150 million of its first lien debt.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 14.57% due to these changes.

VGM Scores

Currently, BJ's has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise BJ's has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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