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BJ's Wholesale Club (BJ) Q3 Earnings Beat, Digital Sales Up

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

The operator of membership warehouse clubs reported adjusted earnings of 92 cents a share that surpassed the Zacks Consensus Estimate of 64 cents, and rose sharply from 41 cents in the year-ago period. The bottom line gained from solid top-line growth, disciplined expense management and reduced interest expense.

BJ’s Wholesale Club generated total revenues of $3,731.7 million that increased 15.6% from the year-ago period and outpaced the Zacks Consensus Estimate of $3,697.4 million. While net sales jumped 15.7% to $3,646.7 million, membership fee income was up 11% to $84.9 million.

Shares of this Westborough, MA-based company have gained 26.4% in the past six months compared with the industry’s growth of 5.1%.

Let’s Delve Deeper

BJ’s Wholesale Club’s focus on simplifying assortments, expanding into high-demand categories and building own-brands portfolio is commendable. It also remains committed toward enhancing omni-channel capabilities and providing value to customers. Cumulatively, these endeavors have been contributing to growth in membership signups and renewals, resulting in higher membership fee income and decent comparable club sales growth.

Comparable club sales during the quarter under review rose 14.1%, following an increase of 17.2% in the preceding quarter. Excluding the impact of gasoline sales, comparable club sales surged 18.5% during the quarter, after increasing 24.2% in the preceding period. Impressive comparable sales growth of 19% in the grocery division contributed to this upbeat performance. Additionally, general merchandise and services division registered comparable sales growth of 13%.

We note that digitally-enabled sales soared 200%, and added 4 percentage points to comparable club sales, excluding gasoline sales. No wonder, the company has been directing resources toward expanding digital capabilities in order to engage better with members and provide them a convenient way to shop, including same-day delivery, curbside pick-up, and buy-online, pickup-in-club.

During the quarter, gross profit grew 20.3% to $743.3 million. Merchandise gross margin rate, which excludes gasoline sales and membership fee income, rose 10 basis points from the year-ago quarter. Continued execution of category profitability improvement was offset by distribution expenses related with COVID-19.

Operating income surged 88.6% to $190.4 million, while operating margin expanded 200 basis points to 5.1%. Adjusted EBITDA increased 57.1% to $242.2 million, while adjusted EBITDA margin expanded 170 basis points to 6.5%.

SG&A expenses rose 8.2% to $552.3 million from the year-ago period, however, as a percentage of total revenues, the same contracted 100 basis points to 14.8%. 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 anticipates to incur roughly $30-$35 million of incremental costs related to COVID-19 in the fourth quarter.

Other Financial Details

BJ’s Wholesale Club, which carries a Zacks Rank #2 (Buy), ended the third quarter with cash and cash equivalents of $46.1 million, up from $30 million at the end of the prior-year quarter. Long-term debt decreased to $845.7 million from $1,339.7 million a year ago. Stockholders’ equity was $217.4 million. The company also lowered its first lien debt by a total of $360 million.

Management incurred capital expenditures of $69.8 million in the quarter under review. The company generated free cash flow of approximately $20.3 million during the quarter under review. Additionally, the company bought back $50 million worth of shares during the quarter.

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