BJ’s Wholesale Club: Modest Q1 Expected With Anticipated Deflation (NYSE:BJ)

BJ’s Wholesale Club Holdings, Inc. (NYSE:BJ) is going to report the company’s Q1/FY2024 financial results on the 23^rd of May in the pre-market. The company has given a FY2024 financial outlook outlining modest expected comparable club sales growth, and BJ’s first quarter of the fiscal year is expected to show a modest revenue growth with continued stable profitability.

I previously wrote an analysis on BJ’s titled “BJ’s Wholesale Club: An Undervalued Alternative To Costco.” The analysis was published on the 26^th of February with a buy rating as BJ’s valuation seemingly had a gap into comparable companies’ valuations and an absolute undervaluation determined by a discounted cash flow, or DCF, model. Since, BJ’s stock has had a total return of 9% compared to an S&P 500 (SP500) appreciation of 3%, beating the index moderately.

In the same period, BJ’s competitors have had a slightly worse stock performance. Costco (COST) stock has appreciated by 5%, and Walmart (WMT) has only appreciated by 2%. Still, the gap in performance is quite modest, and leaves a gap in the companies’ comparable valuations, making BJ’s an attractive option.

Upcoming Q1 Financial Report Preview

BJ’s is going to report the company’s Q1/FY2024 financial results on the 23^rd of May before market open. The quarter follows up BJ’s incredibly strong growth and profitability shown in Q4, but a slightly softer performance is expected in the first quarter. Analysts currently expect revenues of $4.85 billion and an EPS of $0.84. The revenue estimate corresponds to a year-over-year growth of 2.8% and an EPS decrease of $0.01 from Q1/FY2023.

With the Q4 report, BJ’s gave investors a financial outlook for FY2024. The company expects comparable club sales to be up 1-2% in the fiscal year, excluding the more volatile gasoline sales. The gross margin from merchandise revenues is expected to rise by 0.2 percentage points, contributing to an expected adjusted EPS of $3.75 to $4.00 that BJ’s currently expects for FY2024. The adjusted EPS outlook’s middle point is slightly below the achieved FY2023 adjusted EPS of $3.96 – analysts’ current expectation of a slightly weaker net income margin year-over-year in Q1 follows the FY2024 guidance. Most of the stock’s analysts have pushed down expectations for Q1 following the Q4 report.

BJ’s management outlined multiple factors in the Q4 earnings call that should affect Q1 results. Most notably, while BJ’s expects some inflation for FY2024, the company expects to see deflation year-over-year in the first quarter. The company also expects challenges with current macroeconomic uncertainty and geopolitical risks, but I believe that BJ’s is well positioned to conquer the uncertainties as the company has done throughout the Covid pandemic and high inflation, although the communicated deflation will negatively affect Q1 growth.

To summarize, I believe that BJ’s should release a solid Q1 result, despite the growth and margins likely to slow down compared to Q4. The company operates with a stable business model in a stable sector, and the likelihood for a significant earnings miss or beat is small, despite some communicated challenges expected ahead. Analysts’ current financial expectations seem fair, with BJ’s notation of expected deflation in Q1.

BJ’s Continues to Grow the Club Footprint

BJ’s continues to open new clubs. Since my previous write-up, the company has had three announcements regarding new planned store locations. On the 7^th of March, BJ’s announced an expansion into Kentucky with a new planned club in Louisville. In addition, the company followed up within the same month with plans to open a second club in South Carolina and Indiana, a fourth club in Tennessee, and two new clubs in the already well-established Florida market. In April, BJ’s again communicated three new planned clubs, adding a 49^th location in the state of New York and two new locations in Florida, increasing total clubs in the state to 41.

As of Q4, BJ’s has a total of 244 open clubs – the nine newly announced clubs represent a continuation of BJ’s long-term growth plan. Geographically, many of the locations are in already well-established New York and Florida markets for BJ’s, but the company also continues to expand into newer markets. I believe that the expansion into new states shows BJ’s business strength and shows the company’s long-term growth potential. Planned capital expenditures for FY2024 are $500 million, mostly to support the opening of new clubs.

Updated Valuation

BJ’s valuation or financial trajectory haven’t changed dramatically after my previous DCF model, but some updates are still due with the FY2024 guidance – for the current fiscal year, I now estimate a revenue growth of 2.5% instead of 5% due to lower inflation expectations. Overall, I have kept longer-term revenue growth estimates very similar as BJ’s continues to open up new clubs. I have raised the eventual EBIT margin estimate level by 0.1 percentage points into 4.4% as BJ’s communicated towards a multi-year efficiency program in the Q4 earnings call that could generate savings of up to $50 million.

With the mentioned estimates, the DCF model estimates BJ’s fair value at $95.46, around 23% above the stock price at the time of writing. The stock continues to have a good amount of undervaluation, as the financial outlook and stock price have both stayed stable from my previous analysis. In the previous analysis, my DCF model estimated a fair value of $93.48.

A weighted average cost of capital of 6.85% is used in the DCF model. The used WACC is derived from a capital asset pricing model:

In Q4, BJ’s had $14.4 million in interest expenses. With the company’s current amount of interest-bearing debt, BJ’s annualized interest rate comes up to 8.03%. The company continues to leverage modest amounts of debt, and I keep my long-term debt-to-equity estimate at 10%. For the risk-free rate on the cost of equity side, I use the United States’ 10-year bond yield of 4.43%. The equity risk premium of 4.60% is Professor Aswath Damodaran’s latest estimate for the United States, updated on the 5^th of January. I use the same beta estimate of 0.49 as in my previous CAPM. Finally, I add a small liquidity premium of 0.25%, creating a cost of equity of 6.93% and a WACC of 6.85%, up slightly from the previous estimate of 6.73%.

Takeaway

BJ’s Wholesale Club Holdings, Inc. is going to report the company’s Q1 results on the 23^rd of May. After a strong end to FY2023, BJ’s revenue growth and profitability is expected by analysts to soften as the company surprisingly estimates deflation for the quarter amid general disflation. I believe that the expected financial results are fair base scenario assumptions, and are unlikely to vary very much from reported financials as BJ’s should have good forward visibility. The company continues to grow its nationwide club footprint, and with a generally good FY2024 financial outlook, BJ’s operations largely follow on track. The stock continues to have a seeming undervaluation, and I keep my rating at buy.