Tariff Risks And Texas Competition Will Foster Digital Opportunities

Key Takeaways

• BJ's faces competition from established players and may struggle with market share and revenue in new regions like Texas.
  
• Rising costs and tariff risks could pressure margins and profitability if not offset by price adjustments.
  
• BJ's strong sales, high membership renewal, and digital growth indicate potent revenue potential and successful expansion strategy for future market share gains.

Catalysts

Operates membership warehouse clubs on the eastern half of the United States.

• BJ's expansion plans into new markets like Texas could face significant competition, potentially impacting their revenue and ability to capture market share, especially if consumer preferences lean towards established competitors like Costco and Sam's Club.
  
• Tariff risks and rising costs of key commodities could lead to increased pricing pressures. This may result in margin compression, affecting BJ's profitability if they are unable to fully pass these costs on to consumers.
  
• As BJ's continues to invest heavily in digital and real estate initiatives, capital expenditures are expected to rise to approximately $800 million. High investment levels without proportional revenue growth could impact net margins and result in less efficient earnings growth.
  
• The increase in membership fees and potential consumer backlash could offset the growth in membership fee income, especially if renewed interest in spending slows down or if members are sensitive to price changes, impacting overall earnings.
  
• The expected slowdown in comparable club sales growth to 2% to 3.5% from higher previous growth rates suggests possible revenue deceleration. This slowdown may not align with investor expectations, negatively affecting future earnings and stock valuation.

BJ's Wholesale Club Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on BJ's Wholesale Club Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming BJ's Wholesale Club Holdings's revenue will grow by 5.2% annually over the next 3 years.
• The bearish analysts are assuming BJ's Wholesale Club Holdings's profit margins will remain the same at 2.6% over the next 3 years.
• The bearish analysts expect earnings to reach $611.1 million (and earnings per share of $4.78) by about May 2028, up from $534.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.5x on those 2028 earnings, down from 29.4x today. This future PE is lower than the current PE for the US Consumer Retailing industry at 25.0x.
• Analysts expect the number of shares outstanding to decline by 0.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.59%, as per the Simply Wall St company report.

BJ's Wholesale Club Holdings Future Earnings Per Share Growth

Risks

• BJ's Wholesale Club Holdings achieved record net sales, membership, and adjusted earnings per share for fiscal 2024, indicating strong financial health and potential for future revenue and earnings growth.
  
• The company reported a 4.6% growth in comparable club sales excluding gas sales in the fourth quarter, driven by robust traffic and unit growth, which may sustain or improve revenue.
  
• Membership is at an all-time high with a 90% renewal rate, showcasing strong customer loyalty and potential for continued membership fee income growth.
  
• BJ's digital sales grew by 26% year-over-year in the fourth quarter, with 53% growth on a two-year stack, indicating significant revenue potential through enhanced digital engagement and convenience offerings.
  
• The company's aggressive expansion strategy, including the opening of new clubs and gas stations, might lead to increased market share and revenue generation across existing and new markets.

Valuation

• The assumed bearish price target for BJ's Wholesale Club Holdings is $77.0, which represents two standard deviations below the consensus price target of $115.44. This valuation is based on what can be assumed as the expectations of BJ's Wholesale Club Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $140.0, and the most bearish reporting a price target of just $63.34.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $23.9 billion, earnings will come to $611.1 million, and it would be trading on a PE ratio of 19.5x, assuming you use a discount rate of 6.6%.
• Given the current share price of $119.38, the bearish analyst price target of $77.0 is 55.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.