Strong results from BJ's Wholesale show why we love Costco so much

Published Thu, Aug 18 20224:52 PM EDTUpdated Thu, Aug 18 20225:02 PM EDT

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

BJ's Wholesale Club (BJ) reported second-quarter results that easily surpassed Wall Street estimates Thursday morning, offering positive readthroughs to Club holding Costco (COST) ahead of next month's earnings release. Bottom line We'll get into the differences between the two companies — namely in scale and sales mix — but, at a high level, BJ's strong results indicate wholesaler retailers that operate under a membership-fee model are in a position to thrive in this inflationary environment. We've been making this point about its much larger rival Costco for a while, and BJ's numbers — combined with solid results from Walmart -owned Sam's Club earlier in the week — only serve to bolster our conviction. We maintain a 1 rating on Costco, meaning see it as a buy at these levels. Costco has a market cap is more than $248 billion. BJ's quarter Massachusetts-based BJ's earned an adjusted $1.06 per share on quarterly revenue of $5.01 billion, when analysts were looking for EPS of 80 cents and revenue of $4.57 billion, according to FactSet. Drilling down on key metrics for wholesalers, quarterly membership fee income grew 11.3% year to year to $98.8 million and topped estimates by nearly $2 million. Overall member count grew 6% year over year. Same-store sales, excluding gasoline, rose 7.6% year over year, much better than FactSet estimate of 4.2%. Gross margin rate on merchandise sales, which excludes gas and membership fees, came in at 15.2% versus estimates of 13.4%. That was down from 16.5% in the year-ago quarter, however, as factors such as freight costs and merchandise markdowns weighed on profitability. BJ's management also raised its full-year comparable sales guidance, saying it now expects growth in the 4% to 5% range, up from its old forecast of "low single digit." Full-year EPS guidance is now between $3.50 and $3.60, up from approximately $3.25. Shares of BJ's surged more than 8% Thursday, hitting a new 52-week high, as investors cheered the quarter. So impressed by the results, Bank of America upgraded BJ's to buy from hold in a note to clients after the opening bell — not something that happens often. BJ's is a $10 billion market cap company. Sam's Club quarter Before we got Thursday's results from BJ's, we also saw solid Sam's Club results Tuesday along with better-than-feared numbers from its parent company Walmart. (Remember, like BJ's and Costco, Sam's Club is a wholesaler that uses a membership-fee model.) Sam's Club membership hit an all-time high in the quarter ended July 29, and income from those fees rose 8.9% on a year-over-year basis. "Sam's added more new members in Q2 than any other quarter in recent years, benefiting from membership campaigns," CFO John Rainey said on WMT's earnings call. Sam's Club revenue of $21.9 billion exceeded FactSet estimates of $21.52 billion, although $427 million in operating income fell well below analyst expectations of $701.4 million. Management said operating income was dragged down by higher-than-usual markdowns to clear excess goods and a $123 million accounting charge related to inflationary impacts on inventory. Comparable store sales at Sam's Club, excluding gas, increased 9.5% year over year, slightly missing FactSet estimates of 10.1%. The number of transactions in the quarter rose 9.8% compared with the year-ago period. Goldman Sachs analysts liked what they saw in Sam's Club's results, writing in a note to clients Tuesday they thought the "strong" numbers foretold positive things for BJ's Wholesale when it reported in two days. That proved to be a good call. What about Costco? The BJ's and Sam's Club results show the benefits of operating a members-only wholesale chain with a reputation for providing customers value. This is central to why many people sign up to be members at the likes of Costco, BJ's and Sam's Club to begin with. But following months of scorching-hot inflation, the value proposition these wholesale retailers offer can be spotted from a country mile away. "Our members are increasingly relying on us to fulfill their shopping needs," BJ's CEO Bob Eddy said Thursday on the earnings call, an illustration of our point above. To that end, Eddy said "significant gains in traffic and market share," led by the grocery category, were big drivers of BJ's results. People are looking for value, which all three wholesalers are in a position to provide by nature of their membership models. There are some differences between the three companies that are important to consider when making readthroughs, though, in addition to our belief in Costco's top-notch management team. Scale is the first. Costco is the largest of the trio with 837 warehouse stores globally, and roughly 82% of them are located in the U.S. or Canada. BJ's has 229 club locations in just 17 states, with a heavy concentration in northeast states like New York, Massachusetts and New Jersey. Costco, for comparison, is in 46 states and Puerto Rico. Sam's Club has 600 locations across 44 U.S. states and Puerto Rico, according to Walmart's latest annual report. (Fun fact: Sam's Club does not have locations in Massachusetts or Washington, the home states of BJ's and Costco, respectively.) The sales mix varies across the three companies, as well, which is crucial to keep in mind when trying to understand how the current retail operating environment of value-seeking consumers and inventory markdowns impacts each wholesaler. (Segment names, as reported by the company, are in bold.) Grocery accounted for 71% of BJ's merchandise sales in its fiscal 2021, according to the company's annual report. BJ's grocery category is broad, including both meat and fresh produce in addition to packaged foods and even things like beauty care and paper products. General merchandise and services represented 14% of sales, with gasoline and other contributed 15%. Costco's two food-related categories combined for 54.4% of its fiscal 2021 merchandise sales, while non-foods — which includes appliances, apparel and more — accounted for 29.2%. Warehouse ancillary and other businesses — gasoline, pharmacy, food court, and more — represented 16.5% of merchandise revenue. Grocery and consumables were 63.7% of Sam's Club's merchandise sales in its latest full fiscal year, followed by fuel, tobacco and other categories at 15%. Home and apparel represented 11.9% of merchandise sales. Health and wellness — consisting of pharmacy, over-the-counter drugs and optical and hearing services— accounted for 5.4%. The remaining 4.1% came from technology, office and entertainment . What stands out is BJ's has the largest sales exposure to food, followed by Sam's Club then Costco. This is noteworthy because in general a rise in food prices means a larger share of consumers' discretionary income is going toward necessities like groceries, leaving less money left over for discretionary purchases. That dynamic has been felt most acutely by lower-income consumers in recent months. However, Walmart CEO Doug McMillon told CNBC on Tuesday that "people are really price-focused now, regardless of income level." One thing to watch will be how Costco's smaller food share impacts its results, given concern about spending on discretionary items. Perhaps members will choose to do more of their food shopping at Costco, forgoing stops at other grocers to capitalize on the wholesaler's value offerings. Under this scenario, it could help offset less spending in other categories, thought it could impact profits since food is lower-margin. Another possibility is that the higher-income mix of Costco members could mean they're in a position to keep buy things like new clothes, books and patio furniture, putting less pressure on more general merchandise categories. We know that Costco's members tend to be "middle- to upper-middle income," in the words of CEO Craig Jelinek, who spoke to CNBC last month and indicated members appeared to beholding up well despite recession concerns. While we don't have Costco's overall earnings yet, we do have individually monthly sales data for May, June and July that back up Jelinek's remarks. In May, Costco's company-wide comparable sales rose 11.8% year over year , followed by a 13% jump in June and a 7% gain in July. In July, in particular, Costco saw "low double digit" growth in its food and sundries category, which includes frozen foods and so-called dry grocery items like pasta. Fresh foods, led by bakery and produce, rose low to mid-single digits. On BJ's earnings call Thursday, management noted on multiple occasions how the recent spike in fuel prices helps the company demonstrate its value to customers and drive foot traffic into stores. This is a dynamic that Costco management has spoken to in the past, and all signs indicate it will have continued to help Costco in its 16-week fourth quarter (which started in May 9 and ends Aug. 28). What's more, Eddy, the BJ's CEO, said the company's earnings were helped by a "higher-than-normal" profit per gallon once gas prices started to roll over in June. The CEO attributed that to the way prices at the pump lag falling input costs, providing a lift to profits when combined with an overall increase in people buying gas at BJ's. This is another layer to the gas dynamic that could help Costco on the earnings front. As a reminder, membership fees are generally Costco's most important source of profits. They are primarily what allows Costco — and BJ's and Sam's Club, for that matter — to offer competitive prices on other products. (Jim Cramer's Charitable Trust is long COST. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Customers carry their items after shopping at Costco in Washington D.C., May 5, 2021.

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