BJ's Wholesale Club Holdings: Still Waiting For Valuation To Come Down

Core Viewpoint - The company maintains a hold rating for BJ's Wholesale Club Holdings due to its high valuation despite strong fundamentals and positive demand outlook [2][8]. Financial Performance - In 2Q24, BJ reported total revenue of $5.2 billion, reflecting approximately 5% year-over-year growth, driven by same-store sales (SSS) growth of 2.4% primarily from increased traffic [3]. - The total gross margin improved to 18.4%, resulting in a gross profit of approximately $960 million, while operating costs increased by 7.7% year-over-year, leading to SG&A expenses of $748 million [3]. - BJ achieved an EBIT margin of 3.9%, equating to around $203 million, which exceeded consensus estimates by approximately $3 million [3]. Demand and Market Position - BJ is well-positioned to benefit from the current consumer spending environment, evidenced by strong SSS growth for three consecutive quarters, with traffic contributing 400 basis points to the growth [4]. - All product segments showed improvements, with perishables, groceries, and sundries experiencing around 3% SSS growth, while apparel saw high-single-digit revenue growth [4]. - The company added the highest number of members since COVID, reaching approximately 7.5 million members, indicating strong demand and consumer engagement [5]. Membership Fee Potential - There is potential for BJ to increase membership fees, as the company has not raised prices in the past five years, and a fee increase could significantly impact year-over-year growth [6]. - A precedent set by Costco's recent fee increase suggests that BJ may follow suit, which could generate over $30 million in additional membership fee income [6]. Valuation Concerns - Despite a robust fundamental outlook, BJ's valuation has risen to approximately 20x, which is considered too high relative to expected earnings growth and peer valuations [7]. - Similar peers in the industry trade at an average multiple of around 16x, indicating that BJ's current valuation is not attractive enough to warrant an upgrade to a buy rating [7]. Conclusion - The overall assessment for BJ remains a hold rating due to its relatively high valuation, despite strong 2Q24 results and a positive demand outlook [8].