BJ’s Wholesale Goes Public Again, With a Yawner of a First Quarter

Longtime listeners to Motley Fool podcasts will know that quite a few of our analysts are big fans of Costco (NASDAQ: COST), so you might think that the similar warehouse chain BJ’s Wholesale (NYSE: BJ) would earn similar affection.

But there are many reasons why it doesn’t, as host Mac Greer and senior analysts Andy Cross and Jason Moser explain in this segment from the Market Foolery podcast. The retailer — which was taken private a few years ago and recently returned to the markets with an IPO — reported earnings this week, and they were … OK. So why is this such a “glass half empty” story for these Fools? Allow them to explain.

A full transcript follows the video.

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This video was recorded on Aug. 28, 2018.

Mac Greer: We’ve got BJ’s Wholesale reporting better than expected earnings. Andy, I got all excited reading that report. Then the stock was down a little. BJ’s, this is a confusing company, because it was public, then it went private, and now this earnings report is the first report of the new BJ’s Wholesale public company. What gives?

Andy Cross: Private equity took it private in 2011. They reconfigured it and spun it back out to the public markets this year. The stock’s been up a little bit since it came public. But basically, the story there is, their membership fee was up about 10% and their comp sales x gasoline prices was up about 2%. The guidance is about the same thing. I mean, this is a retail story. There’s a membership fee. They really try to compete against the Costcos and the Walmarts of the world, mostly on the East Coast. I mean, I wish them luck, but the environment that they operate in now is far different than what they did in 2011.

Greer: It’s tough. You know that I love me some Costco. Jason, we were talking before the show, you have been a member of BJ’s Wholesale. Tell me about BJ’s.

Jason Moser: Well, yeah, back in mid 2000s, when we were in Newnan, Georgia, there was a BJ’s Wholesale there. And we frequented there as we were going overseas, to get diapers and formula in bulk. I mean, it is very much a Costco-like experience. I think that’s fine. We’ve been very, maybe not critical of Costco, but at least we’re questioning Costco’s ability to grow at this point, given this new e-commerce world and how things are changing.

Mac, I try to be an optimist. I like looking at things from a glass half full perspective. But with BJ’s, I have to be glass half empty. It goes back to the IPO that they just pulled off here. All of the money that was raised from that IPO went to pay down debt. That essentially was debt saddled on that balance sheet from their time with Leonard Green.

Cross: Yeah. They have $1.9 billion of debt and only $30 million of cash.

Greer: Who gets hurt in all of that maneuvering? Is that a victimless crime? Who gets hurt when you have a company like that, that was public, and then goes private, and then goes public again?

Moser: The people who get hurt most are perhaps investors today looking at this story as maybe a second chance, as a great opportunity for BJ’s to get out there and capture this market that clearly exists. Really, I mean, you look at the company, when they go public, you like to see them raise that money for growth. In order for BJ’s to compete in this space, they’re going to need to grow their store base. Their store base is like a third the size of Costco. Well, in order to grow that store base, they’re going to need a lot of money to do it. That IPO could have raised them a lot of money in order to do that. But they’re not going to get that money, because that money all went to paying down debt. So now, BJ’s has to rely on its own success to essentially generate cash, to basically self-fund and grow. If they can’t do that, then they’re going to have to rely either on taking out more debt or issuing more shares. In either case, shareholders probably get hurt along the way.

Greer: And what’s the reason or rationale for joining a BJ’s versus a Costco? Or, at the end of the day, is their best hope just to be in places where Costco isn’t?

Moser: Well, I think generally speaking, it would be trying to be in an area where Costco is not. The problem is, Costco is in a lot of places already. Again, their store base is about three times the size of BJ’s. Trying to find those markets where Costco doesn’t exist yet, while also proving that to be a lucrative market opportunity, that’s a difficult vault to make there. I wish them luck. I don’t know that I would want to be owning this stock at any point in time.

Greer: You know the other problem? Costco is awesome!

Moser: Well, I don’t know that BJ’s is known for, what, the $1.50 hot dog.

Greer: No.

Moser: No Jim Sinegal in their history.

Greer: No. I tried to be middle of the road on this. And I have never gone to BJ’s Wholesale.

Cross: You don’t even try to be middle of the road. Let’s be honest.

Greer: I’m not middle of the road. I just, I don’t know, how are you going to get me if I’ve got the option of going to Costco? There has to be some compelling reason. I’m not going to be a member of both.

Moser: I think you raise a good point there. Costco has a very loyal base already. The people that I know who are members of Costco really like being members of Costco. They’re loyal. Just like Amazon Prime members. Amazon’s done a very good job of growing a loyal subscriber base over time. Netflix has done the same thing. Costco has done the same thing. It’s not to say BJ’s can’t do it. But that hurdle is really high to clear, and they have to do that if they want to maintain any kind of market share in this space. Otherwise … this is already a razor-thin margin game as it is.

Greer: And with Costco, honestly, I get my membership fee back every year in free samples alone. If you said, you could not buy anything at Costco, you cannot buy anything for the coming year, but you get the free samples, I would still be a member. Is that a sickness?

Cross: No, it’s not a sickness.

Greer: It’s a cry for help.

Cross: It’s the Mac Greer that we all know and love. For BJ’s, it’s really going to come down to, the income has to continue to grow. They’re competing in a space that is just so competitive. That’s all margin profits for shareholders. If they want to see any of that growth, it’s got to come on the membership line.

Moser: And the other thing is, you think about Boxed. exists today. It didn’t exist back when these guys went private. You’ve got warehouse-style business that’s just online, and you don’t even need the membership fee to buy from Boxed. And Boxed actually uses Costco as a supplier, in some cases. There’s a good example of synergies, two companies in the same space working together. I feel like BJ’s is just left out in the cold.

Greer: Guys, as we wrap up, I’m going to take this vow. I want to take a walk on the wild side in my later years. I will vow, in the next one to two years, to go into a BJ’s Wholesale.

Moser: No, you won’t.

Greer: Yes, I will! I don’t want any footage, no paparazzi, but I’m going to do it. I need to keep an open mind.

Moser: I’m not doubting you’re making the vow. I’m doubting that you actually follow through on that.

Greer: You can drive me there.

Cross: We’ll hold you accountable for that.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Andy Cross owns shares of Netflix. Jason Moser has no position in any of the stocks mentioned. Mac Greer owns shares of Amazon, Costco Wholesale, and Netflix. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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