The pace of U.S. initial public offerings has slowed in recent years, so new IPOs tend to get attention.
In the case of BJ’s Wholesale Club, you had better think twice about buying. The company was taken private by CVC Capital Partners and Leonard Green & Partners in 2011, and its owners’ attempt to cash in is not backed up by rapid sales growth or strong financial performance.
BJ’s BJ, +0.00% is a relatively small competitor when compared with Costco Wholesale Corp. COST, -0.80% and Walmart Inc. WMT, -0.52% unit Sam’s Club. What really sets BJ’s apart is its low profitability.
BJ’s filed an S-1 report with the Securities and Exchange Commission on May 17 in which it proposed raising up to $100 million in a public offering of shares, although that target number might change. The company runs 215 warehouse stores in 16 states, primarily in the Northeast, compared with Costco’s 741 stores in 11 countries (as of Sept. 3, 2017), and Sam’s Club’s 597 stores in 44 states and Puerto Rico (as of Dec. 31, 2017).
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A wordy pitch
In its IPO filing, BJ’s said that over the past two years, its new management team “has implemented significant cultural and operational changes to our business, including transforming how we use data to improve member experience, instilling a culture of cost discipline, adopting a more proactive approach to growing our membership base and building an omnichannel offering oriented towards making shopping at BJ’s more convenient.”
All that has led to “positive and accelerating comparable club sales over the last two quarters and net income growth of over 109% and adjusted EBITDA growth of 31% in aggregate over the last two fiscal years,” the company said.
It was no surprise that BJ’s also expressed confidence that “these changes will continue to impact sales, profit margins and free cash flow performance favorably in the future.”
Ugly numbers for BJ’s
Supermarkets have always been low-margin businesses that need to focus on volume in order to maximize profits. Club warehouse stores also focus on volume but rely on annual membership fees for profits. We only have three full years of data for comparison, but it is clear that BJ’s is far less profitable than Costco or Sam’s Club.
Here are simplified comparisons of all three, and the format varies depending on how each company breaks down its numbers.
For BJ’s, we have calculated gross and net profit margins as well as the ratios of income for taxes and net income to annual membership fees:
| BJ’s Wholesale Club Holdings (dollar amounts in thousands) | |||
| Fiscal year ended Feb. 3, 2018 | Fiscal year ended Jan. 28, 2017 | Fiscal year ended Jan. 30, 2016 | |
| Net sales | $12,495,995 | $12,095,302 | $12,220,215 |
| Membership fees | $258,594 | $255,235 | $247,338 |
| Total revenue | $12,754,589 | $12,350,537 | $12,467,553 |
| Cost of sales | 10,513,492 | 10,223,017 | 10,476,519 |
| Gross profit margin | 17.57% | 17.23% | 15.97% |
| Income from continuing operations before income taxes | $23,548 | $72,668 | $36,703 |
| Provision (benefit) for income taxes | ($28,427) | $27,968 | $12,049 |
| Net income | $51,975 | $44,700 | $24,654 |
| Net income margin | 0.39% | 0.36% | 0.19% |
| Income from continuing operations before taxes/ membership fee revenue | 9.11% | 28.47% | 14.84% |
| Net income/ membership fee revenue | 19.45% | 17.33% | 9.75% |
| Source: Company filing | |||
A company’s gross margin is its sales, less the cost of goods sold, divided by sales. It does not include overhead or interest expense. It measures profitability on core products and services, and you can see that it has been improving for BJ’s.
The company’s net income margin (net income/total revenue) has also improved, but it is far lower than Costco’s net margin. BJ’s ratios of operating and net income to membership fees have also been low.
Here are numbers for the past three full years for Costco:
| Costco Wholesale Corp. (dollar amounts in millions) | |||
| Fiscal year ended Sept. 3, 2017 | Fiscal year ended Aug. 28, 2016 | Fiscal year ended Aug. 30, 2015 | |
| Net sales | $126,172 | $116,073 | $113,666 |
| Membership fees | $2,853 | $2,646 | $2,533 |
| Total revenue | $129,025 | $118,719 | $116,199 |
| Gross margin, as reported | 11.33% | 11.35% | 11.09% |
| Income before income taxes | $4,039 | $3,619 | $3,604 |
| Provision for income taxes | $1,325 | $1,243 | $1,195 |
| Net income including noncontrolling interests | $2,714 | $2,376 | $2,409 |
| Net income attributed to noncontrolling interests | ($35) | ($26) | ($32) |
| Net income attributable to Costco | $2,679 | $2,350 | $2,377 |
| Net income margin | 2.08% | 1.98% | 2.05% |
| Income before income taxes/ membership fee revenue | 141.57% | 136.77% | 142.28% |
| Net income/ membership fee revenue | 93.90% | 88.81% | 93.84% |
| Source: Company filing | |||
Costco’s net income margins and ratios of operating and net income to membership fees have been much higher than those for BJ’s.
Here are similar numbers for Sam’s Club, taken from Walmart’s most recent annual report:
| Sam’s Club (dollar amounts in millions) | |||
| Fiscal year ended Jan. 31, 2018 | Fiscal year ended Jan. 31, 2017 | Fiscal year ended Jan. 31, 2016 | |
| Net sales | $59,216 | $57,365 | $56,828 |
| Membership fee revenue recognized | $1,411 | $1,372 | $1,348 |
| Operating income | $982 | $1,671 | $1,820 |
| Operating income/ net sales | 1.66% | 2.91% | 3.20% |
| Operating income/ membership fee revenue | 69.60% | 121.79% | 135.01% |
| Source: Company filing | |||
There are limitations to what can be compared with BJ’s and Costco because Sam’s Club’s numbers are a subset of those for all of Walmart. But the trend is clear. Profits for the warehouse store business model are derived from membership fees, and BJ’s makes much less money relative to membership fees and operating income than Costco or Sam’s.
Costco provides the best direct comparison to BJ’s because we have a full set of numbers to work with.
Initial public offerings can be exciting events for investors, but you need to have a compelling story. A new management team and weak set of numbers from BJ’s are hardly inspiring.