BJ - BJ’s Wholesale Club

[hasilp89]

Has anyone spent time on BJ’s or have any thoughts on them vs. COSTCO. The thesis for Costco is pretty well known. BJs has a similar business model although they’re much smaller and appear to have much smaller per store sales. Store count isn’t growing as aggressively.  Large valuation gap and assume it’s because of this but know they compete well with Costco in my town. Wondering if there is a longer term runway for growth. 

 

What I know from a high level:

- Similar business model to Costco/Sams - club warehouse with a membership fee

- higher SKU count than Costco/sams but claim to have similar prices and more convenient selection

-  prides it self on being 25% cheaper than the grocer

- 217 stores all on the east coast. Have not expanded store base significantly since Detroit expansion in 2015 (has focused on margins). Avg store revenue of $69m. Here’s where I’m seeing Costco have a huge leg up 803 stores and I’m getting nearly $200m/store.

- Current distribution base can support 100+ new stores

- New store economics - 5 years to ramp to $50m in revenue. 5 year payback, breakeven in year 1

-  6 million members - retention in the high 80% range (Costco 59m h/h, 109m cardholders retention at 90.9%)

- $325m membership fees - EV multiple of 26x (Costco $3.6b in membership fees - EV multiple of 39x).

 

[n.r98]

No comments interestingly so I'll give it a stab. Costco is so well-loved by the investment public so I presume most people would naturally vote for Costco.

BJ's is interesting, not only do they offer a membership fee, they are the only discounted warehouse club that allow members to apply manufacturer coupons to further the discount. They are actually expanding their storebase by 6-10 stores, ~3-4% of storebase increment. Costco is doing only about ~1% in the US, of course coming coming from a higher storebase.  Management claims to have found the formula for opening new stores; historically after IPO, they've only been opening 1 store a year and ever since the overwhelming response for their new stores in Michigan, they're expanding aggressively. Measuring Costco's market value/store across its entire storebase is quite inaccurate; Costco abroad generates way better margins than Costco US. BJs also generates higher gross margins without price compromise; apparently based on external opinions(i.e. youtube(don't laugh) etc), the price is not much different between the trio retailers. What is cheaper/more expensive depends on the volume discount at each respective warehouse. The higher gross margins imo comes from BJs focusing on selling high margin items with less froth/ancillaries; Costco has larger sales coming from ancillaries(e.g. gasoline, hotdogs) etc to drive traffic and incremental sales albeit at a loss hence the depressed margins. Costco also marks their inventory via LIFO vs BJs AVCO so that sort of contributes to higher COGS as well. I think the whole gross margins think is overblown; ideally it is better if one can earn higher margins per incremental sales while keeping the discount mantra intact. Imo, Costco's edge was mainly its culture and management.

Moreover, BJ's also been furthering their digital platform and they've grown really fast the past year. Only concern would be the same mistake Charlie Munger made with Corts, was 2020 a "cyclical peak"(pandemic induced demand) and is management being too aggressive in their store openings mistaking correlation for causation?  Also, based on their membership fee and members growth count, they've been offering first year discounts/perks; will the new cohort renew their membership when the fee reverts?

Edited April 6, 2021 by n.r98

[Longnose]

15 hours ago, n.r98 said:

 Imo, Costco's edge was mainly its culture and management.

 

 

I agree strongly with this statement. How much do you know about the culture and management of BJ's? I had a roommate in college who worked for costco. He was obsessed with working for them and did so for a very long time. He loved how they treated their employees. My uncle also worked for them for a time after he retired and said he loved the employee culture while working there. I believe culture really defines many companies. 

If you have some insights into how the management operates I would be quite interested in hearing about it.

 

Its stuff like this that makes me smile and love costco. 

Quote

When Costco's current CEO, Craig Jelinek, once approached Sinegal, then the CEO, about raising the price of the hot dog, Sinegal told him, "If you raise the [price of the] effing hot dog, I will kill you. Figure it out." 

 

[Spekulatius]

BJ’s is strong here in New England. Our family is a Costco members for quite some time. Anecdotal, my wife was able to convert two families we got to know when moving here to Costco from BJ’s simply by taken them along to the Costco warehouses one or two times.

My wife also got shown the BJ’s but she think it’s not worthwhile and she found the shopping experience vastly inferior to Costco. It reminded her of shopping at Walmart.

 

When I looked at BJ’s as a stock a while ago, I noticed that it looked optically cheap,  however they lease  all their warehouses, if I remember correctly. Costco owns quite a few of their locations, so I’d you compare both, you need to take this I to account, which diminishes the valuation gap somewhat.

Edited April 6, 2021 by Spekulatius

[fareastwarriors]

What about relative to Sam's Club? 

[hasilp89]

I don’t have anything insightful on the culture, they went public out of PE ownership and it seems the exec team is buttoned up well but can’t speak to the average employee. 
That hot dog story made me chuckle  probably going to get one next time I’m there because of it. 
FWIW I didn’t really do much additional work or invest. It has traded up on the back of strong 2020, valuation and analyst upgrades. Tend to agree that COST is the better LT business.

[n.r98]

3 hours ago, Spekulatius said:

BJ’s is strong here in New England. Our family is a Costco members for quite some time. Anecdotal, my wife was able to convert two families we got to know when moving here to Costco from BJ’s simply by taken them along to the Costco warehouses one or two times.

My wife also got shown the BJ’s but she think it’s not worthwhile and she found the shopping experience vastly inferior to Costco. It reminded her of shopping at Walmart.

 

When I looked at BJ’s as a stock a while ago, I noticed that it looked optically cheap,  however they lease  all their warehouses, if I remember correctly. Costco owns quite a few of their locations, so I’d you compare both, you need to take this I to account, which diminishes the valuation gap somewhat.

Interesting anecdotes. How long ago was this and do Americans entertain the idea of being a member of multiple clubs? Also, how do you think factors such as distance play a role in one choosing a warehouse club? P.s. I don't live in America so I've never experienced the whole big box club culture.

Yes, the leases are definitely an issue(one of my pushbacks as well) and add some fragility to the B/S. However, how much of leasing is truly bad if the business model has a good dose of anti-fragility embedded within; acceleration during a pandemic. Owning a valuable portfolio of real estate didn't prevent Sears from sinking to the ground but was definitely a boon of resiliency for Costco because of its durable business model. Moreover, leasing definitely helps them expand their store-base faster so the execution better be precise. The next year or 2 will be interesting; if this does turn out to be a cyclical-peak, then management(with their aggro expansion) and shareholders will have all fallen prey to narrative fallacy.

Edited April 7, 2021 by n.r98

[wabuffo]

Its been a long time since I looked closely at the US club store competition, but one thing that always stood out for me was just how far ahead Costco was vs Sams Club and BJ's Wholesale in terms of their warehouse sales productivity.

I just went back to the most recent 10-Ks and isolated their US sales and US total square footage (not counting their distribution operations that re-supply the warehouse stores).

Costco warehouse clubs are almost twice as productive as Sam's or almost two-and-half times vs BJ's - its really not even close and never has been as far back as I can remember.

wabuffo

Edited April 7, 2021 by wabuffo

[n.r98]

6 hours ago, Longnose said:

 

I agree strongly with this statement. How much do you know about the culture and management of BJ's? I had a roommate in college who worked for costco. He was obsessed with working for them and did so for a very long time. He loved how they treated their employees. My uncle also worked for them for a time after he retired and said he loved the employee culture while working there. I believe culture really defines many companies. 

If you have some insights into how the management operates I would be quite interested in hearing about it.

 

Its stuff like this that makes me smile and love costco. 

 

Costco definitely upholds a sublime reputation and I do not disagree. Just to play the devils advocate, how much of this great culture is simply having more employees/warehouse(less work/employee) compensated with fatter paychecks(more $/work done)?

Edited April 7, 2021 by n.r98

[Gregmal]

Anecdotally, my mother, who has been looking to move out of Tampa, FL(to something either in North Florida or the NC/SC/VA area)....refuses to consider any place that doesnt have a Costco within 30 minutes. Costco is a cult. And a good one.

[Pelagic]

As a BJs member I have no complaints. If you need or have a way to store the quantities they sell you'll almost always find a better value buying it there than at most grocery stores like Publix. The two stores near me seem like they're always packed and during the height of the Pandemic last year it was pretty insane, even during off hours there would be a line of a hundred plus people wrapping around the store waiting to get it - I went elsewhere. Something that's always struck me as odd about BJs is the attached gas station. Members routinely wait in a 20 minute or longer line just to save what, maybe $2 or $3 on their total gas purchase... insanity and yet there's always a long line for gas.

[Longnose]

14 hours ago, n.r98 said:

Costco definitely upholds a sublime reputation and I do not disagree. Just to play the devils advocate, how much of this great culture is simply having more employees/warehouse(less work/employee) compensated with fatter paychecks(more $/work done)?

 

I like playing the devils advocate game. 

I would personally argue that culture drives more employees/warehouses with bigger paychecks and not the other way around.

If I had to guess the reason Charlie Munger loaded up a significant portion of his net worth into COST is because he saw the culture Senegal was creating and knew that it would foster long term growth. When people want to work for a company because of the way it treats its employees it can only help a company grow.

I live on the west coast so I have never been in a BJ's. So i have no reference for how people perceive them. The revenue and growth numbers do look good on paper. When I look on Glassdoor.com I see a 3.2 star rating with 61% of reviewing employees approving of the CEO. Vs COST with 4.1 stars and 91% approve of CEO. Granted these numbers can be skewed by an HR department that cares about these metrics and works to improve them. 

I really like looking for companies with superb culture/management. I keep a pretty concentrated portfolio and the companies I tend to hold onto are the ones where I really believe in the management. So the more I can learn about Lee Delaney the better. 

[Castanza]

Been a member at all 3 within the last 5 years. 
 

Costco > BJ’s > Sam’s 

Samsclub just feels like a cheap knockoff of Costco and ends up being disappointing. Although I do keep a membership there simply for their gas rewards. At least at BJs I’m getting a solid discount most of the time. 
 

 

[dwy000]

BJ's CEO just passed away unexpectedly.  The CFO has taken over.  Not sure how key he was in the culture or if this will impact growth but it will certainly be disruptive for a while.