BJ’s (BJ) Q2 2023: Own Brands Hit 30% Penetration Target as Margin Mix Shifts

August 22, 2023 | By EarningsIQ Research

BJ’s Wholesale Club leaned into its value-centric model, driving market share gains and robust member growth despite discretionary softness and gas headwinds. Margin mix improved on inventory discipline and own brand penetration, while digital and new clubs offset macro drag. Management’s cautious outlook on discretionary spend is balanced by confidence in consumables, membership quality, and long-term general merchandise transformation.

Summary

• Own Brand Penetration Surges: Private label gains are reshaping margin structure and deepening member loyalty.
• General Merchandise Reset: Inventory discipline and assortment overhaul target long-term profitability, not short-term comps.
• Membership Model Strengthens: High renewal rates and premium tier migration underpin sustainable growth.

Business Overview

BJ’s Wholesale Club operates a membership-based warehouse retail model, generating revenue through annual fees and high-volume sales of grocery, consumables, general merchandise, and gasoline. Its core segments include grocery and perishables, sundries, general merchandise and services, and fuel. Membership fee income, or MFI, is a recurring revenue stream and a key profitability driver, while private label brands and digital initiatives deepen member engagement and margin.

Performance Analysis

Despite a headline decline in total sales driven by lower fuel prices, BJ’s delivered underlying strength in its core merchandise business, with comparable club sales (excluding gas) up on traffic gains. The grocery, perishables, and sundries division led growth, comping up 4% year-over-year, while general merchandise (GM) comps fell 13% as the company intentionally reset inventory and mix to drive future profitability.

Gross margin rate excluding gasoline improved by 90 basis points, reflecting reduced supply chain pressure, less markdown activity, and a healthier sales mix. Digital engagement continues to rise, with digitally enabled sales now representing 10% of merchandise sales, up 15% year-over-year. Membership metrics remain robust, with MFI up 5% and renewal rates at record highs, driven by premium tier migration and credit card program adoption.

• Margin Mix Shift: Higher own brand penetration and GM inventory discipline drove margin expansion despite topline pressure.
• Traffic-Driven Growth: All comp gains were traffic-based, not ticket, underscoring the value proposition’s pull in a disinflationary backdrop.
• Gasoline Normalization: Fuel profits fell sharply from last year’s record, but volumes and share held up, validating the traffic flywheel model.

Overall, the quarter showcased BJ’s ability to grow member count and quality, gain market share, and expand margin while navigating macro crosscurrents and resetting GM for long-term health.

Executive Commentary

Strategic Positioning

1. Private Label Expansion

Own brands Wellesley Farms and Berkley Jensen now approach a 30% penetration target, materially boosting margin and loyalty. These brands outperform national competitors in value, driving higher spend and frequency among engaged members. The paper category, for example, saw Berkley Jensen surpass Bounty in both units and dollars for the first time.

2. General Merchandise Overhaul

BJ’s is intentionally resetting its GM business, reducing inventory, increasing margins, and shifting toward on-trend assortments. While this pressured comps in the short term, the move is designed to build a more profitable, relevant GM business over the long term. Management acknowledges that this is a multi-year transformation, not a quick fix.

3. Digital Convenience

Digital initiatives now account for 10% of net merchandise sales, with curbside pickup and same-day delivery driving engagement. App and website enhancements, such as order modification features, are reducing friction and increasing member loyalty. Digitally engaged members spend more and renew at higher rates, reinforcing the digital flywheel.

4. Membership Quality and Credit Card Migration

Premium tier penetration reached 38%, with the co-brand credit card program accelerating both new account growth and member upgrades. Higher tier members receive greater rewards and gas discounts, enhancing lifetime value. The credit card’s long-term impact is structural, not immediate, but positions BJ’s for future resilience.

5. Club Expansion and Market Entry

New club openings in strategic markets are exceeding expectations, with 27 clubs opened since 2016 contributing nearly $100 million in EBITDA over the past year. Recent expansion into Tennessee and Alabama extends BJ’s geographic reach and supports sustained member growth.

Key Considerations

This quarter’s results reflect BJ’s commitment to value, operational discipline, and member-centric growth, even as discretionary demand softens and macro pressures persist. The company is prioritizing long-term profitability over short-term sales, especially in general merchandise, while leveraging digital and own brands to deepen loyalty.

Key Considerations:

• Margin Accretion from Private Label: Own brand penetration is a durable lever for margin and member engagement, with further runway to 30%+.
• GM Transformation Trade-Off: Short-term comp declines are an intentional trade for higher future profitability and relevance in non-consumables.
• Digital Engagement Drives Stickiness: App and curbside features are not just convenience plays, but also loyalty and renewal engines.
• Membership Model Defensibility: High renewal rates and premium tier migration insulate the business from macro volatility and competitive pricing wars.
• Capital Allocation Discipline: Free cash flow is being balanced between growth investments and opportunistic buybacks, with $259 million in authorization remaining.

Risks

Discretionary spending remains under pressure, posing a risk to the pace of GM recovery and overall comp growth. Gasoline profit normalization removes a prior earnings tailwind, while wage inflation and macro uncertainty could pressure SG&A. The company’s cautious outlook on discretionary categories and focus on inventory discipline mitigate risk, but a prolonged consumer pullback or competitive pricing escalation could weigh on future results.

Forward Outlook

For Q3, BJ’s guided to:

• Comparable club sales ex-gas to grow approximately 2% for fiscal 2023
• Merchandise gross margin rate increase of about 50 basis points year-over-year for FY23 (raised from prior outlook)

For full-year 2023, management maintained:

• EPS guidance of $3.80 to $3.92, with Q3 facing tough gas margin comps and Q4 benefiting from a 53rd week

Management highlighted several factors that will shape the outlook:

• Disinflation is moderating but will persist, especially in grocery and sundries, with inflation expected to ease further in Q3 and Q4
• GM recovery is expected to accelerate in Q4 as new assortments and easier comps take hold

Takeaways

BJ’s Q2 highlights the company’s ability to drive core traffic and margin gains through value, private label, and digital, while deliberately repositioning general merchandise for long-term growth. Membership remains the core engine, with premium tier and credit card adoption strengthening defensibility.

• Margin and Membership Lead Results: Margin mix and member quality gains offset gas normalization and discretionary headwinds, supporting sustainable profit growth.
• GM Reset Is a Strategic Bet: The intentional GM reset sacrifices short-term comps for a more profitable, relevant business, with early signs of assortment traction.
• Watch for GM and Digital Leverage: Investors should monitor GM category performance in Q4 and digital engagement trends as leading indicators of future comp and margin upside.

Conclusion

BJ’s is executing a deliberate strategy to deepen its value moat, with margin expansion, premium membership migration, and digital convenience all reinforcing the core model. While discretionary softness and gas headwinds persist, the business is structurally positioned for long-term compounding through disciplined capital allocation and member-centric innovation.

Industry Read-Through

BJ’s results reinforce the resilience of the membership warehouse model in a value-seeking consumer environment, with private label and digital convenience emerging as critical levers for margin and loyalty. The intentional reset of general merchandise signals a broader industry trend toward mix and inventory discipline, even at the expense of short-term comps. For other warehouse and big-box retailers, the focus on premium tier migration, digital engagement, and own brand expansion provides a template for navigating macro headwinds and sustaining market share gains. Competitive pricing remains rational, but the battle for member wallet share is intensifying through differentiated value and convenience.

BJ Consumer Staples Retail Membership Private Label Digital General Merchandise Margin