BJ’s Wholesale Club (BJ) Q1 2023: Merchandise Margin Rises 100bps as Membership and Digital Engagement Deepen
Merchandise margin expansion and resilient membership drove record operating results for BJ’s despite general merchandise softness. Strategic investments in digital and private label paid off, while the new co-brand credit card accelerated higher-tier engagement. Management expects moderating margin tailwinds and cautious general merchandise trends as the year progresses.
Summary
- Margin Expansion Anchors Results: Supply chain relief and disciplined pricing fueled notable merchandise margin gains.
- Membership Quality and Digital Penetration Advance: Higher-tier and digitally engaged members grew, supporting long-term value.
- General Merchandise and Macro Caution Persist: Leadership signals a conservative outlook amid discretionary demand headwinds.
Business Overview
BJ’s Wholesale Club operates a membership-based warehouse club model, generating revenue from annual fees and the sale of groceries, sundries, general merchandise, and gasoline. Its core segments include groceries/perishables, sundries, general merchandise/services, and fuel. Membership fee income (MFI), recurring annual revenue from member subscriptions, is a critical profit driver, while digital and private label sales are rising as strategic priorities.
Performance Analysis
BJ’s delivered a record first quarter in adjusted EBITDA, propelled by a 5.7% merchandise comp sales increase (excluding gas) and a 100 basis point improvement in merchandise gross margin. The margin expansion was driven by declining diesel and ocean freight costs, as well as lapping last year’s inflation-driven price investments. Grocery, perishables, and sundries remained robust, with comp sales up 8%, while general merchandise and services comps fell 8% as consumers prioritized essentials and weather dampened seasonal categories.
Membership trends remained a standout: member count grew 5% year over year, higher-tier penetration reached 38%, and renewal rates held at a record 90%. The launch of the new co-brand credit card with Capital One, offering enhanced rewards and gas discounts, saw rapid adoption, with over 115,000 new card members added since launch. Digital engagement was another bright spot, with digitally-enabled comp sales up 19% and now comprising 10% of net merchandise sales, led by services like BOPICK (buy online, pick up in club) and same-day delivery.
- Margin Relief from Supply Chain: Distribution cost normalization and reduced freight/diesel spend lifted merchandise gross margin by 100bps.
- General Merchandise Drag: Discretionary categories saw volume and ticket declines, reflecting both macro caution and weather impacts.
- Digital and Private Label Growth: Digital penetration and own brand sales both outpaced overall market growth, deepening member loyalty and spend.
Despite a strong operating quarter, adjusted EPS dipped due to an unexpected tax expense, not core business weakness. Cash flow remained healthy, enabling continued investment in club expansion and digital initiatives.
Executive Commentary
"Our business continued to perform at a high level, demonstrating the power of our member-centric model and the Warehouse Club channel. Membership is by far the most important product that we sell, and it's also our most valuable asset."
Bob Eddy, President and Chief Executive Officer
"Net sales for the first quarter were $4.6 billion, a 5% increase over the prior year...Merchandise gross margin rate improved by 100 basis points year over year, primarily due to a much anticipated and welcome relief in supply chain costs that challenged our business last year."
Laura Felice, Chief Financial Officer
Strategic Positioning
1. Membership Model as Core Moat
BJ’s doubled down on membership quality and retention, achieving record renewal rates and higher-tier penetration. The company’s new co-brand credit card, with enhanced rewards and gas discounts, is designed to further elevate member lifetime value and loyalty, especially as higher-tier members now account for 38% of the base.
2. Digital Convenience and Engagement
Digitally enabled sales rose 19%, with nearly 70% higher spend from digitally engaged members versus club-only members. The company’s investments in BOPICK, curbside, and same-day delivery are deepening engagement and driving higher renewal rates, positioning BJ’s to capture shifting consumer preferences for convenience.
3. Private Label Penetration
Own brand (private label) sales growth outpaced the market, with Wellesley Farms and Berkley Jensen brands gaining share and penetration. These products offer significant savings to members and drive higher visit frequency and spend, supporting the company’s goal of reaching 30% private label penetration.
4. Real Estate and Format Expansion
BJ’s accelerated club openings, with two new locations in Q1 and plans for 11 total in 2023, including entry into Tennessee. New clubs are delivering higher renewal rates and higher-tier penetration, validating the expansion strategy. The company is also piloting smaller format “BJ’s Market” concepts to increase convenience and market reach.
5. Merchandise Transformation
General merchandise remains a work in progress, with leadership investing in refreshed assortments and supplier relationships (notably in apparel and toys) to reignite growth in the back half of the year. Early results in apparel suggest potential, but larger-ticket categories remain under pressure.
Key Considerations
BJ’s Q1 results highlight the company’s ability to leverage its membership-centric warehouse model to drive margin and loyalty, even as discretionary demand softens. The strategic focus is on value, digital engagement, and footprint growth, with general merchandise transformation still underway.
Key Considerations:
- Margin Sustainability: Q1 benefited from unique supply chain relief; management expects these tailwinds to moderate in coming quarters.
- General Merchandise Rebuild: Apparel and toys are early focus areas, but high-ticket categories remain vulnerable to macro and consumer caution.
- Competitive Intensity: Warehouse club peers, notably Sam’s Club, are increasing promotional and membership discounting, raising the bar for member acquisition and retention.
- Digital and Private Label Synergy: Digitally engaged and private label shoppers are higher value members, and continued investment in these areas is critical for long-term growth.
Risks
Key risks include continued weakness in discretionary general merchandise, margin compression if supply chain costs rebound, and intensifying competition from both warehouse clubs and mass merchants. Macroeconomic uncertainty and consumer selectivity could pressure traffic and ticket, while further deflation in grocery could challenge pricing power and margin. Unexpected tax or regulatory changes may also impact bottom-line results.
Forward Outlook
For Q2, BJ’s guided to:
- Low single-digit merchandise comp sales growth (excluding gas)
- Adjusted EPS slightly higher than Q1 on an absolute basis
For full-year 2023, management maintained guidance:
- Comparable club sales growth (ex-gas) of 4% to 5%, toward the lower end
- Flat year-over-year EPS
Management highlighted:
- Margin improvement will moderate as supply chain tailwinds fade
- General merchandise comps expected to improve in the back half, led by refreshed assortments
Takeaways
BJ’s Q1 demonstrated the strength of its membership-driven model, digital and private label strategy, and operational discipline. The company is well positioned for long-term growth, but near-term caution is warranted given general merchandise and margin normalization.
- Membership and Digital Execution: Record renewal, higher-tier growth, and digital engagement are building a defensible, higher-value customer base.
- Margin and General Merchandise Watchpoints: Margin gains are likely to fade, and discretionary categories remain a drag; transformation progress is key for the back half.
- Future Focus: Investors should monitor the pace of general merchandise recovery, digital penetration, and competitive intensity, especially as macro and consumer dynamics evolve.
Conclusion
BJ’s Q1 2023 results underscore the company’s operational strength and strategic clarity, with membership and digital as durable growth levers. However, investors should temper near-term expectations for margin and general merchandise, focusing instead on long-term member economics and execution against transformation initiatives.
Industry Read-Through
BJ’s results reinforce the resilience of the warehouse club model in a value-seeking environment, with membership economics and private label penetration emerging as key differentiators. Digital convenience and higher-tier engagement are becoming table stakes, as seen in BJ’s and peer strategies. The margin tailwind from easing supply chain costs is likely to moderate sector-wide, while general merchandise remains a challenge across retail, especially for big-ticket and seasonal categories. Competitive intensity in membership, pricing, and digital will remain elevated, forcing all players to innovate on value and experience.