BJ’s Wholesale Club Holdings Inc. (BJ, Financial) offers capital growth potential after its decline over the past year.
The warehouse club chain is investing in new technology, seeking to cut costs and is aiming to sell an increasing number of its own brands to boost its profitability.
Product shift
The company is changing the types of products that it sells to appeal to a broader range of consumers. In the fourth quarter of 2019, for example, it increased its range of healthy and organic products in response to growing demand from its customers. It also plans to offer financial and business-related products that may enable it to appeal to a different type of consumer than it has in the past.
In addition, it is aiming to increase the proportion of own-brand products sold in its stores. Own brands made up around 20% of its total sales in fiscal 2019, but its recent release of products and services, such as its cellphone offering, could boost this figure in upcoming quarters. This could increase the retailer’s differentiation versus its peers and boost its profitability, since many of its own brands could offer higher margins than third-party products.
Growth strategy
BJ’s is investing in new technology to access a large amount of data on its customer transactions. It intends to use this data to make more relevant personalized recommendations to its members that may result in an increase in sales. It will also ramp up its online marketing to appeal to a younger consumer demographic. This may increase its membership numbers and catalyze its financial performance.
BJ's is also hoping to optimize its stores more effectively so that they make better use of the selling space. For example, it is using an increasing amount of data to determine how much space in its stores to dedicate to different product categories at various times of the year. This may boost its sales prospects, and lead to it carrying a lower amount of inventory.
Additionally, the retailer plans to improve its website and make it simpler for customers to purchase its products online. This could boost its financial outlook because BJ’s has found that consumers who shop online spend a greater amount on average than those who visit its stores.
Potential challenges
The spread of coronavirus could cause shipping delays for some of its products. According to the company's fourth-quarter results, it is uncertain about the extent of these delays, but it could negatively impact on its sales prospects in the short run.
BJ’s performance in the fourth quarter was disappointing as it recorded a 2% decline in grocery sales compared to the prior-year quarter. Should this level of performance continue, it could hold back the company’s overall prospects.
In response, the retailer is seeking to improve its efficiency by reducing staff numbers in its head office and is conducting a review of its administrative costs. It expects this process to deliver $100 million in savings by the end of fiscal 2021. The company will reinvest its savings where possible to enhance the shopping experience of its customers, which could improve its competitive position.
Outlook
Market analysts forecast the company will report a 21% increase in its earnings per share in fiscal 2020, followed by growth of 10% in 2021. The retailer’s price-earnings ratio of 16.2 indicates it offers good value for money given its growth potential.
Disclosure: The author has no positions in any stocks mentioned.
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