BJ’s Wholesale Club (BJ, Financial)’s ongoing investment in improving the customer experience could enhance its competitive advantage.
The retailer is set to deliver more personalized offerings to its customers, as well as a localized product assortment, as it aims to continue attracting new members.
Its valuation suggests that it could stage a successful turnaround after its 7% stock price decline in the last year.
Investing in technology
The company’s increasing focus on using data to attract new members could be a catalyst for the stock. Its approach is producing a higher-quality membership base with more higher-tier members. For example, in the last two years the percentage of the company’s total members who are on its most profitable membership tier has increased from 21% to 27%.
BJ’s is also investing in digital marketing tools in order to appeal to a wider demographic. This strategy doubled the percentage of the company’s new members who were acquired through its digital channels in the last year, and the company expects this trend to continue.
BJ’s is seeking to strengthen its competitive advantage through investing in its omnichannel offering. For example, it has launched a new website, an app and same-day delivery services in the last year. These are resonating with its customers, with 15% of its members using the app each month. This provides the business with additional data on its customers’ shopping habits that can be used to enhance its assortment of products and personalize its offering.
Growth strategy
The company’s focus on improving the customer experience could differentiate it from sector peers. For example, it has launched a new promotional system in the current fiscal year that provides additional data to its customers. This includes information such as the percentage of savings that is available to customers who purchase multiple items, as well as innovative personalized offers and targeted digital promotions that have the potential to boost the company’s cross-selling opportunities.
In addition, BJ’s is seeking to more closely align its product assortment with local demographics throughout its store estate. For example, it has expanded its range of international foods and Hispanic foods at some of its clubs in order to increase the appeal of its offering to the local population. It is also seeking to simplify its product assortment across a number of grocery categories in order to focus on the products that provide it with the strongest growth potential.
Potential threats
The ongoing trade war between the U.S. and China could be detrimental to the U.S. retail sector. President Trump’s plans to impose additional tariffs on Chinese imports are expected to put further pressure on U.S. consumers. Since U.S. consumer confidence has declined through 2019 to its lowest level of the year in August, higher prices across the retail industry may mean that investors grow more cautious about retail stocks.
In response, BJ’s is seeking to reduce its reliance on China by diversifying its global supply chain. It now sources more of its products from other markets in Asia and Africa, with China-sourced goods representing only 3% of its cost of sales in the current fiscal year. This means that the company has less exposure to the risks posed by tariffs than many of its industry peers. It expects to further reduce the proportion of its goods that are sourced from China, which could make its products more competitively priced than those of its rivals.
Outlook
BJ’s is expected to grow earnings per share by 11% in the next fiscal year. Its forward price-earnings ratio of 17 suggests that it offers good value for money given its long-term growth potential.
The company’s focus on improving the customer experience, winning new members and adapting its assortment to local demographics mean that it could recover after its 6% underperformance of the S&P 500 in the last year.
Disclosure: the author has no position in any stocks mentioned.
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