Berkley Jensen

Here is a write up to bring in the new year. I had done this around September/October. I initiated a position in BJ at $67 and change right around the $9 billion market cap range.

Moving forward to the new year I plan give myself a write up on my changes to my process as well as transparency on my returns as well as mistakes and why I sold certain positions this past year. The below is an unedited version of what I did in October.

BJ is a wholesaler that has been around since the 80s. They could be considered a one-foot hurdle as well.  They are at a rather reasonable price currently and may have more growth on the horizon.  The firm was initially privately held but going public in 2018. Currently being led by CEO Bob Eddy. BJ is a smaller warehouse club store business with solid road ahead found in 19 states with 238 stores. 

In general, warehouse club stores have seen consistent growth over past 15 years. With an estimated CAGR of 6%. Also marked by barriers to entry, the two most notable wholesalers are Costco and Sam's which both have over 500 stores and are multi-national corporations. Businesses here have consistent and stable cash flows. As we can see all three have long running operating history.

In looking at BJ as an investment two important features to key in on would be the new distribution centers coupled with a stronger balance sheet that pave the way for BJ growth runway. 

Essentially at the current valuation we are getting the growth for free. 

1.     Key argument for growth for free here would be the purchase of the 4 distribution centers from

Burris Logistics in 2022. One key feature of the acquisitions was the distribution center in Kentucky that was purchased. It ideally was nowhere near other BJ stores. Which signals an area of key interest for growth over the next few years. 

2.     BJ has many states for open growth to explore. The runway is long with only 19 states currently inhabited and no international exposure as well. Sitting at least half the capacity or less of the its two larger direct competitors, Sam’s and Costco, which have 500 stores or more. This is a favorable situation for BJs given their cash flow flush business and plans for growth.  

3.     With the deleveraging of the balance sheet over the past few years it not only frees up cash flows for investment but also allows them to take on more debt if needed to grow the business. They essentially brought debt down from $2.5 billion in 2017 to $447 million in 2023. Having this financial flexibility opens up more door to opportunity for the company overall in the coming years.  

Other notable features to consider with the investment:

Currently they are at a reasonable valuation. Simply put its not cheap but it’s not expensive either.  BJ Currently has TEV/EBITDA of 10 which is at a relatively fair ratio when compared to COST. The presentations point to at least 10 new units openings annually for the foreseeable future. 

The business produces high ROIC when we don’t introduce the Operating leases to the overall equation. 

That said, without the inclusion of Operating leases to the invested capital portion of the equation we are looking at a 3-year average of 28%. With the Operating leases added to Invested Capital it will be an average of 13%. Still solid for a business overall. 

Stable cash flows from the business and industry as a whole are what investors demand in times of market uncertainty. With the recent inflation trends businesses like BJ are well positioned to gain and retain new membership. This is shown with a recent retention rate at 90%. This marks for a solid foundation for the business on a go froward basis. 

CEO Bob Eddy and team have been allocating capital intelligently. This is seen through the high returns on equity most recent and lowest of three years is 49% with a 3-year average of 82%.BJ have a return on assets averaging roughly 8% over past 3 years. Lastly, BJ has a solid Return on invested capital the firm receives which has averaged roughly 28% over past 3 years.

Catalyst

Continued share repurchases from their robust cash flows. 

Efficient deployment of capital toward new store openings.  Higher than expected store openings annually.