We are reiterating our long-term ‘Neutral’ recommendation on BJ’s Wholesale Club Inc. (BJ) with a price target of $54.00. Moreover, BJ’s Wholesale holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
Boasting a viable business strategy and a healthy balance sheet, BJ’s Wholesale Club offers investors one of the strongest growth stories in this space. For fiscal 2011, the company expects to achieve earnings per share growth of 5.9% to 13.8% based on net sales growth of 6.5% to 8.5% and comparable club sales growth 3.5% to 5.5%.
BJ’s as a warehouse club is uniquely positioned to drive traffic as it offers a wide assortment of brands at compelling prices by housing approximately 7,000 stock keeping units (SKUs) compared with 4,000–5,000 SKUs carried by its competitors. Moreover, BJ’s also offers its customers the choice of bulk or consumer-friendly package sizes.
The company’s retail model, which ensures optimum inventory movement, has considerable cost advantages including labor, logistics, and operations that are sustainable when compared to its supermarket competitors that normally stock an average of 48,000 SKUs, and levy higher handling charges.
BJ’s Wholesale Club Inc. recently posted better-than-expected first-quarter 2011 results on the heels of a rise in traffic, increase in sales of perishable foods and gasoline, and effective cost management.
The quarterly earnings of 63 cents a share beat the Zacks Consensus Estimate of 56 cents and surpassed its own guidance range of 54 cents to 58 cents. The quarterly earnings also rose 26% from 50 cents in the prior-year quarter.
Total revenue, which includes net sales, membership fees and other revenues, jumped 10% to $2,829 million from the prior-year quarter and came well ahead of the Zacks Consensus Estimate of $2,802 million.
Based on healthy first quarter results, BJ’s Wholesale has gained confidence, as is evident from its increased fiscal 2011 outlook. Management now expects earnings between $2.68 and $2.88 per share, up from $2.62 and $2.82 projected earlier.
BJ’s Wholesale now expects second-quarter 2011 earnings between 74 cents and 78 cents a share. Management projected net sales to rise in the range of 7.5% to 9.5% with comparable club sales growing between 4% and 6%.
BJ’s will sustain its investments in Club payroll, Club remodels and technology to augment sales of perishable items, which have been the driving factor behind the first quarter results and have helped in increasing sales, improving traffic count and gaining market share. Further, a negligible debt-load and healthy cash reserves augur well for future operating performance.
However, sluggish economic recovery and erratic consumer behavior could intensify competition, as supermarket stores and other warehouse club operators could offer compelling prices to lure consumers. Moreover, being concentrated primarily in the northeastern U.S., BJ’s clubs might see cannibalization of sales with the opening of new stores in existing markets.
Moreover, BJ’s also hinted that it is looking at strategic options for the company. For bidders, BJ’s offers a striking prospect for acquisition as it has a healthy balance sheet with modest debt and offers access to a sturdy food and grocery market that is gaining ground. It is not the first time that the speculation of BJ’s sale has hit the market. Earlier, a private equity player, Leonard Green, had offered to acquire the wholesale club chain in November 2010.
Given the pros and cons, we prefer to maintain our ‘Neutral’ stance on the stock. BJ’s Wholesale, which faces stiff competition from Costco Wholesale Corporation (COST) and Sam’s Clubs, a division of Wal-Mart Stores Inc. (WMT), operates 190 clubs in 15 states.
BJ’S WHOLESALE (BJ): Free Stock Analysis Report
COSTCO WHOLE CP (COST): Free Stock Analysis Report
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