BJ's Wholesale Beats, Lifts Outlook - Analyst Blog

BJ's Wholesale Club, Inc. (BJ), a leading warehouse club operator in the United States, recently posted better-than-expected third-quarter 2010 results on the heels of higher merchandise margins and effective cost management, and lifted its outlook.

The quarterly earnings of 43 cents a share beat the Zacks Consensus Estimate of 36 cents, and also came ahead of its guidance of 37 cents. However, the earnings dropped 4.4% from 45 cents in the prior-year quarter.

The Zacks Consensus Estimate dropped by a penny prior to the earnings announcement with 4 out of 18 analysts covering the stock lowering their estimates and none revising their estimates upward in the last 30 days.

Behind the Headline

Total revenue, which includes net sales, membership fees and other revenue, jumped 4.9% to $2,631.1 million from the prior-year quarter but fell short of the Zacks Consensus Estimate of $2,639 million. Net sales for the quarter rose 4.8% to $2,569 million, membership fee income climbed 6% to $48.7 million and other revenue jumped 5.7% to $13.4 million.

BJ's also hinted about its plan of raising membership fee to $50 per year from $45 beginning January 2011. The company had last increased its fee in January 2006.

Comparable club sales for the quarter grew 2.5%, including a positive impact of 1% from gasoline sales. Excluding gasoline sales, merchandise comparable club sales for the quarter climbed by 1.5%. Management hinted that stiff competition and cannibalization adversely affected comparable club sales by 1.3%. In the year-ago quarter, comparable club sales tumbled 2.5% as gasoline sales dropped 6.4% due to lower gas prices.

Comparable sales of perishables jumped by 7%, food rose by 4%, but general merchandise sales declined by 3% during the quarter compared to the year-ago quarter. Traffic continues to remain healthy, rising 2.4%, but average tickets dropped by 1%.

Operating income during the quarter surged 31.1% to $39.2 million, whereas operating margin expanded 30 basis points to 1.5%.

Management Guidance

Riding on the back of the stronger-than-expected results, BJ's now expects fiscal 2010 earnings between $2.48 and $2.52 per share, up from $2.40 and $2.50 previously anticipated. Following this a positive sentiment may be palpable among the analysts covering the stock, and we could witness a rise in the Zacks Consensus Estimate in the coming days. The current Zacks Consensus Estimate for fiscal 2010 is $2.50.

For the fourth quarter BJ's forecasted earnings of 92 cents a share, reflecting a decline of 2% from the prior-year quarter. Management hinted that the increase in merchandise sales will be offset by higher selling, general and administrative expenses and rise in cost due to investments in Club payroll and remodels.

The current Zacks Consensus Estimate for the fourth quarter is 93 cents, and we could witness a correction in the Estimate in the coming days with analysts revising their estimate in line with management's guidance.

Other Financial Details

BJ's ended the quarter with cash and cash equivalents of $65.8 million, total long-term debt of nearly $696,000 and shareholders equity of $1,130.9 million. For fiscal 2010, management continues to expect capital expenditures between $205 million and $225 million, and expects to generate net operating cash flows between $275 million and $295 million.

BJ's, which faces stiff competition from Costco Wholesale Corporation (COST) and and Sam's Clubs, a division of Wal-Mart Stores Inc. (WMT), currently operates 190 clubs in 15 states.

Management notified that it will sustain its investments in Club payroll and Club remodels to augment the sales of perishable items, which have been the driving factor behind third quarter results, and have helped in increasing sales, improving traffic counts and gaining market share. However, we believe that a sluggish economic recovery and a weak consumer spending environment could intensify the competition, as supermarket stores and other warehouse club operators could offer compelling prices to lure consumers.

Currently, BJ's Wholesale holds the Zacks #3 Rank, which translates into a short-term ‘Hold' rating.

 
BJ'S WHOLESALE (BJ): Free Stock Analysis Report
 
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