BJ's Wholesale in Neutral Lane - Analyst Blog

We recently upgraded our recommendation on BJ's Wholesale Club, Inc. (BJ), a leading warehouse club operator in the United States, to Neutral with a price target of $49.00. Earlier we had an Underperform rating on the stock.

Boasting a viable business strategy and a healthy balance sheet, BJ's Wholesale offers investors one of the strongest growth stories in the industry. Recently, the company posted better-than-expected third-quarter 2010 results on the heels of higher merchandise margins and effective cost management, and lifted its fiscal 2010 earnings 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. BJ's Wholesale 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 is palpable among the analysts covering the stock, and we have been witnessing a rise in the Zacks Consensus Estimates. In the last 7 days, the Zacks Consensus Estimate for fiscal 2010 jumped 6 cents to $2.51 and for fiscal 2011 it climbed 8 cents to $2.80. 

For the fourth quarter, BJ's forecasted earnings of approximately 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, which has remained stagnant, in spite of revisions in the estimates by 5 analysts in the upward direction and by 6 analysts in the downward direction in the last 7 days, thereby neutralizing the impact on the consensus.

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. Further, a negligible debt-load and healthy cash reserves augur well for future operating performance.

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. Moreover, BJ's clubs being highly concentrated in the northeastern U.S. may see cannibalization of sales with the opening of new stores in existing markets.

BJ's as a warehouse club is uniquely positioned to drive traffic as it offers wider assortments of brands at compelling prices by carrying approximately 7,200 stock keeping units (SKUs) compared to 4,000–5,000 SKUs carried by its competitors, as well as offering its customers the choice of bulk or consumer-friendly package sizes.

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.

Given the pros and cons we prefer to be Neutral on BJ's Wholesale. The Zacks #3 Rank, which translates into a short-term Hold recommendation, also correlates with our long-term view.

 
BJ'S WHOLESALE (BJ): Free Stock Analysis Report
 
COSTCO WHOLE CP (COST): Free Stock Analysis Report
 
WAL-MART STORES (WMT): Free Stock Analysis Report
 
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