We are reiterating our long-term Neutral recommendation on BJ’s Wholesale Club Inc. (BJ) with a price target of $53.00. 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. The company expects to achieve earnings per share growth of 3.6% to 11.5% in fiscal 2011, based on net sales growth of 6.5% to 8.5% and comparable club sales growth of 2.5% to 4.5%.
BJ’s as a warehouse club is uniquely positioned to drive traffic as it offers a wider 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 recently posted healthy sales results for the five-week period ended April 2, 2011. After registering a growth of 5.5% in February 2011, BJ’s experienced comparable club sales growth of 5.3% in March. Rising gasoline prices positively impacted comparable club sales by 4%. Net sales for March jumped 9.1% to $1,083.3 million from $992.7 million in the same month prior-year.
BJ’s will sustain its investments in Club payroll, Club remodels and technology to augment sales of perishable items, which have been the driving force behind fourth quarter results. Further, a negligible debt-load and healthy cash reserve augur well for future operating performance.
However, a 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.
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
WAL-MART STORES (WMT): Free Stock Analysis Report
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