BJ’s Wholesale Club, Inc. (BJ), a leading warehouse club operator in the United States, recently posted better-than-expected fourth-quarter 2010 results on the heels of a rise in traffic, membership renewals and increase in sales of perishable items, helping the company to gain market share. The company in 2011 will continue to focus on expanding its perishable business.
The quarterly earnings of 95 cents a share beat the Zacks Consensus Estimate of 92 cents, and rose 1.1% from 94 cents in the prior-year quarter. The Zacks Consensus Estimate had remained stable prior to the earnings release despite 5 out of 19 analysts covering the stock lowering their estimates in the last 30 days.
On a reported basis, including one-time items, earnings came in at 19 cents a share, substantially lower from $1.00 earned in the year-ago quarter.
Let’s Dig Deep
Total revenue, which includes net sales, membership fees and other revenue, jumped 7.3% to $2,961.8 million from the prior-year quarter but fell short of the Zacks Consensus Estimate of $2,977 million. Net sales for the quarter rose 7.4% to $2,899.8 million, membership fee income climbed 6.5% to $48.7 million and other revenue jumped 2.3% to $13.3 million.
Comparable club sales for the quarter grew 3.8%, including a positive impact of 2.1% from gasoline sales. Excluding gasoline sales, merchandise comparable club sales for the quarter climbed by 1.7%. Management hinted that stiff competition and cannibalization adversely affected comparable club sales by 2%.
BJ’s Wholesale sales for February 2011 grew 9.3% to $814.1 million, whereas comparable club sales climbed 5.5% for the month, including a contribution of 3.1% from gasoline sales.
Comparable sales of food increased 2%, reflecting a 7.4% rise in perishable sales. General merchandise sales inched up 1% during the quarter compared to the year-ago quarter. Traffic continues to remain healthy, rising 2%, but average transaction amount remained flat for the quarter.
By categories – bakery, cheese, dairy, deli, frozen, health & wellness, meat, milk, prepared foods, produce, small appliances, summer seasonal, video games and winter supplies– reported robust sales. On the other hand, apparel, baby food, books, cigarettes, diapers, plates & utensils, paper products, prerecorded video and televisions delivered sluggish sales.
Other Financial Details
BJ’s ended fiscal 2010 with cash and cash equivalents of $101.4 million, a negligible debt-load of nearly $540,000 and shareholders equity of $1,144.3 million. The company incurred capital expenditures of $187 million, and generated cash flow from operating activities of $229 million during the year.
For fiscal 2011, management expects capital expenditures between $180 million and $200 million, and expects to generate net operating cash flows of over $330 million.
During the quarter under review, BJ’s Wholesale did not buy back any shares. In fiscal 2010, the company repurchased 272,800 shares at $33.69 per share, aggregating approximately $9.2 million. The company still has about $272 million at its disposal under its existing share repurchase authorization.
Club Openings
BJ’s Wholesale, which faces stiff competition from Costco Wholesale Corporation (COST) and Sam’s Clubs, a division of Wal-Mart Stores Inc. (WMT), currently operates 190 clubs in 15 states. During fiscal 2010, the company opened 8 new clubs, including a relocation and shuttered 5 clubs. BJ’s plans to open 6 to 8 new clubs, including a relocation, in fiscal 2011.
Management Guided
BJ’s Wholesale now expects first-quarter 2011 earnings between 54 cents and 58 cents a share. Management projected net sales to rise in the range of 6.5% to 8.5% with comparable club sales growing between 2.5% and 4.5%.
For fiscal 2011, BJ’s Wholesale projected earnings between $2.62 and $2.82, net sales growth of 5.5% to 7.5% and comparable club sales increase of 2.5% to 4.5%.
BJ’s in Neutral Lane
BJ’s Wholesale will sustain its investments in Club payroll and Club remodels to augment the sales of perishable items, which have been the driving factor, 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.
In February 2011, BJ’s hinted that it is looking at strategic options, which might include a possible sale of the company. For the 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 sale of BJ’s has hit the market. Earlier, a private equity player, Leonard Green, had offered to acquire the wholesale-club chain in November 2010. However, the company remains silent about any such hearsay.
Currently, we have a long-term Neutral rating on the stock. Moreover, BJ’s Wholesale holds a Zacks #3 Rank, which translates into a short-term Hold rating.
BJ’S WHOLESALE (BJ): Free Stock Analysis Report
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