BJ Wholesale Club (NYSE: BJ) is one of the top three players in the warehouse-club industry. BJ is a regional player primarily in 16 states in the northeast with 170 warehouses from Maine to Florida. BJ Wholesale had a tough fourth quarter and saw earnings plummet. Now it faces some difficult business decisions as it reports its first-quarter earnings.
Total revenue increased 13.4% for the quarter ended in February; however, same store sales rose only 1.5%. Selling, general and Administrative expenses increased 29% to $206.73 million, while provisions for credit cards doubled to $2 million. The bottom line effect was operating income fell nearly by half as operating margins shrunk over 200 basis points to 1.88%. Net income cratered 77% to $11.85 million.
BJ's results were weighed down by one-time charges and charges associated with one-time hits due to the closure of two units of the ProFoods restaurant supply store. Sales and traffic were especially worrisome.
In the past several years, BJ has opened typical big-box warehouses and has added gas stations and pharmacies to drive up traffic. BJ's also offered "life-sized" packages of food items, in addition to apparel, jewelry and beauty items, to attract affluent shoppers into a one-stop shopping concept and away from the more traditional stores.
Current operating margins of 2.5% are well below industry averages, and earnings growth at 4.3% has dramatically lagged sales growth of around 10%. BJ Wholesale club has historically carried over 50% more items than its competitors. BJ plans to reduce the number of brands and packages and concentrate on high-margin consumables. To increase traffic at existing stores, the company will also cut down on the number of new warehouses opened in 2007 and 2008. In a typical year, BJ opens 12 to 15 new warehouse clubs with an average square footage of 112,000 sq ft. The need for this restructuring is quite important as the pressure from Costco (Nasdaq: COST) and Sam's Club (NYSE: WMT) has intensified, and it is just a question of time before these two open stores in direct competition with BJ's in its prime northeast territory.
By management's caution, this turnaround may last longer than one quarter. Estimates for the first quarter ending April are 18 cents to 22 cents per share. Traffic and comp sales need to improve to drive sales, while margins are expected to recover due to the focus on higher-margin private-label goods.
BJ's competition is rising; more than 75% of the company's warehouses are now within 10 miles of a competing warehouse. Gas stations and pharmacies were added to drive traffic to the stores. Unfortunately, rising gas costs and concerns over rising medical costs have added margin pressures to the company's already thin profitability. While the high number of shelf items gave BJ a bit of a competitive edge for the consumer dollar, it further dampened profitability. Now the company must also worry about keeping a lid on expenses while it builds traffic to its newly planned private-label merchandise. BJ does enjoy strong membership-renewal rates and now must work to get those members through the door.
Despite its thin margins, BJ's cash flow enables it to fund to store expansions and improvements and maintain a strong balance sheet. The company has over $115 million in cash and marketable securities on its balance sheet. It remains conservatively leveraged with only $3 million in debt.
Most of the senior management has been with BJ's for several years. The executive officers and directors own about 2% of the company and have been sellers in recent times.
The Future for BJ
BJ Wholesale club is working on its restructuring plan to build foot traffic to its warehouses and grow profit margins in a very competitive business. The plan to focus more on private-label brands will help ease the pressure on margins. Whether investor patience will last until the plan comes to fruition is the question. The stock sold off sharply after the disappointing fourth quarter, and management has cautioned about some upcoming tough quarters. Shareholders may see more price pressure as results are released in coming weeks.
In the current environment of the private-equity spending spree, BJ may seek ways to increase shareholder value. Its free cash flow, low debt, cash and small insider ownership, could make it attractive to the large cash hordes circling corporate America.
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