Taking Stock: BJ's Wholesale Club

Dear Mr. Berko:

Please give me your thoughts on BJ's Wholesale Club. Why is the stock making new highs when earnings seem to be in a rut? Also, does BJ's Wholesale also own BJ's restaurants? I had dinner at a BJ's here in Phoenix, and it's a fantastic place to go. I'd like to own 50 shares of each. What do you think?

S.R., Phoenix

Dear S.R.:

I was in a BJ's Wholesale Club (BJ-$48.46) last December, and holy Geronimo, the building was bigger than a Costco or a Sam's and carried almost 50 percent more merchandise. The thing was so huge, so noisy and so frenzied that I felt like I was a tourist at Disneyland during the Christmas holidays and admission was free.

Anyhow, BJ seems to have run into a strong Wal-Mart headwind that has cauterized its growth over the past couple of years. Costco is also nipping hard at BJ's heels and taking lots of pretty painful bites.

Unfortunately, BJ's concentration of stores in the Northeast exposes revenues and earnings to regional economic fluctuations. As a result, the recent rise in food and gas prices during the last year has had a greater negative impact on BJ than it has on Costco or Wal-Mart. So management finds itself the last dog in a three-dog race running in a very competitive and difficult economic market.

As a result, last year's earnings grew only 2 cents, and earnings for 2011 might only increase between 3 percent and 5 percent. But this $11 billion revenue company has a superb balance sheet, 24,000 employees, only 55 million shares and a $2.5 billion market cap. Management closed five stores in Miami, Charlotte and Atlanta, and has laid off several hundred good folks at its headquarters in Massachusetts.

And the only reason that BJ's shares are heading higher is a rumor that Leonard Green & Partners, one of those "vulture-ugly" private equity firms, has been sniffing the BJ carcass. The price talk is in the neighborhood of $55 to $60 per share.

These circulating buzzards already own 9.5 percent of the outstanding stock. They have a storied history buying undervalued retail assets and taking them private, firing redundant employees, squeezing costs, cutting expenses, browbeating suppliers, then merging what's left or doing an IPO.

But I doubt that Green's privateers will have much success taking BJ's 1.3 percent net profit margins anywhere near Wal-Mart's 3.6 percent level. The BJ shares are a speculation based on Leonard Green & Partners' rumored intent.

And no, BJ's Wholesale is not related to BJ's Restaurants. I spoke to Laura Sen (CEO of BJ's Wholesale), and she gruffly denied any relationship. But the balance sheets seem to have similar footprints so I don't think Sen was completely candid with me.

However, I do like BJ's Restaurants (BJRI-$37.10) -- not the stock but the food. At $37.10, I think the shares are too pricey even though 2010 earnings of 80 cents are expected to come in at 95 cents, and even though 2010 revenues are expected to zoom from $515 million to $605 million in 2011.

Those revenues derive from 85 operating units in Arizona, Texas, Nevada, Oregon, California and Florida. That's about $7.2 million in revenues per unit or some $20,000 per day so you can be certain the food is fresh.

BJRI has a "to-die-for" menu, and management plans to open one new unit per month. The balance sheet is crystal clean, there are only 27 million shares out, its 4.4 percent net profit margins are excellent and they serve some of the best hand-crafted beers I've tasted.

However, at 37 times earnings, I think BJRI's stock price is too high.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Fri, Feb 18, 2011