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BJ's Wholesale Club, Inc. (NYSE:BJ), a leading warehouse club operator in the United States, recently posted better-than-expected first-quarter 2011 results on the heels of a rise in traffic, increase in sales of perishable foods and gasoline, and effective cost management. Consequently, the company raised its full year outlook.

The quarterly earnings of 63 cents a share beat the Zacks Consensus Estimate of 56 cents, and surpassed its own guidance range of 54 cents to 58 cents. The quarterly earnings also rose 26% from 50 cents in the prior-year quarter.

On a reported basis, including one-time items, earnings came in at 62 cents a share, up 26.5% from 49 cents earned in the year-ago quarter.

Let's Dig Deep

Total revenue, which includes net sales, membership fees and other revenue, jumped 10% to $2,829 million from the prior-year quarter and came well ahead of the Zacks Consensus Estimate of $2,802 million. Net sales for the quarter rose 10% to $2,769.3 million, membership fee income climbed 8.7% to $50.4 million and other revenue jumped 2.4% to $9.3 million.

Comparable club sales for the quarter grew 6.3%, including a positive impact of 3.9% from gasoline sales. Excluding gasoline sales, merchandise comparable club sales for the quarter climbed by 2.4%. Management hinted that stiff competition and cannibalization adversely affected comparable club sales by 2%.

Comparable sales of food increased 4%, reflecting an 8% rise in perishable foods. General merchandise sales inched down 1% during the quarter compared to the year-ago quarter. Traffic continues to remain healthy, rising 2%, and average transaction amount climbed 1%.

By categories – bakery, dairy, deli, frozen, health & wellness, meat, milk, prepared foods, produce and small appliances – reported robust sales. On the contrary, apparel, books, cigarettes, diapers, prerecorded video and televisions delivered sluggish sales.

Other Financial Details

BJ's ended the quarter with cash and cash equivalents of $206.7 million, a negligible debt-load of $381,000 and shareholders equity of $1,191.1 million. The company generated cash flow from operating activities of $128.8 million and incurred expenditures for property additions of $31.9 million during the quarter.

For fiscal 2011, management expects capital expenditures between $180 million and $200 million, and expects to generate net operating cash flows of over $370 million.

During the quarter under review, BJ's Wholesale did not buy back any shares. The company still has about $272 million at its disposal under its existing share repurchase authorization. The company has no plans to repurchase shares in fiscal 2011.

Club Openings

BJ's Wholesale, which faces stiff competition from Costco Wholesale Corporation (NASDAQ:COST) and Sam's Clubs, a division of Wal-Mart Stores Inc. (NYSE:WMT), currently operates 190 clubs in 15 states. During fiscal 2011, the company plans to open 6 to 8 new clubs, including a relocation. During the quarter, the company opened 1 club.

Let's Walk Through Guidance

On a healthy first quarter results, BJ's Wholesale become more optimistic, as evident from its increased fiscal 2011 outlook. Management now expects earnings between $2.68 and $2.88 on a net sales growth of 6.5% to 8.5% and comparable club sales increase of 3.5% to 5.5%.

Earlier, BJ's Wholesale had projected earnings in the band of $2.62 to $2.82, net sales growth of 5.5% to 7.5% and comparable club sales increase of 2.5% to 4.5%.

BJ's Wholesale now expects second-quarter 2011 earnings between 74 cents and 78 cents a share. Management projected net sales to rise in the range of 7.5% to 9.5% with comparable club sales growing between 4% and 6%.

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.

BJ's hinted that it is looking at strategic options for 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.

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.

Source: BJ's Wholesale Beats Estimates