Something's a Bit Fishy at BJ's Wholesale

BJ's Wholesale Club Inc. (BJ) recorded another month of positive comparable store sales (or comps, which are sales from stores open in excess of a year), benefiting greatly by an improved assortment of fresh food offerings as well as exposure to gasoline sales. The company had a 3.0% comp increase during December, slightly below the consensus estimate of 3.6%, and well shy of the figures out of rivals Costco Wholesale Club Inc. (COST) and Sam's Club (division of Wal-Mart (WMT)).

Consistent with recent months, BJ's experienced the strongest sales increases in food across a variety of categories. However, what has us concerned was the 2.0% decrease in customer traffic and a 3.0% drop in general merchandise comps. While management explained the traffic shortfall was linked to snowstorms in the Northeast, it was still discouraging when stacked up to more favorable readings from Costco and Sam's Club. Additionally, general merchandise comps were strengthening for good portion of 2007, so the sudden moderation raises question to the shopping habits of the core BJ's consumer and merchandise execution.

Management reiterated its 4Q earnings per share guidance of $0.70-$0.74, but given the trends in general merchandise comps throughout the holiday season we believe the low-end of this range is a more likely outcome. The company expected a rebound in jewelry and apparel sales for 4Q, two higher margin merchandise categories, which by all accounts failed to materialize. Accordingly, we have adjusted our 4Q earnings per share projection down to $0.70 from $0.75.

We were optimistic on shares of BJ's in the latter stages of 2007, citing improving operating metrics amid the implementation of turnaround strategies by new management. Now, in our view the stock could be pressured near-term due to consumer spending related worries and signs that BJ's fundamental recovery is stalling. As a result of this hypothesis, which raises the probability of management lowering its FY`08 earnings per share guidance of $1.85-$1.95, we have reduced our rating to neutral from overweight with a price target of $26.00.

Disclosure: None.

Written by Brian Sozzi, a Research Analyst for Wall Street Strategies specializing in the apparel/hardline goods sectors of the retail industry.