amirthr's  Instablog

BJs Wholesale Club (BJ) is the third largest warehouse/wholesale club in the United States, after Costco (COST) and Sam’s Club, a division of Walmart (WMT). BJ offers a compelling investment alternative for patient, conservative and long-term investors.
 

Industry: BJ is in the warehouse club industry. This industry has been on a long-term secular growth trend since the founding of the Price Club in 1976 by Sol and Robert Price. The primary reason for this growth is a fundamentally sound business model where clubs charge an annual fee (about $35 to $40 per year) for membership. This is an incentive that drives it members to the club to shop for their most commonly used household needs. For its part, the clubs provides members with discounted items (discount of 30-40% compared to other retailers and discounters are not unheard of). The annual fees also provide a predictable source of revenues and enhance cash flows, since the membership fees are paid once a year, but recognized over the year, as per accounting rules. Other advantages of the industry, like lower packaging and shipping costs etc are well known and do not need repetition.
 

Company: BJ has grown total revenues to $10.187 billion in 2009 from $4.932 billion in 2000, at a compounded annual growth rate of 9.25%. Operating margin has declined from 4.3% to 2.2%. Industry analysts suggest that the warehouse clubs have ample growth opportunities in the next 10 years as they are grabbing market share from traditional retailers and even discounters. In the authors’ opinion, operating margin has declined so much and should stabilize at this level going forward. Further, food constitutes more than 60% of BJ’s revenues and should be a stable source of revenue in the future as well.

Valuation: BJ is valued at about $2 billion. BJ has a cash flow of about $300 million, free cash flow of $100 million with virtually no debt. BJ also has an aggressive buyback program – in 2010, management expects to use free cash flow to buy back stock worth $100 million. Think about this –  if management maintains free cash flow (this is a ridiculously conservative assumption – this implies no revenue growth, no margin expansion, no expansion in stores…essentially status quo) and stock continue to languish where it is at around $40, then the company will buy itself out in 20 years!!! Obviously, something has to give, and the author believes it is the stock price which will move higher. Factor in some revenue growth, and the case for BJ becomes compelling.

Another interesting insight in to the buyback: On 31^st December 1999, BJ stock was at $36.50 with about 75 million shares outstanding, giving it a market cap of about $2.74 billion dollars. In the last 10 years, the company has reduced its outstanding share count to about 50 million shares (a 30% reduction), but the company is valued at only about $2 billion.