A Safer Stock for Tougher Times

01/21/2008 12:00 am EST

Focus: STOCKS

Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, says a retailer that caters to budget-minded consumers would be a good choice as the economy slows.

BJ’s Wholesale Club (NYSE: BJ) operates 176 retail stores in 16 eastern states. These large-format stores, which average about 113,000 square feet in size, offer a diversified line of merchandise at discounted prices. Customers must pay an annual membership fee that starts at $45.

Food sales, including fresh meats and produce, dairy products, and dry grocery goods, generated 61% of total revenues through the first nine months of fiscal 2008. General merchandise such as consumer electronics, small appliances, jewelry, health and beauty products, toys and apparel, generated 37% of revenues.

Many stores also offer specialty services such as optical centers, photo processing, brake and muffler maintenance, home improvement services, Verizon Wireless centers, and discounted home heating oil. About half the stores also sell gasoline at below-market prices.

Excluding gasoline, fiscal 2007 saw sales growth of just 0.5% and lower profit margins stemming from an unfavorable merchandise mix and higher markdown activity. In response, BJ closed its ProFoods Restaurant Supply operations and all 46 pharmacies. It improved its membership acquisition strategy, priced key high traffic items more competitively, and expanded its selection of high-margin food products such as organic and prepared foods, imported cheeses, and fresh meats. These initiatives provided a boost to operations.

Through the first nine months of fiscal 2008, total revenues climbed 7.9% year over year to $6.53 billion. Excluding gasoline, sales in comparable stores grew 2.4% despite the elimination of pharmacies. Food sales, which increased 6% on a comparable store basis, continued to drive the top line. General merchandise sales in comparable stores rose 2%.

However, due to lower-margin gasoline sales, early markdown activity, and an unfavorable product mix, the gross profit margin fell 34 basis points to 7.51%. Net income from continuing operations grew 9.6% to $70.7 million or $1.08 per share.
 
While a weakening economy poses a significant investment risk, discounters such as BJ should do well as consumers try harder to stretch every dollar. Competition from other retailers, however, could shrink margins for everybody. Nonetheless, BJ’s product mix is heavily skewed toward less cyclical items so the company should stand up well against any further weakening in consumer spending.

Recent sales levels suggest business remains strong. Excluding gasoline, November comparable store sales were up 4.5%. This was the largest single monthly gain in 2007 to date. BJ may have also benefited from electronics sales during the holiday season. (December comparable sales rose 3%, slightly below analysts’ estimates. The stock closed Friday near $28.50—Editor.)

Subscribe to Forbes Growth Investor here…

Related Articles on STOCKS