Monday, August 30, 1999

BJ's Wholesale Club Inc.
Phone: 508-651-6650
Website: www.bjswholesale.com
Price (8/27/99): $29 5/8


Sometimes, big things come in even bigger packages. Everything about BJ's chain of warehouse clubs is huge. The acre of selling space. The high palletized ceilings. The institutional-sized bulk portions. And, yes, capital appreciation has been mammoth-sized too.

Having just completed its 25th consecutive quarter of higher operating income has made BJ's as fiscally reliable as the quality of the company's fresh-baked chocolate muffins (which, in moments of decadence, I can certainly vouch for).

With reasonably ambitious expansion propping up the top line and improving margins helping out the bottom line, BJ's has been a well-spread feast for growth investors. Bon appetit.


In 1984 BJ's introduced the warehouse shopping club concept in New England. Today it has grown into a 101 store chain selling food and wares at wholesale prices. Charging $35 for an annual membership to individuals and area businesses, BJ's claims it can help patrons shave about 25% in savings over retail supermarket prices.

BJ's and home improvement retailer HomeBase (NYSE: HBI) were originally subsidiaries of Waban. Two years ago the parent company was split in two, giving each chain publicly traded independence.

In March the stock split 2-for-1.


Income Statement
12-month sales: $3,818.9 million
12-month income: $92.2 million*
12-month EPS: $1.22*
Profit Margin: 2.4%
Market Cap: $2233.7 million
(*Includes non-recurring items)

Balance Sheet
Cash: $40.8 million
Current Assets: $513.1 million
Current Liabilities: $401.8 million
Long-term Debt: none

Price-to-earnings: 24.3
Price-to-sales: 0.6


Waban's real gem was always BJ's. While HomeBase could have had a rich future following in the footsteps of peers Home Depot (NYSE: HD) and Lowe's (NYSE: LOW), cashing in on the real estate and home remodeling boom during these welcome interest rate years, it was not to be. Earnings have been falling for HomeBase, and today the stock trades for half of what it did back when BJ's was spun-off in July of 1997.

While the market value of BJ's was twice that of HomeBase's at the time of the split, it was easy to see how things would only continue to get better for the warehouse sibling. Popularity of the wholesale clubs has surged. Last year same store-sales rose 5.2% for BJ's -- and those figures have improved further with the comps rising 6.3% so far this year.

Similarly favorable fundamentals have blossomed at Costco (Nasdaq: COST). However, while BJ's was trading just a few ticks higher a year after the spin-off, Costco was already in demand -- rising more than 30% over the same time.

While some coattails come with "Inspected by Caveat Emptor" labels, this one was more than justified. BJ's was growing steadily. In 1997 the company earned $0.90 a share. Last year it was $1.07 per share before noncash accounting charges. The company was a consistent quarterly crowd-pleaser yet neglected by Wall Street. Those times were about to change.


The practice of packing bulk-sized goods onto heavy-duty shopping carts has gone mainstream. Costco, BJ's, and Wal-Mart's (NYSE: WMT) Sam's Club have succeeded in taking the superstore approach to old school cash and carry. In the process the warehouse clubs have become more consumer friendly.

Just a few years ago BJ's cash registers would only ring up cash or check sales. Two years ago the stores began accepting Visa. Last year, in a savvy financial services move, the company offered a co-branded MasterCard. Using the BJ's plastic anywhere provides the company with credit card revenue while shoppers receive warehouse price breaks.

While going for plastic beyond paper in terms of payment is typically a margin cruncher, BJ's has been able to grow through shrewd cost management and strategically sound price hikes. Economies of scale have also played a part for a company where that very notion is often at the root of customer appreciation.

Momentum is strong for BJ's, where each of the past two quarters has improved on last year's impressive same-store sales increases. That is a good sign as new stores continue to go up and the company heads into its seasonally strong January quarter. The holidays have proven to be BJ's finest showing with the chain's feast-friendly bulk portions and steeply discounted gifts. If BJ's customers stay happy, BJ's shareholders will remain even happier.

--Rick Aristotle Munarriz

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