Foolish Forecast: A Sluggish BJ's

Attention, big-box shoppers. Next up in the earnings parade: BJ's Wholesale Club (NYSE: BJ  ) . BJ's reports Q2 2007 results tomorrow morning.

What analysts say:

  • Buy, sell, or waffle? Sixteen analysts follow BJ's, down one from last quarter. Four rate it a buy, 11 more say hold, and one counsels selling.
  • Revenue. On average, they expect to see sales grow 7% to $2.29 billion.
  • Earnings. Profits are predicted to rise a penny to $0.41 per share.

What management says:
As fellow Fool Lawrence Rothman described in "BJ's Summertime Slip" earlier this month, BJ's respectable growth pattern of earlier this quarter evaporated in July. After BJ's posted 4% and 5% comps gains in May and June, respectively, same-store sales decelerated to just 1.5% growth in July as gasoline sales, and sales from the firm's closed-down pharmacy department, withered away.

CEO Herb Zarkin also blamed several additional factors for the weak performance in July, ranging from an early expiration for the firm's springtime 90-day trial membership promotion, to fewer sales of air conditioners this year, to a dearth of attractive coupons put out by manufacturers. Even so, Zarkin seemed proud of the fact that BJ's managed to hit its guidance range, with comps growing 3.7% for the quarter and total sales up 8.2%.

What management does:
Of course, sales are just part of the earnings equation. To keep profits growing, a firm needs to maintain or grow its margins on sales as well. In that regard, BJ's stabilized its performance last quarter, maintaining rolling operating and net margins at the previous quarter's level, even as gross margins continued to erode. Compared with its rivals, though, BJ still earns lower margins on its wares than do Costco (Nasdaq: COST  ) or Wal-Mart (NYSE: WMT  ) .

Margin

1/06

4/06

7/06

10/06

2/07

5/07

Gross

10.5%

10.5%

10.4%

10.4%

10.1%

9.9%

Operating

2.7%

2.7%

2.7%

2.5%

2.1%

2.1%

Net

1.6%

1.6%

1.5%

1.4%

0.8%

0.8%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

The Fool says:
On the plus side, BJ's is improving its working capital management. As I described last quarter, the firm drove down inventories 2% in Q1, even as its sales rose nearly 8%. That put fewer goods in the warehouse, and more cash in the bank, resulting in a tripling of cash generated from operations during the quarter. Scaled-back store buildout helped keep more of that cash in the bank, with the result that free cash flow reached $26.9 million.

Moral of the story: Rising sales aren't the be-all and end-all of business. Whatever tomorrow's comps results look like, I'll be happy if BJ's can just report similar cash-generating success.

What was BJ's stocking last quarter? Find out in:

Costco is a Motley Fool Stock Advisor selection, and Wal-Mart is an Inside Value pick.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.


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