BJ's: Earnings With a Generous Helping of Fun

BJ's Wholesale Club (NYSE: BJ  ) made two press releases yesterday, and I'm not sure which one delighted investors more. First, the company released Thanksgiving fun facts. For instance, last year the company sold enough cans of cranberry sauce during the Thanksgiving shopping season to reach the top of the Empire State Building 88 times, and turkey equivalent to the weight of 8,000 NFL football players. (It wasn't clear whether the company was referring to defensive backs or linebackers.)

Following the trivia release, BJ's issued solid third-quarter earnings. Total sales for the third quarter increased 8%, with comparable-store sales up 3.4%. Operating income rose 21%, and earnings per share leapt 25% to $0.35, topping analyst estimates by $0.02.

Behind the numbers
Foolish investors shouldn't be surprised by the earnings "beat," since BJ's made some noise with its September sales release. Still, there's meat behind the third-quarter numbers that sheds light on the company's operations.

With warehouse clubs like Costco (Nasdaq: COST  ) and the Sam's Club division of Wal-Mart (NYSE: WMT  ) , I always look at membership income first, since this is the engine that drives future business. BJ's posted a 7.4% increase this quarter. Not bad, and renewal rates are holding steady in the mid-80% range. The company will enjoy a membership income headwind for one more quarter following last year's $5 increase.

I like BJ's inventory position going into the holidays, essentially flat with last year, and down 2% per warehouse. With other retailers like Kohl's (NYSE: KSS  ) showing alarming inventory bulges heading into the holidays, BJ's is making meaningful progress with a SKU rationalization effort.

I'm also impressed with the gains the company is making in fresh food sales. While warehouse clubs pay the rent on consumables, fresh food is an add-on sale that also benefits margins. BJ's is taking its fresh offerings seriously and gaining share.

But don't let the 25% quarterly EPS gain make you overly giddy. A big piece of the increase came from lower pre-opening expenses, which were slashed by 72%. This savings results from slower new store growth, which will be a brake on sales gains in future years.

All in all, I think BJ's is a stronger retail competitor with a slower growth rate. It is focused on operational improvements, trying to catch up to bigger rivals Costco and Sam's in sales volume per warehouse. I've thought that was the right strategy for quite a while for this company. While I continue to recommend Costco as the clear leader in the warehouse club business, BJ's seems like it's on the right track -- and having some fun along the way.

Which warehouse club stock is right for you?


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