Sometimes you can love a company's services or products and still have no interest whatsoever in the stock. Such is the case for me with BJ'sWholesale Club (NYSE: BJ ) .
In contrast to Fool colleague Rich Smith's experiences, I happen to love my local BJ's (his is in Virginia, mine in North Carolina). The employees are friendly and helpful, the store layout makes sense, and I'm usually able to find what I want. Although I must acknowledge that BJ's produce department is a horror show of semi-rotten garbage, I've liked everything else about the store.
As a matter of fact, I actually chose to patronize BJ's because I found the employees at the local Costco (Nasdaq: COST ) to be incredibly rude and unhelpful. Given the relative fortunes of the two companies over the past few years, though, this is clearly a local phenomenon.
BJ's results for the fourth quarter were pretty much in line with my view of the store as a whole -- pretty good if you don't expect too much. Sales climbed about 7%, with comparable club sales up 3.4%, for the quarter, and EPS grew 12% if you adjusted both years for certain charges and gains. Margins were also OK, so long as you're willing to back out the one-time lease accounting adjustment.
The trouble with BJ's, though, goes beyond its results. Traffic in the fourth quarter was flat, and store traffic has been anemic for some time now. Given that people can't buy your groceries if they're not in your stores, this is clearly a problem.
What's more, general merchandise sales (that is, non-food items) were weak yet again. Although the food business overall, and fresh food in particular, has been quite strong, the problem with merchandise sales troubles me. After all, if the company can't turn around its non-food business, it essentially becomes a grocery store. Given the current state of supermarkets, I don't think any BJ's investor wants to contemplate that fate.
Fools also should not be lured in by the company's free cash flow. Although the company produced strong free cash flow growth for the year ($115 million versus $23 million), that figure looks to be cut in half next year as the company continues its store expansion program.
Looking ahead, I find it hard to see how BJ's will ever make any meaningful headway on warehouse rivals Costco and Wal-Mart's (NYSE: WMT ) Sam's Club. Both of its rivals are far larger and fully national (BJ's is mostly just an East Coast operation), which gives them considerable advertising and vendor negotiation leverage. While BJ's does trade at a discount to its larger peers, I'm not sure there's any reason to think that the company deserves an on-par valuation.
While I might kick myself for not having bought these shares in early 2003 (when they traded below $10 a share), I think the turnaround is now fully priced into the stock. I'll continue to happily shop at BJ's stores, but I can't say that I really have any interest in adding their shares to my shopping list.
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Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.
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