Warehouse club BJ's Wholesale reported strong second-quarter profits this morning. Along with Costco and Sam's Club, the niche seems to be having no problem in winning over customers during these cost-conscious times. The companies continue to add new services to bring their members back, but at some point the simplicity of the warehouse club might be blurred by the complexity of its offerings.
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Big gains come in big packages. BJ's Wholesale Club (NYSE: BJ) delivered the goods this morning, reporting second-quarter results that were in line with Wall Street's estimates. With sales and earnings marching 9% and 17% higher, respectively, the company was able to grow margins at a time when many companies are going the other way. It's telling to the niche's popularity that BJ's now sports trailing revenues of $5 billion even though it is only the third-largest warehouse club chain. Costco (Nasdaq: COST) and Wal-Mart's (NYSE: WMT) Sam's Club loom larger, yet all three are performing well in the otherwise trying retail market. Membership clubs have their privileges. In bare-bones settings stocked with palletized food items in bulk quantities along with more general merchandise, it's not the simple, rustic décor that has shoppers flashing their subscriber cards -- it's the bargains. Minimal overhead allows the clubs to institute meager markups to already-economical large portioned goods, so consumers truly do get more bang for their buck at the warehouse chains. That, of course, assumes they can get through a five-pound tub of margarine and escape hernia injury while carrying a 100-ounce box of Froot Loops. While warehouse club items are cheap, the stocks aren't. All three major players are trading at earnings multiples higher than their projected growth rates -- though considering their consistent performances in good times and bad, it's easy to see why the equities deserve to be marked up. Last month, the three warehouse kings saw favorable comps in a very tight cluster. With same-store sales gains between 3.5% and 4.9%, the nearly uniform performance indicates that the industry deserves as much credit for the companies' success as their actual operating performance. (For more on the retail business, visit our InDepth page on the subject.) Even big things in small packages seem to be working out well. Smart & Final (NYSE: SMF), which compacts the warehouse club model into smaller stores, has reported 10 consecutive quarters of consistent profitability after an early 1999 restructuring. While one might be tempted not to fix what isn't broken, warehouse clubs are still looking for ways to grow repeat business. Just as discount department stores like Wal-Mart have added everything from video rentals to photo processing while supermarket chains have taken to financial services, the use of gimmickry to get the customer to come back more often is nothing new. From Costco's travel agent services to BJ's recent addition of gas pumps outside its superstores, making the warehouse club a more central pivot point in the lives of its members is all the rave. But will it become too much? Early next year, BJ's will begin testing an in-store pharmacy. No, you won't be able to pick up prescribed cough syrup by the gallon. But by enticing patrons to come back for prescription refills the chain is targeting more steady repeat visits. The question: If one thinks of BJ's when tires go bald or the flu kicks in, does that begin to dilute the company's strength as a warehouse club chain? BJ's is already about more than just groceries, as non-food products make up more than a third of the company's sales right now. It's something to watch. In the pursuit of trying to become everything to everyone, some brands get sullied along the way. Rick Aristotle Munarriz used to go to BJ's and Costco just to load up on the free samples. Ahh, free lunch! Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.
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