"Consume, consume!" chant the throngs of shoppers flooding the aisles of discount club warehouses such as Costco (NASDAQ:COST), Wal-Mart's (NYSE:WMT) Sam's Club, or today's topic, BJ's (NYSE:BJ). But should investors heed the mantra? Every quarter gives us a clearer and clearer answer to that question, an answer that's so crucial to your portfolio's health. Tomorrow's Q4 and full-year 2005 earnings release from BJ's will be no different.

Wall Street Wisdom:

  • General consensus. Of the 19 analysts who track BJ's, only one rates it a buy. Twelve call the stock a hold and the remaining six actually counsel selling it.
  • Revenues. BJ's is expected to report 6% better revenues in Q4 2005 than it did in Q4 2006. The target is $2.17 billion.
  • Earnings. Profits are expected to rise 10% year over year, to $0.74 per diluted share.

Margin watch:
Watching BJ's margins evolve is about as exciting as stocking store shelves. Gross margins have inched up just 40 basis points in the past 18 months. Operating margins have barely budged. Net margins haven't moved at all.

Margins %

7/04

10/04

1/05

4/05

7/05

10/05

Gross

10

10.1

10.3

10.4

10.4

10.4

Op.

2.6

2.6

2.6

2.5

2.5

2.5

Net

1.6

1.6

1.6

1.6

1.6

1.6

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

Foolish lookout:
It appears that BJ's has already missed its estimates on the revenues side. Earlier this month, the company issued a press release putting its Q4 sales at $2.1 billion, for just a 5% increase over the year-ago period. That alone probably wouldn't be enough to cause an earnings miss, but combined with the stagnation of rolling net margins over the past 18 months, it makes an earnings miss look more likely. If the quarter is to be saved, I expect that share buybacks will have something to do with it. At last report, BJ's had reduced its share count by 3% since October 2004. Additional buybacks, combined with any margin improvement at all, would be enough to achieve the 10% profits growth that Wall Street hopes to see.

Valuation metrics:
Thanks to a 20% run-up in share price over the past three months, BJ's shares are starting to look pricey. The shares trade for about 17 times trailing earnings and 42 times trailing free cash flow. Weigh that against the 11% long-term growth that analysts expect BJ's to produce, and I think you'll agree that BJ's has some work to do if it's to grow into its valuation.

Costco is aMotley Fool Stock Advisorrecommendation. For more of Tom and David Gardner's stock picks, check out Stock Advisor free for 30 days.

Fool contributorRich Smithdoes not own shares of any company named above.