Foolish Forecast: BJ's on Deck

Editor's note: BJ's had one fewer business day in its April 2006 to April 2005 comparison while the quarterly comparisons had the same number of business days. A previous version of this article stated otherwise. We regret the error.

More big-box retailing, er, wholesaling news, is on the way, investors. Next up in the earnings parade: BJ's Wholesale Club (NYSE:BJ), which reports its Q1 2006 numbers tomorrow morning.

What analysts say:

• Buy, sell, or waffle? Eighteen analysts follow BJ's, but two-thirds of them rate it only a hold. One says buy, and the other five recommend selling the stock.
• Revenues. Analysts believe sales grew only 6% over the last year, to $1.9 billion.
• Earnings. They're expecting to see a 24% slide in profits to $0.19 per share.

What management says:
Like most retailers, BJ's generally reports its sales numbers a few days before releasing earnings. On May 4, the news was generally good. Sales were indeed up 6% at $1.9 billion for the quarter. The company also revealed that same-store sales for the quarter were a bit on the weak side, rising only 2% against last year's numbers -- and higher gas sales (or more likely, higher prices being charged in those sales) accounted for 1.4% of the increase.

In the sales report, management estimated that April comps were depressed 1.5% to 2% because the month included one less day this year than last. Comps came in at 1.2% versus 8.4% in April 2005, and had gas sales not risen 1.5% over last year, comps for April would have actually declined. For the quarter, comp store sales increased 2% versus 5.8% last year.

What management does:
Now here's a coincidence. Just like Wal-Mart (NYSE:WMT), which owns BJ's rival Sam's Club, BJ's rolling gross margin has risen 30 basis points over the last 18 months. Just like Wal-Mart, BJ's operating margins haven't wobbled more than 10 basis points over the last year and a half. But on the net margins, BJ's is the more consistent (if not the more efficient) operation. In every quarter for the last 18 months, the company has boasted the exact same trailing-12-month net margin.

The Fool says:
For all the stability of its profit margins, I remain unimpressed by BJ's business, both relative to those of its primary competitors, Costco (NASDAQ:COST) and Wal-Mart, and objectively. Relatively speaking, BJ's has the lowest gross, operating, and net margins of the three. And although BJ's grew its profits faster than either of its rivals over the last year, it was the slowest revenue grower, and analysts expect it to be the slowest grower over the next five years.

Objectively, I'm less than impressed with those profits that BJ's grew so quickly last year. Over the last six months, BJ's booked $79.4 million in "accounting profits" under generally accepted accounting principles. But in terms of actual cash profits, the firm pocketed less than half that amount: just $35.3 million. This imbalance pops up somewhat frequently at BJs, with part of the reason for the underwhelming free cash flow being that the company let accounts receivable get out of hand. While sales grew 7% over the last six months, accounts receivable jumped 17%. Tomorrow, I'd suggest that investors look to see if the company can (a) get its accounts receivable back under control, and (b) close the gap between its GAAP net earnings and its real cash profits.

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Fool contributor Rich Smith does not own shares of any company named above.