Warehouse Clubs Profit as Economy Wanes

By , Money Morning •

By Jennifer Yousfi
Managing Editor

At a time when the flagging U.S. economy has savaged most of the retail sector, warehouse-club players Costco Wholesale Corp. (COST) and BJ's Wholesale Club Inc. (BJ) have managed to flourish.

The two firms are the David and Goliath of the $200 billion warehouse club sector: Costco is the largest U.S. player, with a market capitalization of $27.1 billion, dwarfing BJ's, a regional player in 16 Northeast states that has a market value of $2.1 billion. But even with its limited scope, BJ's is the nation's No. 3 warehouse club, trailing Wal-Mart's (WMT) Sam's Club.

Just last week, both Costco and BJ's reported strong quarterly results. Those strong financial results contrasted strongly with the disappointing results released by such retailing stalwarts as Target Corp. (TGT), Kohl's Corp. (KSS) and J.C. Penney Co. Inc. (JCP), which have been struggling as the U.S. market founders.

Costco Makes the Cut

For its second fiscal quarter ended Feb. 17, Costco's net income increased 31% to $327.9 million, or 74 cents per share, from $249.5 million, or 54 cents per share, in the same period the year prior. Earnings per share exactly matched analyst expectations of 74 cents per share, according to Reuters Estimates.

The increase in profit was driven in part by a same stores sales increase of 7% for February, which beat analyst expectations of a 6% increase. Sales increased to $16.62 billion from $14.8 billion, while membership fee revenue increased to $342.92 million from $307.32 million for the quarter.

"I think they are doing quite a good job of delivering sales growth and keeping prices very competitive in order to do that," Stephanie Hoff, an analyst with Edwards Jones, told Reuters.

But in a market that lives and breathes on analyst expectations, sometimes meeting those expectations just isn't good enough. Costco shares slumped the day of its earnings announcement and are down $7.14 year to date.

Costco shares closed at $62.62 yesterday (Tuesday) and have traded between $51.52 and $72.68 during the past 52 weeks.

But BJ's Beats Expectations

On the same day, BJ's reported earnings for its fiscal fourth quarter ended Feb. 2. Net income increased to $50.24 million, or 80 cents per share, from $11.86 million, or 18 cents per share, a year ago.

p>Earnings per share beat BJ's own forecasts of 70 cents to 74 cents per share. It attributed the strong earnings to higher than expected January sales, good merchandise margins and lower costs.

Sales increased 2% percent to $2.4 billion. Same store sales for February increased to 5.9%, which includes the effects of higher gasoline prices, which beat analyst expectations of a 4% increase.

But what really sent BJ's shares soaring the day of the announcement was the firm's positive outlook for the months ahead. It forecast a same store sales increase of 1% to 3% in March, and an increase of 10% to 12% in April. Shares are up $1.56 year to date.

BJ's Wholesale shares closed at $35.39 yesterday (Tuesday) and have traded between $26.36 and $39.15 during the past 52 weeks.

Analysts at Deutsche Bank AG (DB) this week maintained their "Hold" rating on BJ's shares, but boosted their target price to $36. And last week, Standard & Poor's Equity Research analysts upgraded BJ's shares from a "Hold" to a "Buy," and raised their target prices from $33 to $41.

Membership Has Its Privileges

The warehouse club business model is uniquely suited to tough economic times. As consumers are seeking to stretch their dollars, they shop for the lowest prices.

"The combination of inflation and economic stagnation has families looking for ways to reduce expenses," BJ's Chief Executive Officer Herb Zarkin said on a conference call with analysts.

Warehouse clubs sell bulk items, creating an economy of scale for consumers. And the rising cost of gas also helps. Some stores offer discount gas to their customers, but even stores without gas sales can benefit as shoppers buy more in order to make fewer costly trips to the store. Stocking up on bulk purchases at a warehouse store can cut down on weekly trips to the local grocery store while increasing sales for Costco and BJ's.

Another major difference maker that is warehouse retailers require shoppers to sign up for a membership card, which is also thought to help boost sales. Shoppers perceive they are receiving special access to discounts as a member and are apt to buy more.

While the stores offer a range of goods from orange juice to televisions, both firms are focusing on consumer staples to keep ahead of the financial slowdown in luxury spending.
"People still have to eat," Richard Galanti, Costco's chief financial officer, said to analysts.

News and Related Story Links:

  • Forbes:
    BJ's Wholesale Profit Climbs Sharply