BJ’s Wholesale to Underperform

We now expect BJ’s Wholesale Club Inc. (BJ), a leading warehouse club operator in the United States, to ”Underperform” compared to peers with a target price of $37.00. Earlier we had a “Neutral” recommendation on the stock.

BJ’s 2Q Performance Lower-Than-Expected

Sluggish economic recovery and intensifying competition to lure budget constrained customers is weighing on BJ’s Wholesale Club. The company recently posted lower-than-expected second-quarter 2010 results. The quarterly earnings of 67 cents a share missed the Zacks Consensus Estimate of 73 cents, and also fell short of its outlook of 74 cents.

The company hinted that the recent quarter was challenging, as it faced intense competition from supermarket stores trying to grab market share by going aggressive in their pricing. This compelled BJ’s to make pricing adjustments at the cost of margin.

BJ’s Truncates Guidance

BJ’s forecasts a weak recovery and a sluggish consumer spending environment in the second half of 2010 worsening the competition in the market. The company faces stiff competition from two major warehouse club operators, Costco Wholesale Corporation (COST) and Sam’s Clubs, a division of Wal-Mart Stores Inc. (WMT).

Consequently, the company has taken a conservative stance and lowered its fiscal 2010 guidance. BJ’s now expects fiscal 2010 earnings between $2.40 and $2.50 per share, down from $2.58 and $2.68 previously anticipated. Management now forecasts a net sales increase of 8% to 10%, as against a growth of 9.2% to 11.2% predicted earlier. Merchandise comparable club sales excluding gasoline sales are expected to rise between 2.5% and 4.5%, down from an increase 2.7% to 4.7% anticipated earlier.

Zacks Consensus Agreement

A negative sentiment is palpable among the 17 analysts covering the stock following the second quarter earnings release. In the last 7 days, 7 analysts have slashed their earnings forecasts for the third and fourth quarters. For fiscal 2010, 2 analysts cut their earnings forecast. For fiscal 2011, 8 analysts have lowered their estimates.

In the last 30 days, 15 analysts lowered their estimates for the third and fourth quarters. However, only one analyst increased his estimate for the third quarter. For fiscal 2010, 16 analysts revised their estimates downward. For fiscal 2011, 14 analysts axed their estimates.

Zacks Consensus Magnitude

Downward pressure is apparent in the Zacks Consensus Estimate, which has been falling in the last 7 days. The current Zacks Consensus Estimate for third-quarter 2010 is 38 cents, which has dipped 4 cents in the last 7 days, and 7 cents in the last 30 days. For the fourth quarter the Consensus has dropped by 3 cents and 7 cents, in the last 7 and 30 days, respectively, to 94 cents.

For fiscal 2010, the Zacks Consensus Estimate now stands at $2.47, after tumbling 4 cents and 21 cents in the last 7 and 30 days, respectively. For fiscal 2011, the Zacks Consensus Estimate is $2.75, after falling 9 cents in the last 7 days and 16 cents in the last 30 days.

All these reinforce our conservative stance on the stock’s performance in the near future. Consequently, we prefer an Underperform rating on BJ’s Wholesale Club. Moreover, our Zacks #4 Rank, which translates into a short-term ‘Sell’ recommendation, correlates with our long-term view.

BJ’S WHOLESALE (BJ): Free Stock Analysis Report

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