Another Blowout Month for BJ’s Wholesale (BJ)

The stock market is enduring another large sell off for the second straight day as the investing community considers the tough road ahead for the global economy. While the credit crisis unwinds and banks de-lever, the prospect of overall economic growth looks pretty dismal for the time being. However, not all companies are contracting right now, not by a long shot. So, instead of submitting to the doom and gloom scenario, we have been trying to highlight companies that stand to do well through the recessionary environment. BJ’s Wholesale (BJ) is one such company and, even compared to other big-box, discount retailers, BJ’s continues to shine.

BJ’s Wholesale

BJ’s Wholesale is a warehouse retailer in the same vein as Costco (COST) and Sam’s Club (WMT) but BJ’s has a greater focus on groceries. These retailers all sell in bulk and thus are able to offer discounts to consumers which are very much in demand right now. These discount retailers are positioned to gain foot traffic from shoppers that no longer seem to care that Whole Foods (WFMI) is organic. When times are tough, discounters are your best defensive stocks in retail. As most retailers struggled mightily in October, this strategy has panned out thus far for BJ’s as same store sales rose by 10.2%. When excluding gas sales, which were stronger than expected, same store sales were up 6.6%. This was not just a fluke which stands out because of the month’s disastrous equity market performance but rather marked the fifth straight month that BJ’s has posted double-digit gains in same store sales!

BJ’s has been growing like gangbusters and is opening new stores all over the east coast. In 2001, the company operated 118 stores. By the end of 2007 that number had ballooned 46% to 172 stores, more than half of which had a gas station attached. Some analysts had feared that with a relatively small footprint (16 states on the east coast), the company would begin to cannibalize sales by over-saturating those markets. Well, we think that the continuing strong increases in same store sales—as most of these new stores have been open for more than a year—demonstrate that the growth was favorable.

BJ’s has grown to become a much larger player in the warehouse/club retail market but is the market recognizing that growth appropriately? BJ is up more than 10% year to date but were the overall stock market not in the tank; it would likely be up far more based on the company’s earnings performance. BJ’s is near the low end of its historical price-to-sales and price-to-cash flow ranges even after considering today’s five percent increase. Understandably, BJ’s upped its guidance for the current quarter to $.45 – $.49 from $.36 – $.40. Because of these results, many analysts are upgrading their ratings; Ockham, on the other hand, cannot raise our ratings on BJ because it is already Greatly Undervalued. For defensive investors who want retail exposure, BJ’s with its torrid sales growth in food and gas, could be a nice addition to any portfolio.

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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