Bookkeeping: Beginning BJ's Wholesale Club (BJ) Position

One of our long running themes has been the "Pooring of America" as costs of life overcome wage increases in the country for the lower and middle classes - it has been happening slowly but surely over the past decade - median wages have not kept up with inflation even if you use the government's faulty understated inflation figures. [Do The Bottom 80% of Americans Stand a Chance] Using reality the unwashed masses are falling even further behind, and without lines of credit available in great quantity as they once were (including house ATM) this problem will now be exposed (and has been the past year) as the tide washes out.

To that end, I've been pointing to to the Walmarts (WMT) and McDonalds (MCD) over the past year as good investments - but we have not bit ourselves. Today we have an opportunity in BJ's Wholesale Club to get a poor man's Costco (COST). The stock is down 7% on what I consider a good earnings report. Full report here.

• BJ's Wholesale Club Inc (NYSE:BJ - News) said on Wednesday quarterly profit rose as shoppers headed to its stores in search of low prices on food and fuel, and the No. 3 U.S. warehouse club operator raised its full-year profit forecast.
• Profit for the second quarter ended August 2 was $36.5 million, or 61 cents per share, up from $36.3 million, or 55 cents per share, a year earlier. Excluding a benefit of 3 cents per share for state income tax audit settlements, BJ's earned 58 cents per share in the latest quarter. Analysts, on average, had been expecting it to earn 57 cents per share, according to Reuters Estimates.
• BJ's quarterly net sales, which exclude membership fee revenue, rose 17.9 percent to $2.65 billion from $2.25 billion. Sales at clubs open at least a year, a key retail gauge known as same-store sales, jumped 15.5 percent, including an 8.1 percent contribution from sales of gasoline.
• The company said traffic increased by 5 percent for the quarter, excluding the sales of gasoline, its strongest growth since 2004. (people flooding into discount warehouses sounds like a "recovering economy to me!)
  

Raised Guidance (again)

• BJ's raised its full-year profit forecast, the second upgrade in a matter of months. The company now expects earnings for the year of $2.10 to $2.20 per share, up from its May guidance of $2.04 to $2.14 per share. The May forecast was 6 cents per share above the company's previous expectations offered in March.

Share Repurchases

• The company also announced that its board has authorized an additional $200 million for share repurchases. During the second quarter, BJ's purchased about 1.4 million shares of its own common stock at an average cost of $37.45 each, or approximately $54 million total.
• During the half-year ended Aug. 2, BJ's purchased about 2.4 million shares of its own common stock at an average cost of $35.30 each, or about $83 million. Including the $200 million authorization announced Wednesday, the company has about $291 million available for share repurchase.

The company has about about 60M shares outstanding so 2.4 million is not insignificant. (4%)

From a portfolio management point of view this helps build up our "consumer" side of the ledger - we are not hopeful for the US consumer but every so often (the past 5 weeks for example) consumer stocks rampage off of oversold levels and we are on the outside looking in. So this helps us get some exposure on that side and still fits into our wheelhouse of catering to the area of retail we think more and more Americans have been and will continue to migrate to (downscale) [Dec 26: Target Shoppers Turning into Walmart Shoppers]

Remember, we have noticed the trend the past few months that trend breakouts are not working (buying stocks as they break out) since by the time the breakout happens the move is 80%+ over and we're just scraping for crumbs as returns when the stock reverses after failed breakout. So we are adjusting and now looking for fundamental stories we like... ok... fundamental stories we can live with... and have pulled back. This is a classic case. When breakouts work for 2-3 months we'll switch back to our preferred method.

Technically the stock pulled back to near its 200 day moving average ($36.50s) so we're buying here. We are starting with a 2.5% stake in the upper $37s. After a gap down like this, there is some damage to the chart so I don't expect any imminent rebound, and $43 is going to provide a world of resistance but that's a good 15% higher and if we can get that in 6 months it would be a good return. If the stock breaks below $36.00 level we'll take the smaller loss and cut back simply for technical reasons.

The stock is quite rich at just under 18x forward estimates for barely double digit growth but this is the type of stock the money flow is going to, and valuations mean nothing nowadays. Important distinction about this bipolar market - not 4 days ago we had retailer flying up 10-15% on what I considered bad earnings reports/guidance; today we have a few retailers with what I see as solid reports and they are being beaten. This market has no memory from 1 week to the other, and what works one week fails the next. The "rotation" of money from week to week, or day to day, or month to month is relentless and nothing works for long periods of time. A very difficult market for anyone who does not have very short time frames.

EDIT @ 12:30 PM: Comments in this story on why the stock is down - I find these worries ironic when EVERYONE on CNBC assures me that as oil goes down all our inflation problems go away in the "coming 6 months". The spin meisters in our land of punditry are relentless. Remember, inflation is a tax on all things, producers and consumers - someone has to eat it. Except in our Goldilocks Kool Aid scenario proposed by pundits where inflation has peaked and you should buy consumer stocks across the board as gas dropping 40 cents means all is right in the world. Yet today its a concern again? ;)

• On a conference call with analysts, BJ's executives forecast second-half merchandise margin rate may slow from the first half as it predicted continued pressure from food and other inflationary cost increases. Echoing a repeated theme throughout the industry, the company said sales of less profitable food and other consumable products were strong while sales of discretionary merchandise from furniture and best seller books to jewelry and television slowed. That also raised concern about discretionary spending for the upcoming holiday season, analysts said.
• "Inflationary price increases is not new to us," BJ's President Laura Sen said on the call. "The size and velocity and number is really what's unusual about this year and for what we can see in the foreseeable future, we see more price increases coming in the second half." (The Kool Aid drinkers argue against this, saying inflation peaked this month - hence buy those Las Vegas casinos, airlines, home stocks, and auto stocks as the consumer is unleashed back onto the economy)
• "Investors are concerned about inflationary pressures and BJ's ability to pass that on to consumers in order to maintain its profitability," said Joe Feldman, an analyst at Telsey Advisory Group. On a conference call with analysts, BJ's management fielded many questions from analysts asking about cost and competitive pressures and the company's ability to pass them on.

[Jul 23: Costco Warning & McDonald's Continues to Be Dinner of Choice for Pooring Americans]

Long BJ's Wholesale Club in fund and personal account