Earnings Preview: Costco and BJ's Bank on Rising Prices

Inflation, bad weather and consumer confidence will all be topics of discussion when warehouse club chains BJ's Wholesale Club (BJ) and Costco Wholesale Corp. (COST) report quarterly earnings next week.

The members-only retailers are expected to report improved results thanks to a combination of rising gas prices, food inflation and easier comparisons to the year-ago period. But some analysts have suggested that their potential for beating the forecasts for the quarter could be dampened by the effect of bad weather on sales in December and January.

The companies report results on Wednesday, with BJ's meeting with analysts before the market opens, while Costco executives will hold their investor call shortly after the opening bell.

After four consecutive quarters of lower year-over-year profits, investors are expecting Costco to report growth again during the second quarter of its fiscal 2010. Analysts expect earnings of 71 cents per share, up 29% from 55 cents a year earlier, according to the consensus estimate from Thomson Reuters.

BJ's, which showed shrinking profits only in the last quarter, is also expected to bounce back with modest profit growth in the fourth quarter, which ended Jan. 30. The analysts' consensus projects earnings of 96 cents per share during the quarter, up 7.9% from 89 cents a year ago.

Deflation Is Departing, But Frugality Is Thriving

The warehouse clubs have benefited from U.S. consumers' frugality: They're attracting shoppers looking for better prices on necessities such as food and health and beauty aids. But they've gotten hit by price deflation on food items and on big-ticket electronics such as flat-screen TVs. Additionally, when oil prices retreated in 2009 from the peaks set in mid-2008, the deflating gas sales lopped off several percentage points off the clubs' comparable-sales totals.

The effect of the gas price declines began abating in the second half of last year, first as the anniversary of the price peaks passed, and later as the prices came back sharply in late 2009.

And now, the clubs have begun reporting that food prices are coming back. Both Costco and BJ's posted increased sales in January, despite the move of the Super Bowl (and the increased food and TV sales it normally brings) to February. Both companies cited the rising gas prices and lifting food deflation as sources of their sales gains.

Room to Expand, Especially Where Sam's Club Retreats

With prices stabilizing, investors will want to see the clubs become more aggressive about adding new members and expanding stores. In 2009, increases in store traffic helped the clubs offset lower transaction totals, and with shoppers still holding back, adding traffic is the only way to grow sales. Given that most forecasts call for only moderate growth in consumer spending, Wall Street will need to see more membership growth in store for 2010.

Costco is still the favorite among investors, and rated a buy by most analysts, but concerns are rising that the stock may be overpriced. As BloggingStocks recently noted, the stock has struggled to hold on to a price around $60, and may be set for a fall to between $51 and $54. BJ's is less popular with analysts, who have mixed opinions about the stock; most rate it a hold, according to the First Call estimate.

Both have a chance to take advantage of the recent weakness shown by rival Sam's Club -- owned by Wal-Mart Stores (WMT) -- which recently announced it would close down a few locations and cut staff in a bid to cut costs. Costco has been aggressive over the last year, despite the recession; it opened a location in New York City in November, and said it would continue to open mall-based stores and more locations in urban markets, testing how to adapt its big-box model to those locations.

As the retail earnings season draws to a close, many retailers have reported they're ready to move from defensive mode to some kind of "new normal" fight for sales and market share. Investors will want to hear the same from the big-box clubs.