BJ's and Costco Report Rising Profits for the Quarter

Life is starting to get back to normal for warehouse club chains, which reported rising sales and profits during the most recent quarter, thanks to more stable food prices and higher gasoline sales.

BJ's Wholesale Club (BJ) and Costco Wholesale (COST) both reported growth in sales and store traffic, but held their optimism in check for the rest of the year, saying consumers are still being careful with their money and the recovery is still plodding ahead slowly.

BJ's posted net income of $55.1 million, or $1.01 per share, for the quarter, up 4.7% from the same period a year ago. That beat the analysts' consensus estimate of 96 cents per share. For the year, BJ's reported $132.1 million in income, down 1.9% from the previous fiscal year.

Comparable sales (for stores open at least a year) were up 4.6% in the quarter, and 2.3% after gas sales were factored out. Gas sales also caused the full-year totals to drop 1.9%: Without gas receipts, comparable sales would have been up 4% for the year. Chief Operating Officer Laura Sen said the sales numbers were "very respectable," considering some clubs had to close down temporarily due to the record-breaking snowstorms that hit the East Coast during the quarter.

Both Costco and BJ's estimated that those blizzards and rains in California cost them about 1.5 percentage points overall in their comparable sales for the quarter.

A Modest Forecast

BJ's was conservative in its guidance for the fiscal year ahead, predicting net income between $133.1 million and $138.1 million, or $2.54 to $2.64 per share. Its first-quarter forecast was also modest: $21.3 million to $ 23.7 million in earnings, or 40 cents to 45 cents per share.

The company's forecast expects a comparable sales increase of 2.5% to 4.5%, growth in membership fees and growing margins thanks to expense efficiencies and strong sales of perishables such as food, said CFO Frank Forward. That will be offset partially by increased costs due to technology investments, growing payroll and store renovations, he added. Among BJ's planned investments: New cash registers and gas pumps, and upgraded refrigerator cases to improve its sales of food.

Costco's income for the second fiscal 2010 quarter, which ended Feb. 14, rose 25.1% to $299 million, from $239 during the year-ago period. Investors had expected the company to reverse gears after four consecutive quarters of lower year-over-year profits.

Earnings of 67 cents per share fell short of analysts' expectations of 71 cents per share, according to Thomson Reuters' consensus estimates. However, CFO Richard Galanti noted that earnings per share would have been 70 cents without a one-time tax charge during the last quarter. For the first half of the fiscal year, income rose 12.5% above the past year, to $565 million.

Missing a "Freebie" From Last Year

"We're pretty darn close to where we thought we were going to be," when the company issued guidance at the start of the fiscal year last August, said Galanti. He wouldn't give guidance for the second half of the current fiscal year, other than saying trends look "promising," thanks to an easing of the food deflation, a weaker dollar helping in overseas markets and fewer markdowns at home.

"We don't have the freebie of the big, aggressive prices we had last year," he said.

Comparable sales were up 9% for the quarter, with strong growth abroad, where comparable sales grew 26% compared to 5% in the U.S. After factoring out gas sales and currency fluctuations against the dollar, total comparable sales grew 3%, with international sales up 10% and U.S. sales up 2%. Costco has international stores in Canada, Mexico, the U.K. and Asia.

February's comparable sales were similar: They rose 9%, or 4% after factoring out gas sales and currencies. U.S. sales were up 5%, and international sales were up 26%, or up 2% and 10%, respectively, after factoring out gas and currencies.

The End of Deflation Will Benefit the Clubs

Both club chains said they plan to return to a more normal schedule of store openings, after pulling back slightly last year. Galanti said Costco intends to open eight new stores in the second half of fiscal 2010, for a total of 14 net new locations during the fiscal year. He hopes to increase that number to somewhere in the low 20s over the next two fiscal years. Forward said BJ's will open more stores in 2010 but that the company doesn't anticipate expanding its square footage by more than its current rate of 5% to 6% a year in the near future.

The clubs are expecting mild growth in traffic, average receipts and membership this year, but they expect some help from rising prices. The impact of falling gas prices is effectively disappearing after passing the anniversary of October 2008's price drop, said Forward, and food deflation appears flat now and should be factored out by the second quarter of 2010.

Even in big-ticket electronics, deflation is easing. Galanti noted that TV sales in February appeared to show deflation down to 5% year-over-year.

"Selling Pretty Darn Well"

Market indicators are positive for growth, said BJ's Sen. But she added that discretionary spending is still "creeping along." Forward noted that BJ's expects traffic to rise this year by around 3%, and he expects average receipts to grow modestly, around 0.5% to 1%.

But February's numbers also point to some improvement in categories such as apparel, and even midprice items for the home, such as small appliances, said Galanti.

"Some of that stuff is selling pretty darn well," he said.

Galanti said Costco's buyers are being more aggressive about bringing in big-ticket merchandise, "but you never know until it's there."