BJ's Wholesale Club, Inc. (BJ) reported strong sales results for the second quarter with total sales growth of 17.9 percent and comparable-store sales growth of 15.5 percent. The company's efforts to improve its merchandise and increase store traffic continue to drive steady sales growth. The difficult macro economic conditions are also pushing customers into wholesale clubs, which offer a better value compared to supermarkets. We think this positive momentum can continue for the next few quarters.
Despite the company's recent improvements in store traffic and sales, there are still numerous concerns with BJ's Wholesale Club. The company remains a distant third to industry heavyweights Sam's Club (WMT) and Costco (COST). Other than the company's competitive position in the wholesale club market, we remain concerned with the lack of geographic diversity, and inability to substantially expand its profit margins from current levels. We maintain our Hold rating.
Shares of BJ's Wholesale Club trade in-line with the industry mean. We think this valuation reflects the company's improving business prospects and above trend growth in the near term. The stock currently trades at 18.8x our fiscal year 2008 EPS estimate and 17.7x our fiscal year 2009 EPS estimate. This valuation reflects the company's strong performance that should last for the next few quarters. Our target price is $42 or about 18x our fiscal year 2009 EPS estimate.
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