NATICK, Mass. — BJ's Wholesale Club here is seeking a new top executive to deal with declining same-store sales, particularly in general merchandise — declines that apparently led to the resignation of Michael T. Wedge as president and chief executive officer and the appointment of Herb Zarkin, the company's chairman, as interim CEO.
The company said it is seeking “a fresh perspective.”
According to analysts, the change in top management could also signal a possible change in ownership, with renewed speculation that a leveraged buyout by a private equity or real estate firm could be imminent — a possibility Wall Street has anticipated for several years.
“BJ's is a favorable nominee as a leveraged buyout target for several reasons,” said Deborah Weinswig, an analyst with Citigroup, New York, including its undervalued stock, solid cash flow and low debt levels.
“The company has significant potential in the hands of the right owner,” she said. “For example, its cash flow grew at a seven-year compound annual growth rate of 13%. Although it generates cash, BJ's has not been able to grab market share at a rate we would expect based on its business model.
“Additionally, BJ's owns approximately 30% of its real estate, and an additional 7% of buildings owned are on ground leases. It also had $40.1 million in cash on its balance sheet at the end of the third quarter.
“BJ's operating margin in the quarter of 1.4% was 92 basis points lower than in the third quarter of 2005, primarily due to de-leveraging sales, general and administrative expenses as a result of weak top-line growth. We believe BJ's operating margins will not experience significant expansion, as the company has not been very aggressive in expanding its higher-margin treasure-hunt assortment, and same-store sales have been disappointing.”
Weinswig said she believes a reasonable offer price for the company would be approximately $37 per share, which was 25% higher than the stock price at the close of business Nov. 21, the day before Wedge resigned. The stock last week was trading around $32 per share.
Neil Currie, an analyst with UBS, New York, also said he believes BJ's may be a potential takeover prospect, based on the company's statement that it would benefit from “a fresh perspective.”
“While management has over-complicated what should be a simple business model — by stocking double the SKU's of Costco — and [while] a turnaround is proving difficult, BJ's is a good candidate for private equity investment due to its strong cash flow and conservative balance sheet,” he said. “Past comments from Wedge indicated he would not welcome such an approach.”
Currie also said Wedge's departure “comes at a critical time and could be a sign of further business deterioration.”
Chuck Cerankosky, an analyst with FTN Midwest, Cleveland, said speculation about a potential sale of BJ's to a private investor “has been around for awhile,” and he said he doesn't see Wedge's departure as an indicator that the speculation may become fact.
While overall same-store sales have been acceptable, “the company has had negative comps in general merchandise for the last several months,” he added, “and since it's general merchandise that generates higher rings per unit and higher gross profit per customer, it's very problematic when GM isn't moving well in a club model.”
According to Cerankosky, Wedge's resignation “signals that the company has not yet found a solution to that problem, and it hopes a new CEO will have a solution.”
Consequently, he said he believes any new CEO at BJ's is likely to have a strong general merchandise background.
Finding a successor may not be easy, Weinswig pointed out, “[because] there is currently a dearth of retail management talent [as BJ's looks] for an external candidate with retail experience.”
BJ's, which has operated in New England since 1984, has 171 club locations. Unlike its two principal competitors — Costco Wholesale Corp., Issaquah, Wash., and Sam's Clubs, Bentonville, Ark. — BJ's is more consumer-oriented, with a higher SKU count and smaller pack sizes. Groceries, encompassing food and sundries, account for more than 70% of total sales at BJ's, compared with approximately 60% at the other two club operations.
BJ's sales for the fiscal year ending in late January are expected to hit $8.6 billion, a jump of 7.5% over the $8 billion reported at the end of 2005. However, while sales for the 39-week period that ended Oct. 28 rose 2.9%, net income fell 21.8% and comps, excluding gasoline, declined 0.4%.
Those results were announced Nov. 14, just eight days before Wedge resigned.
Wedge, 53, was named president and CEO of BJ's in September 2002, after joining the company in 1988 when it was a division of Waban, which operated BJ's and HomeBase — a warehouse operation that was sold in 1997.
Zarkin has been a director of BJ's since late 1996 and chairman since 1997. The company said he had intended to retire from the board next May but has indicated he will instead seek re-election at the company's annual meeting in May.
“While the company has made great strides in its efforts to improve general merchandise sales and customer traffic, overall progress has not come as quickly as we had hoped and expected,” Wedge and Zarkin said in a joint statement. “We agree the company's leadership team will benefit from a fresh perspective at this time.”
