For Wholesale Clubs, May Was Extra Sweet

BJ's, Costco and Wal-Mart's Sam's Club all blow away estimates.
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Retail wholesale clubs emerged as big winners in the May retail race, as gas-conscious consumers looked to economize without curbing their spending habits.

BJ's Wholesale Club

(BJ) - Get Report

,

Costco

(COST) - Get Report

and

Wal-Mart's

(WMT) - Get Report

Sam's Club division were among the biggest beneficiaries of May consumer spending, helping them blow away same-store sales consensus estimates Thursday, each by more than 5 percentage points.

Costco had a 16% rise in same-store sales, compared with estimates for a 10.3% increase, while total sales were $3.8 billion, up 19%. Sam's Club posted an 11.8% increase, compared with the 6.7% consensus estimate. Total sales increased 12.9% to $2.94 billion.

And BJ's said same-store sales in May were up 12.1%, ahead of the Thomson First Call consensus for a 7% increase. The company said gasoline sales contributed 2.3% to total same-store sales. Total sales in the period rose 16.5% to $576.4 million.

"Wholesale clubs clobbered the competition with their relatively lower gas prices, better merchandising and increased customer acceptance of the wholesale club concept," said Richard Hastings, retail analyst at Bernard Sands.

The International Council of Shopping Centers reported that wholesale clubs had an aggregate 14.3% increase in May same-store sales, compared with the overall industry rise of 5.7% and a 3% rise for the wholesalers in May 2003. The next best sector in May was the drug stores with an aggregate 8.5% increase in same-store sales. The ICSC tracks 74 retail chain stores.

In a down market, shares of all three retailers were up in afternoon trading with BJ's shares lately adding 99 cents, or 4.1%, at $24.88. Wal-Mart shares were up 93 cents, or 1.7%, at $57.28, and shares of Costco were rising 77 cents, or 2%, at $39.55.

Hastings called the wholesale trend sustainable as shoppers not only come for the cheaper gas to fill up their SUVs but also for prescriptions, food and necessities. The clubs are one-stop shops for other goods, too, from computers and electronics to vacation-planning services, jewelry and wine.

Costco's gas proposition has helped get customers to the stores for the last couple years, said Jim Ragen, an analyst at Crowell, Weedon, who called Costco a "destination" store because of the amount and variety of goods it sells.

"I'm not sure

Costco's lower gas prices are driving increases in sales in their stores

currently, but there's some correlation there," said Ragen, who personally owns shares of Costco. (Crowell, Weedon does not do investment banking for Costco.)

Indeed, Costco said on a recorded conference call discussing May's same-store sales results that gas sales added 135 basis points to its overall same-store sales gain. The average price per gallon was $2.02 in May, compared with $1.51 per gallon in May 2003, the company said.

A BJ's spokesperson said gas was also $2.02 a gallon at the company in May, up 45% from $1.40 per gallon in May 2003.

In contrast, the American Automobile Association's current average price for regular gas is $2.041 per gallon, compared with $1.477 last year. A month ago, the price per gallon was $1.834.

Costco also said that even though Memorial Day was later this year than last year, the shift added 3% to total same-store sales because its sales period ended May 30, rather than May 29 in 2003.

Wholesale clubs are likely also still benefiting from the Southern California grocery workers' strike that began in late 2003 and went into early 2004 at the national supermarkets

Albertson's

(ABS)

,

Safeway

(SWY)

and

Kroger

(KR) - Get Report

. The strike was settled in February.

Costco, for one, has a big contingent of stores in Southern California and analysts speculated during the strike that it was a likely place for consumers to do grocery shopping, as the company also has a pharmacy and high-quality food. Once consumers shift to a new market, it is less likely they will move back, especially since the strike lasted over four months. (BJ's does not have stores in California.)

Indeed, the company said on its Thursday conference call that Southern California was among the best-performing regions in May. Costco also said in March that overall same-store sales were 50 to 100 basis points higher in the second quarter because of the strike. Incidentally, Costco has reported double-digit same-store sales since September 2003.

Overall, said Hastings, "Higher gas prices are having, at this point, a mostly isolated impact

on total consumer spending, depending upon household exposure to miles traveled per week for work. ... It would take gas prices of at least $2.75 per gallon national average to have a bigger impact on consumer spending."

National Retail Federation President Tracy Mullin echoed Hastings' remarks. "It may cost more to drive to the stores, but consumers are still shopping," she said. "Consumers have told us they would scale back some spending as gas prices increase, but the shift does not appear to be dramatic."