Buy BJ’s Wholesale Club (NYSE: BJ)

Target: $40

Buy Up To: $29

Options Trade: BJ’s is a recent IPO and does not trade options currently. I expect the stock will be optionable soon and will alert you with an options trade at that point.

Rationale:

BJ’s originally went public in 1997 as a spin-off from Waban Inc. It was subsequently taken private in 2011 by private equity retail specialists Leonard Greene and CVC.

The company returned as an IPO on June 28th. The deal priced at $17 and the stock traded up immediately to the mid-20s. I expect it to rise to at least $40.

There are no formal estimates yet due to the quiet period that restrains underwriters immediately following an IPO. This lag in promotion often gives investors a window of opportunity.

I see huge gains in BJ’s income this fiscal year.

The company increased membership fees by 10% this past winter. Despite the higher annual fee, membership renewal remains at all-time high levels. BJ’s upper-income customer demographic exposes it the healthiest segment of consumers.

Profit margins are increasing dramatically. BJ’s narrowed the number of store-brand labels from 10 to 2 over the past few years. This streamlining has helped store-brand label products, which produce higher profits, grow from 10% of sales to 19%.

BJ’s scale allows it to gain better leverage from suppliers, which also helped boost gross margins 85 basis points in its most recent quarter. Disciplined expense management has kept SGA flattish.

Expanding product margins, flat SGA expenses plus mid-single digit revenue growth is a fabulous formula for double-digit earnings growth.

I expect the stock to continue rising as underwriters issue buy ratings. The next earnings event will be mid-August.