Shares of BJ's Wholesale Club Inc fell 11 percent on Wednesday after JP Morgan downgraded the warehouse club to "neutral" from "overweight," saying its "valuation is tough to justify" and its December sales at clubs open at least a year may be below plan.
"While BJ's has executed an impressive turnaround since Herb Zarkin became CEO, we think it's time to move to the sidelines," wrote JP Morgan analyst Charles Grom in a research note.
BJ's, which competes with larger rivals Costco Wholesale Corp and Wal-Mart Stores Inc's Sam's Club, is trying to turn its business around after facing disappointing sales and attracting fewer customers.
Zarkin, who was named CEO in March after holding the position on an interim basis, is cutting the number of items that BJ's offers and is stocking merchandise that either has better margins or sells faster.
Grom said Zarkin has initiated an "impressive" turnaround at the warehouse club operator that has involved improving in-store product presentation, condensing store hours, and exiting unprofitable product categories, like furniture.
But Grom said recent visits to BJ's warehouse locations suggests December sales at clubs open at least a year, or comparable club sales, may be below plan.
"With (1) more challenging comps looming and (2) the end of its fall free trial member program (12/31/2007) we're concerned that BJ's comp trend could soften in the coming months," Grom wrote.
Grom also said that BJ's has a heavy presence in the Mid-Atlantic and Northeast, and higher home heating costs "are likely to be an additional drag."
He said BJ's stock valuation is hard to justify if its comparable club sales begin to slow.
"In the warehouse club space, we continue to see Overweight-rated Costco as the clear-cut winner and think BJ's could have a challenging time trying to gain share in 2008," he wrote.
BJ's shares fell $3.85 to $29.98 in morning New York Stock Exchange trading.