Dear Mr. Berko:

Dear S.R.:

I was in a BJ’s Wholesale Club (BJ-$48.99) last December, and holy Geronimo, the building was bigger than a Costco or a Sam’s and carried almost 50 percent more merchandise. The thing was so huge, so noisy and so frenzied that I felt as if I was a tourist at Disneyland during the Christmas holidays and admission was free.

Anyhow, BJ seems to have run into a strong Wal-Mart headwind that has cauterized its growth over the past couple of years. Costco is also nipping hard at BJ’s heels and taking lots of pretty painful bites.

Unfortunately, BJ’s concentration of stores in the Northeast exposes revenues and earnings to regional economic fluctuations. As a result, the rise in food and gas prices during the past year has had a greater negative impact on BJ than it has on Costco or Wal-Mart. So management finds itself the last dog in a three-dog race, running in a very competitive and difficult economic market.

As a result, earnings for 2011 might only increase between 3 percent and 5 percent. Management closed five stores in Miami, Charlotte and Atlanta, and has laid off several hundred good folks at its headquarters in Massachusetts.

The only reason that BJ’s shares are heading higher is a rumor that Leonard Green & Partners, one of those “vulture-ugly” private equity firms, has been sniffing the BJ carcass. The price talk is in the neighborhood of $55 to $60 per share.

These circulating buzzards already own 9.5 percent of the outstanding stock. They have a sordid history of buying undervalued retail assets and taking them private, firing redundant employees, squeezing costs, cutting expenses, browbeating suppliers, then merging what’s left or doing an initial public offering.

I doubt that Green’s privateers could take BJ’s 1.3 percent net profit margins anywhere near Wal-Mart’s 3.6 percent level.

I spoke to Laura Sen (CEO of BJ’s Wholesale), and she gruffly denied any relationship with BJ’s Restaurants. But the balance sheets seem to have similar footprints, so I don’t think Sen was completely candid with me.

I do like BJ’s Restaurants Inc. (BJRI-$37.13) – the food, not the stock. At $37.13, I think the shares are too pricey, even though earnings are expected to rise from 80 cents per share in 2010 to 95 cents in 2011, and even though revenues are expected to zoom from $515 million in 2010 to $605 million.

These revenues derive from 85 operating units in Arizona, Texas, Nevada, Oregon, California and Florida. That’s about $7.2 million in revenues per unit, or some $20,000 per day, so you can be certain the food is fresh.

BJRI has a “to-die-for” menu, and management plans to open one new unit per month. The balance sheet is crystal clean, its 4.4 percent net profit margins are excellent and its restaurants serve some of the best handcrafted beers I’ve tasted.

But at 37 times earnings, I think BJRI’s stock price is too high.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. ©2011 Creators.com