Benefit of Gas

Businesses Benefiting From Rising Gas Prices

Terrence D. Brown

FIN 370 Finance for Business

March 3, 2011

Instructor Art Philibert, M.B.A.

Costco, BJ's and Wal-Mart Stores Inc's (WMT.N) Sam's Club see business at their pumps perk up when gasoline prices rise, as they have been doing amid political unrest in the Middle East and Africa.

With the price of regular gasoline close to $4 a gallon in some parts of the country, retailers such as Costco are doing what they can to absorb higher commodity costs, a move that could pressure margins.

For now, the economy remains on solid footing despite the spike in gas prices, according to recent consumer confidence data.

BJ's has gas stations at 103 of its 190 or so locations and sales and memberships increase in tandem with the price per gallon.

"We see each week and each day, actually, as gas prices rise, more and more traffic to the clubs," Chief Executive Laura Sen said during a conference call. "We see this as one of our best marketing tools, especially in a rising price environment."

BJ's, which is considering selling the company, also reported a better-than-expected quarterly profit, while Costco's profit met Wall Street's expectations.

Wall Street Strategies analyst Brian Sozzi cut his rating on Costco to "sell" from "hold" and his price target to $65 from $75, in part because Costco's decision to hold off on raising prices for a bit could pressure its margins.

BJ's shares rose 0.5 percent to $48.57, while Costco's shares slipped 1.7 percent to $72.39.

Costco, the top warehouse club operator, said that lower-margin gasoline accounted for 8.5 percent of sales in the quarter, up from 7.2 percent a year earlier.

Costco's February sales at stores open at least a year rose 8 percent, while analysts were looking for a 7 percent increase, according to Thomson Reuters data.

Smaller competitor BJ's said its February same-store sales rose 5.5 percent. Analysts were expecting a 3.5 percent...