BJ's to Ramp Up Private Label Efforts

NATICK, Mass. -- BJ's Wholesale Club, Inc. here yesterday said private label in grocery-type categories was a bright spot in an otherwise mixed second quarter--and chain executives added that they plan to increase their emphasis on private label going forward.

Overall, BJ's profit performance was problematic, with reported net income for its second quarter ended July 29, 2006 of $26.4 million, or 39 cents per diluted share, vs. $30.5 million, or 44 cents per diluted share for the year-ago period, a decline of 13 percent, a slide the company attributed to lower-than-anticipated sales, and "significantly lower gasoline profitability" due to rising fuel prices.

Acting c.f.o. Frank Forward said in a conference call yesterday that quarterly sales of groceries and food increased slightly, thanks to such strong performers as paper products and produce. Weaker food categories for the quarter included meat and dairy, he said.

Meanwhile, general merchandise sales dipped, with such strong categories as health and beauty aids, televisions, summer seasonal items, and consumer electronics offset by weaker performers like air conditioners, DVDS, apparel, and jewelry.

President and c.e.o. Mike Wedge noted during the call that the company wasn't pleased with its traffic in general merchandise for the quarter, adding, "We expected to do better, and we know we can do better."

Bright spots for the company, according to Wedge, included consumer packaged goods, which "continued to generate solid comp-sales increases," driven by member insight sales initiatives; and sales of private brands, up 17 percent and accounting for 13 percent of all second-quarter sales, up from 11 percent of all sales in the year-ago period, and 7 percent two years ago.

The company said it would "continue to add in private brands," including in the area of dry grocery, to cover price points it hadn't addressed before, which would help it better compete against mass retailers and supermarkets.

Overall results for the quarter included $3.4 million post-tax, or five cents per diluted share, for stock-based compensation expense, compared with $.2 million post-tax for stock-based compensation expense last year.

Net income for the first half of 2006 was $41.8 million, or 62 cents per diluted share, as opposed to $49.1 million, or 71 cents per diluted share, for the comparable period in 2005. Results for the first half of 2006 included income of $2.1 million post-tax, or three cents per diluted share, for House2Home bankruptcy recoveries, and expense of $5.8 million post-tax, or nine cents per diluted share, for stock-based compensation expense.

However, second-quarter net sales came to about $2.1 billion, a rise of 5.6 percent over the year-ago period. Comparable-club sales for the quarter grew 1.8 percent, including a contribution from gasoline sales of 1.9 percent. For the first half of 2006, total sales went up 6.0 percent and comparable-club sales rose 1.9 percent, including a 1.7 percent contribution of gas sales.

Among the company's expansion plans are the opening last month of a 625,000-square-foot cross-dock facility in Uxbridge, Mass., containing a state-of-the-art management system; and the conversion of 60 clubs to the company's expanded "fresh" presentation, featuring more perishables.

In light of its disappointing results, the company revised earnings guidance for the full year to a range of $1.69 to $1.77 per diluted share, from $1.85 to $1.92 per diluted share. BJ's also lowered its annual target for comparable-club sales growth to a range of 2 percent to 4 percent from a range of 3 percent to 5 percent.

During the call, the company said it would "moderate" its store openings to help avoid cannibalization of sales from sites to close to each other. For instance, BJ's will open only 10 clubs for the year, instead of its original prediction of 10 to 12 locations. One of the clubs will be its third research and development club. There other two are in Kissimmee and Cape Coral, Fla., respectively, but company officials didn't disclose where the third club would be located.

BJ's operates 167 clubs, including two ProFoods Restaurant Supply Clubs.
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