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Food a Major Factor in BJ's Positive Q2, Future Plans

NATICK, Mass. -- Due in large part to robust private label and high-margin fresh food sales, BJ's Wholesale Club, Inc. yesterday posted a positive second quarter performance, although tempered on the income side by lower than anticipated profits on fuel.

Sales for the quarter ended July 30 were up 7.7 percent to $1.98 billion, as opposed to $1.84 billion in the prior-year period. Comparable-club sales for the quarter grew 3.2 percent, including a 40-basis-point contribution from gasoline sales of gas of about 0.4 percent. Net sales for the first half of 2005 amounted to $3.75 billion, an 8.7 percent rise from the year-ago period.

BJ's e.v.p. and c.f.o. Paul McDonough said that comp food sales were up 6 percent for the quarter, with the strongest increases in the beverage, coffee, paper products, and produce departments. By contrast, comparable-club general merchandise sales were down 1 percent; strong sales of air conditioners, beauty care, and TVs were offset by softer sales of furniture, sporting goods, and computer hardware and software, explained McDonough in a conference call.

BJ's president and c.e.o. Mike Wedge said in a statement: "For the first half of 2005, we achieved solid results while continuing to focus on innovation. An ongoing theme for BJ's in 2005 is steadily improving merchandise margins driven by a higher penetration of private brand and fresh food sales, as well as lower merchandise costs achieved through global and e-sourcing initiatives."

During the conference call, Wedge was enthusiastic about the company's booming private label and produce departments. He said that private brands made up 11 percent of second-quarter sales, an increase of 7 percent over last year, and that BJ's had added 115 items to its private label lineup during the quarter, resulting in more than 1,000 products under 15 unique labels. "Year over year, we achieved a comp-sales increase of 52 percent," he concluded. As for produce, Wedge noted that sales grew 17 percent on a comparable-sales basis, reflecting a 30 percent increase in units and an average price reduction of 12 percent for the department.

He additionally mentioned "strong comp-sales increases" in the company's prepared foods, deli, bakery, and rotisserie chicken departments.

Net income for the second quarter was $30.5 million, or 44 cents per diluted share, vs. net income of $28.0 million, or 40 cents per share, in the year-ago period.

Net income for the first half of 2005 was $49.1 million, or 71 cents per share, which included $2.9 million of post-tax income ($4.3 million pre-tax) stemming from a recovery of bankruptcy claims related to the House2Home, and $1.8 million of post-tax expense ($3.0 million pre-tax), to increase the company's reserve for claims by several credit card-issuing banks. The net total of these two items came to $1.1 million, or two cents per share.

For the first half of 2004, BJ's posted net income of $44.1 million, or 63 cents, which included net expense of $0.5 million, or one cent in the second quarter, and first-quarter income of $1.4 million, or two cents per share, which was related to a recovery of medical claims overcharges.

Last year's results included a post-tax charge of $3.6 million, or five cents per share, to establish a reserve for claims by credit card-issuing banks, and post-tax income of $3.1 million, or four cents, related to the company's recovery of bankruptcy claims in connection with House2Home.

Because of lower-than-planned profitability on gasoline sales during the second quarter and a revised estimate for gas profitability in the third quarter, BJ's now expects to post earnings for the full year of $1.85 to $1.91 per share, down from the company's previous guidance of $1.87 to $1.95 per share. The lower profitability was attributable crude oil and gas prices "[marching] steadily upward throughout the quarter," as McDonough put it during BJ's conference call yesterday. McDonough added that the company "[didn't] expect any significant relief in the short term" in regard to gas profitability.

Among other second-quarter highlights were the adoption of a new site-selection model that chooses optimal trade areas and locations based on sales potential, which Wedge said had opened up greater expansion opportunities in BJ's core markets by revealing that stores can be clustered closer together than previously believed; and the opening of three new clubs, four gas stations, five deli departments, five rotisserie chicken departments, three pharmacy sections, and about 80 third-party-operated home-improvement kiosks.

Turning to important developments during first half of 2005, Wedge expressed excitement over the company's second research-and-development club, which opened in February in Cape Coral, Fla. (the first is in Kissimmee, Fla.) Among the Cape Coral club's unique amenities, which were suggested by member insights, are a health-and-wellness store-within-a-store featuring a pharmacy and optical center, organic/natural sections, and even a member meeting room for cooking demonstrations and other community events. Wedge said that the purpose of such R&D clubs was to “sharpen our competitive edge in food."

In terms of future openings, Wedge noted that the company plans to open four to five new clubs and four gas stations in the second half of 2005, as well as relocating one older club in Rochester, N.Y., and is "on track" to open 12 to 15 new clubs in 2006, including four in the first quarter.

Additionally, in discussing bakery, pet care, beauty care, and consumer electronics, categories that BJ's was in the midst of "reinventing," Wedge said that they were all enjoying "double-digit" comparable-club sales increases, particularly beauty care, for which the company intends to introduce an upscale private brand of products.

Despite the impact of price spikes of oil on gas sales, Wedge believed that the company had seen "substantial progress on many fronts" and that "innovation is alive and well at BJ's."

BJ's now operates 161 clubs, including two ProFoods Restaurant Supply clubs, and 85 gas stations, as opposed to 151 clubs and 78 gas stations last year.

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