Fresh Food Spurs BJ's Q1 Gains

NATICK, Mass. — Improvements in fresh-food presentations and in shrink control, along with a continuing consumer flight to value, brought store traffic to a five-year high and boosted quarterly earnings at BJ's Wholesale Club here, officials said last week. The warehouse-club operator posted net income of $24.3 million on sales of $2.3 billion during the fiscal first quarter, which ended May 2. Overall

NATICK, Mass. — Improvements in fresh-food presentations and in shrink control, along with a continuing consumer flight to value, brought store traffic to a five-year high and boosted quarterly earnings at BJ's Wholesale Club here, officials said last week.

The warehouse-club operator posted net income of $24.3 million on sales of $2.3 billion during the fiscal first quarter, which ended May 2. Overall sales were down slightly from the same period a year ago, due mainly to gasoline price deflation. Excluding gasoline, comparable-store sales improved by 7.5%, with food comps up 9%. Net earnings improved by 41.6% compared with the year-ago quarter.

A 7% increase in store traffic was the chain's highest in five years, while average transactions increased by 1%, “which indicates our members continue to spend at or above last year's level, even though some of the items they bought were cheaper than they were a year ago,” Laura Sen, BJ's chief executive officer, said in a conference call discussing results.

Net earnings of 45 cents per share were at the high end of company estimates, and the strong performance prompted the company to raise its earnings guidance for the full year by 2 cents. However, BJ's noted comparisons would be difficult for the remainder of the year, particularly as it laps volatility in gasoline costs.

Chuck Cerankosky, managing director at Northcoast Research, Cleveland, said BJ's is likely gaining share in its markets by providing value in food offerings without necessarily compromising quality.

“BJ's has done an excellent job of conveying to members that it has got great-quality products. Whereas some people may have chosen to save money by purchasing lower-quality perishables in a supercenter, you can save a lot of money in BJ's geography without giving up quality,” Cerankosky said. “Our observations show consistently that BJ's has one of the best day-to-day meat offers out there beyond a few gourmet places, and they are continuing to improve in produce.”

According to Sen, improvements in quality and presentation are driving incremental sales improvements among perishable goods. Operational improvements to reduce shrink, in the meantime, reinforced BJ's fresh message and drove profits despite deflation in some fresh categories.

“I'm more pleased by the fact that [lower shrink] indicates we have better freshness than the actual [shrink] rate improvement,” Sen said. “Although it is very nice to have the rate improvement. The freshness is what will drive the repeat business and more members entering and staying in the category.”

Sen said the company had remodeled about 60 clubs to provide additional space for perishables and that there is an extensive program to increase refrigerated space at all locations. The company is also working with its vendors on creating smaller package sizes, which she said helps drive frequency and provides shoppers with lower price points.

“It's hard to tell where any specific chain is getting market share from, or losing it to, but obviously the comps are very strong and suggest they are taking some from the supermarket channel,” Cerankosky said. “If you look at some of the competitors on the Eastern seaboard, whether it's Pathmark, Ahold's chains, Publix or Winn-Dixie — BJ's is outperforming all of them, even when you include the slower pace of same-store sales in general merchandise categories.”

BJ's saw comparable sales of general merchandise improved by 4% in the quarter.

The company said it expected sales for the full year to increase by 2.2% to 3%.

Q1 RESULTS

Qtr Ended 5/2/09 5/3/08
Sales $2.26B $2.25B
Change +0.2%
Comp-store* +7.5%
Net Income $24.3M $17.2M
Change +41.6%
Inc. /Share 45 cents 29 cents
* EXCLUDING GASOLINE. INCLUDING GASOLINE, COMPS FELL BY 1.5%.