BJ's Stems Profit Erosion Amid Slowing Sales in Q2

NATICK, Mass. — Unseasonably cool and rainy weather in the Northeast dampened quarterly sales results for BJ's Wholesale Club here, although profits were hotter than expected, the retailer said last week.

BJ's navigated slower consumer spending by making progress in expense control and seeing some gross margin benefit as a result of deflation in some food categories, officials said in a conference call last week. Specifically, BJ's was able to hold prices in deflationary categories like gasoline and meat until supermarket channel competitors reacted, Laura Sen, chief executive officer, told analysts in a conference call.

“When the cost of goods drops, sometimes the competition chooses to hold retail a little higher than they might otherwise do it, and that benefits us,” Sen explained. “And we will follow rather than lead down, and that's a help to gross margins.”

Although the economic slowdown has consumers focused sharply on price, Sen said competitors have reacted with more restraint this year than she had expected.

“We've seen a rational competitive set this year,” she said. “We watch pricing very closely. And I don't foresee, based on what we've seen so far, that competition will behave very differently [in the second half of the year]. Going into this year I thought the competitive environment would be a lot more severe as people were trying to gain sales based on the weak environment. But that has not been the case.”

Sen acknowledged some grocers have followed through on recent pronouncements of more significant price investments, but she said relatively high cost structures still provide BJ's with an advantage.

“We are aware of what they are doing, but they are still on a high/low model which requires their margins to be much higher to support what they do,” she said. “They're still unionized, and they still have third-party distribution. … And from the statistics we look at on a regular basis, they are gaining share from each other but not from us.”

BJ's reported net earnings of $35.1 million, or 64 cents per share, for the second quarter, which ended Aug. 1 — down 3.6% from the same period last year but at the high end of the company's guidance for the quarter. Sales of $2.5 billion decreased by 5.2%, and comparable-store sales fell by 7.7%. Excluding gasoline, comps improved by 2.9%.

The results prompted officials to adjust its yearly sales forecast down, and earnings slightly up.

Sen said BJ's was pleased with the results of new clubs that opened in the quarter, particularly metropolitan New York sites in the Bronx and in Pelham, N.Y. She said BJ's is scheduled to open an 85,000-square-foot prototype store later this year in Quakertown, Pa. That store — smaller than BJ's typical 113,000-square-foot club but larger than its small-format store of 71,000 square feet — will allow BJ's to better penetrate smaller markets and provide an option in some areas where competing warehouse clubs won't build, Sen said.

Q2
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* EXCLUDING GASOLINE