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Headwinds Might Hinder but Won't Thwart BJ's

BJ's is looking at some headwinds that might slow its run of success in the recession, including the impact of food deflation, but edibles should buoy the operation as the company adds clubs to sustain its momentum.

In the second quarter, food deflation, along with fuel price volatility, weather effects in the Northeast and a wary consumer pressured top line and comparable store sales, but the company managed to post positive comps in its merchandise operations.

In the second quarter ended Aug. 1, BJ's sales decreased by 5.2 percent to $2.5 billion. Net income was 64 cents per diluted share versus 61 cents in the year earlier period, beating an analyst estimate of 62 cents per share. Comparable store sales decreased by 7.7 percent, including a negative impact from sales of gasoline of 10.6 percent. Excluding gasoline, comps gained 2.9 percent, below the company's guidance of positive four to six percent, with most of the miss due to forces of nature, either actual or economic, Frank Forward, the company's chief financial officer, said in a conference call yesterday, as transcribed by SeekingAlpha.

"Our second quarter sales were unfavorably affected by unseasonably cool and wet weather in the Northeast, weak consumer spending and increased price deflation, particularly in some perishable departments such as dairy, milk, meat and produce," he said.

Forward also noted that signing up new members in the recession has been proving harder. New clubs have been doing well in their opening periods, but overall, the effort has produced flatter numbers and may fall into the negative range before the year's end. "New member sign-ups in comp clubs remain a challenge," he noted." In the second quarter, they ran slightly below last year."

Yet, for every piece of bad news at BJ's there seems to be a hunk of good tidings that at least balances. On the member front, for instance, renewals remains strong, said CEO Laura Sen, who enthused:

We continue to see positive membership trends during the second quarter, with renewals tracking slightly ahead of plan for the year and an increase in sign-ups of rewards members versus last year. As a reminder, rewards members pay an $80 membership fee instead of $45, which makes them eligible to earn up to $500 a year in merchandise credits known as BJ's Bucks.
Despite deflation, food remains an important advantage for BJ's, said Sen, as comp food sales increased by six percent in the second quarter on top of a 10 percent increase in last year's period. "In perishables, where we saw accelerating rates of price deflation in meat, produce, milk, eggs and dairy, comp sales increased by approximately six percent on top of a 12 percent increase in last year's second quarter," she said.

Food sales have allowed BJ's to gain market share and, with continuing positive merchandise comps and profits, the club operator plans to press its advantage, rolling out new clubs despite the economy. Sen noted:

Chain expansion is key to our growth strategy. We plan to open seven new clubs this year compared to four new clubs last year. During the second quarter, we opened a new club in Claremont, Fla., as well as two clubs in the metro New York market, one in Pelham Manner and the other in Bronx terminal market.
Metro New York comped positive for the company in the second quarter and, even when gasoline sales are considered, returned the best comparable store sales of any operating region. It remains a lynchpin of BJ's success. Sen asserted:
We have high expectations for membership and sales volumes in the two metro New York clubs based on the population density of their trade areas, and so far, we are very pleased with the enthusiastic response we have seen from the surrounding communities.
The company opened three clubs earlier this year and just debuted its latest in North Bergen N.J., Sen pointed out, adding:
Additionally, we are on track to open three more clubs this year including our first 85,000 square foot prototype, which will be located in Quaker Town, Pa. The two other clubs will be located in Oaks, Pa., and Flushing, Queens. We expect to open the two Pennsylvania clubs before the Christmas holiday season and the Flushing, N.Y, club in January.
Of course, all the activity in the Northeast means BJ's remains subject to the vagaries of the region's often cranky weather. Still, the company has proven adept at adapting to its complex demographic and ethnic landscape, using food to draw customers who often become loyalists. So, for the immediate future â€" and despite a J.P. Morgan decision to downgraded BJ's shares to neutral from overweight based on the headwinds it faces â€" the company's prospects do seem solid.
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