BJ’s pursues new strategy, focuses on perishables

NATICK, MASS. —BJ’s posted first-quarter results that indicate net income declined, although in the midst of merchandising and operational changes and during a gain in total and comparable-store sales.

In the first quarter, net income was $13.7 million, or 21 cents per diluted share, which included income of 1 cent per diluted share from the sale of pharmacy-related assets. For the 2006 first quarter, BJ’s posted net income of $15.4 million, or 23 cents per diluted share, which included income of $2.1 million post-tax, or 3 cents per diluted share, for bankruptcy recoveries relating to the defunct House2Home home furnishings operation, and an operating loss of $1.3 million post-tax, or 2 cents per diluted share, related to the loss within discontinued operations from the ProFoods restaurant supply business.

Net sales for the first quarter gained 7.5% to $2 billion from $1.9 billion for the 2006 like quarter while comps increased by 2.3%, including a contribution from gasoline sales of 1.4% and a negative impact of 0.4% from the absence of pharmacy sales versus the year-ago period.

In the conference call, Herb Zarkin, chairman and ceo, addressed questions that remain about the warehouse club chain, which has stepped away from a strategy developed by former ceo Mike Wedge that included expansion into the restaurant supply business and rapid expansion of private-label products.

The new approach is designed to step back from any marginal practices and operations, focusing instead on management experience in areas where profits are more certain. Club managers have been given more autonomy in running their respective units and have been provided with control of payroll allocation, endcaps, product placement and merchandise adjacencies—a move designed to encourage them to take a more entrepreneurial tack on driving sales. “This approach has improved morale as well as conditions in the clubs,” said Zarkin.

Perishable foods, fashions and seasonal merchandise represent BJ’s highest margin items and management is making them a priority. To boost perishables, BJ’s has invested in personnel and training to improve departmental performance. The company has cut back on the number of private labels and own-brand products it offers—dropping 350 SKUs—to drive “signature merchandise” that can help differentiate BJ’s from the competition and consumables that can provide a value that sets the warehouse club apart from supermarket rivals.

BJ’s also plans to expand high-margin perishables with an emphasis on gourmet and natural items. It will enhance the treasure hunt aspect especially in general merchandise with “wow” items and higher-margin apparel.

As for club expansion, BJ’s plans to slow down and concentrate on locations where quick returns may be realized.

During the first quarter, BJ’s opened a new club in Valley Stream, N.Y., and a second new club has just opened in Manchester, Conn. “In July, we plan to open a new club in Haverhill, Mass., and during the fourth quarter we plan to open clubs in Fort Lauderdale, Fla., and Stratford, Conn., bringing the total number of clubs this year to five new clubs,” Zarkin said. “It would be fair to say that we are being more selective on new sites than we have been in the past. Our original estimate was for eight to 10 clubs in 2007. A few of those planned clubs were delayed and will be open next year, and a couple that were in geographically marginal markets such as Port St. Lucie, Fla., were cut from the list. In the near term, all our new clubs will be located in markets where we have a reasonable chance of being profitable in the first full fiscal year. In 2008, we have conservative planning for six to eight new clubs.”

Deborah Weinswig, a Citi-group analyst, said in a research note, “We were impressed with how fast changes are being made at BJ’s, including the SKU rationalization and repositioning of its private-label offerings. Additionally, we are pleased with BJ’s decision to lower square-footage growth for 2007.”