BJ's Cites Strong Price Competition in Q2

NATICK, Mass. — Wal-Mart Stores' ballyhooed rollbacks may not have gotten the response from consumers that the company wanted, but they sure captured the attention of competitors.

BJ's Wholesale Club here cited “an intense level of price competition” from discounters and conventional supermarkets — Wal-Mart in particular — for sparking price investments of its own during the second quarter, leading to margins and profits coming in considerably below expectations last week.

Laura Sen, BJ's chief executive officer, told analysts in a conference call that the wholesale club was prompted to respond to aggressive temporary price reductions by Wal-Mart near the end of May. The response to Wal-Mart alone was estimated to have shaved 3 cents per share off quarterly net earnings, officials said — or about half the 6-cent difference between analyst expectations and reported results. The quarter ended July 31.

“I would say that [Wal-Mart's] price rollbacks really started intensifying at the end of May, and the beginning of June,” Sen said. Clearly, I think the kinds of items we saw being highly promoted at Wal-Mart were the kind of trip-driving items that we rely on to establish and maintain our value proposition. And so we decided to respond. I think we all agreed it was the right thing to do, [but] it was painful.”

Wal-Mart officials last week said its rollbacks did not get the customer response the company had anticipated (see Page 1), and that it had reduced their intensity. Sen acknowledged that competition with Wal-Mart had subsided, but that conventional supermarkets are keeping up pressure on perishables.

BJ's reputation for providing its members with superior pricing to alternatives means getting swept up in hot price competition from time to time, said Chuck Cerankosky, an analyst for North Coast Research, Cleveland. This, he said, is prompted by continued — and perhaps worsening — economic strain on consumers.

“What the member of a wholesale club wants to see is that overt difference between the price the conventional channels are offering on their shelf compared to what you have in the wholesale club, and BJ's felt there was a need to keep those spreads large and visible,” Cerankosky told SN. “The comps were decent, but their pricing decisions did have an impact on profitability, and it looks like that could be the case for the remainder of the fiscal year at BJ's.”

The retailer also last week adjusted its forecast for sales and earnings in the fiscal year, saying earnings would likely come in at $2.40 to $2.50 per share, down from a May forecast of $2.58 to $2.68. Sales growth was adjusted downward from 8% to 10% vs. earlier expectations of 9.2% to 11% growth.

“There is no question that in Q1, we thought that the economy was improving. Everything in our sales would have indicated that, and our plans for this year were based on that assumption,” Sen said. “But Q2 gave us a very different feeling about the consumer's mindset, the consumer's confidence, the consumer's willingness to spend on discretionary items. Even with our narrow mix, we see the top items growing disproportionately with the rest of items, which tells me [consumers] are very disciplined about spending.”

BJ's said it planned to open nine new clubs before the end of its fiscal year in January, including three under its new 85,000-square-foot prototype. Sen said the smaller store — which debuted this spring in Quincy, Mass. — was “a promising new growth vehicle for us.” BJ's other new stores will be around 120,000 square feet.

Sen did not comment on questions about discussions with investor Leonard Green & Partners, who in a filing last month disclosed a 9.5% ownership stake and raised the possibility of engineering a leveraged buyout.

Quarterly net income of $35.8 million, or 67 cents a share, improved by 1.7%, but was below analyst expectations of 73 cents. Sales of $2.7 billion improved by 8.6% with comparable sales excluding gasoline improving by 2.9%.

Q2 RESULTS

* EXCLUDING GAS