BJ's Cuts Back on Expansion Plans

ELLIOT ZWIEBACH

NATICK, Mass. — BJ's Wholesale Club here said last week it plans to reduce capital spending by 20% or more over the next couple of years as it opens fewer stores per year.

The company said it expects to allocate $110 million to $120 million to capital expenditures this year, compared with earlier guidance of $140 million to $150 million, with five openings scheduled rather than the eight to nine originally forecast.

According to Herbert Zarkin, chairman, president and chief executive officer, “For the next couple of years we want to make sure any club that does open is really a profitable club. We have historically spent a lot of time and money opening clubs in what we consider great growth areas that are not necessarily producing good results right now [because] we have to build brand-name recognition.”

Gary Giblen, an analyst with Goldsmith & Harris, New York, said BJ's has already saturated the Northeast, “and it has not done well in some new areas, particularly with its entry into Atlanta, where it had disappointing results, so it's apparently decided to be more careful in opening new locations instead of overexpanding.”

He said the cutback in spending could also be related to industry speculation that BJ's might be for sale, “though it's doubtful the company would show its hand unless a deal was very close.”

Adrianne Shapira, an analyst with Goldman Sachs, New York, said the slowdown in unit growth is designed to allow management to focus more on the core store base and on turnaround initiatives, including plans to boost market share within high-margin perishable categories by investing in service levels and reducing inventory and clutter to enhance the “shopability” of fashion and seasonal lines.

“BJ's is a top-line turnaround story,” she said, “and the key question going forward remains: Will traffic return on the heels of these changes?”

According to Zarkin, BJ's anticipates between six and eight club openings next year. “I don't picture opening 12 or 14 clubs next year — once we get past the next couple of years, we should go back to a growth rate of 10 to 12 to maybe 14 a year.”

He made his remarks during a call to discuss BJ's financial results for the 13-week first quarter that ended May 5, in which net income fell 11.4% to $13.7 million, sales rose 7.5% to $2 billion and comparable-store sales (excluding gasoline and the negative impact of discontinued pharmacy sales) rose 0.9%.

Zarkin said the numbers reflect “considerable progress,” reflecting the investments BJ's is making in perishables merchandising and general merchandise initiatives.

“We are encouraged by the early signs we have seen in terms of sales trends and traffic, despite the unfavorable impact of the weather in April,” Zarkin said. “Everything we have seen so far has taught us there are significant opportunities to improve the profitability of BJ's business while still enhancing the shopping experience of our members.”

In a separate announcement, BJ's said last week that its board authorized the repurchase of up to an additional $100 million of the company's common stock, for a total of about $133 million available for share repurchase.