BJ's to Search for Zarkin's Successor

JON SPRINGER

Natick, Mass. — Nearly a year after coming out of retirement to lead BJ's Wholesale Club here, Herb Zarkin is seeking a successor.

The interim chief executive officer of BJ's told analysts last week that the company is seeking to hire a chief operating officer to groom for the CEO role. Zarkin, who is also BJ's chairman and served as CEO of its parent company from 1993 to 1997, stepped in last November to take over the CEO role from Mike Wedge.

At that time, Zarkin said efforts to improve general merchandise sales and customer traffic at BJ's “had not come as quickly as we had hoped and expected.” In a presentation to analysts last week, Zarkin highlighted progress the chain made in those areas over the past year.

The efforts have reduced clutter and made clubs more relevant to shoppers, analysts who attended the meeting last week said. But some expressed concern that the turnaround could falter under unsuccessful efforts to boost stagnant membership growth.

“They have made some progress in improving the business but ultimately they are not getting much traction on traffic,” David Strasser, an analyst for Bank of America Securities, New York, said in a research note.

Strasser downgraded his stock recommendation to “sell,” saying BJ's had limited upside from continued merchandising progress, but significant stock risk if progress is impeded by membership softness.

According to Strasser, store traffic at BJ's has been flat to negative for two years, and recent efforts to boost membership via increased advertising have failed. That has forced the company to try to attract new shoppers by discounting memberships — a major contributor to profits.

“We believe that free memberships are driving traffic, which is inconsistent with the warehouse club model of profitability, where the majority of operating income comes from membership fees,” Strasser wrote.

Other analysts last week had a rosier outlook, saying that ongoing improvements in store selection and merchandising could go a long way toward improving traffic woes. BJ's has reduced its overall SKU count from about 8,400 items last holiday season to 7,200 currently. “As a direct result of this initiative, BJ's assortments are becoming more cohesive and relevant to customers,” according to a research note published last week by Deborah Weinswig, an analyst with Citibank, New York.

BJ's at the same time has been improving the quality of its food presentation and moving toward better-quality general merchandise, said Chuck Cerankosky, an analyst at FTN Midwest, Cleveland. Zarkin's challenge, Cerankosky said, will be to leverage BJ's food strength toward more profitable sales in general merchandise.

“I am particularly impressed with how far along the curve they have come in prepared foods,” Cerankosky told SN. “They've made as much progress as Harris Teeter, Safeway or Kroger in that regard.

“They still have some improvements to make in general merchandise, but this is a good time for that,” he added. “The concern you have for BJ's is whether the food offering is enough to get the general merchandise component going.”