RISING GASOLINE PRICES REDUCE PROFITS AT BJ'S

Jon Springer

NATICK, Mass. -- Saying rising gas prices have hurt profits, BJ's Wholesale Club here reduced its earnings forecast for the year by about 3 cents per share.

The warehouse club, which strives to price its fuel below that of local competitors, saw profits in the gasoline segment drop as prices and sales for the category rose, Paul McDonough, BJ's senior vice president of finance, told analysts in a conference call discussing the chain's second-quarter financial results. "We don't expect any significant relief in the short term" from rising fuel prices, he added, with fuel earnings in the third quarter running about 2 cents per share below the company's previous expectations.

Rising crude oil and gas prices stand to hit low-price leaders the hardest, as they tend to purchase more often and pump more volume than competitors, explained Mike Wedge, BJ's president and chief executive officer. Earlier this year, Issaquah, Wash.-based warehouse club Costco expressed similar sentiments, saying its yearly profits would come in as much as 4 cents below analysts' expectations due to rising gas prices in the spring.

"In a rising market where we're buying supplies quicker than our competitors, we're putting high-cost gasoline into the ground quicker than they are, and that puts a lot of pressure as we struggle to maintain our pricing index relative to the street," said Wedge, who added that gasoline as a category remained profitable despite the tough conditions in the quarter.

Gas accounted for 0.5% of BJ's 4.4% rise in comparable sales during the first half of the fiscal year. During the second quarter that ended July 30, comparable-store sales rose 3.2%, including a 40 basis-point contribution from gasoline. Overall sales were up 7.7% to $2 billion during the quarter and up 8.7% to $3.8 billion during the first six months of the year, the company said.

Quarterly earnings of $30.5 million, or 44 cents a share, increased 8.8% from a year ago. First-half income of $49.1 million, or 71 cents per share, increased 11% from 2004's first-half figures.

Food sales grew 6% on a comparable basis during the quarter, McDonough said.

In the conference call, Wedge highlighted strides BJ's has made in membership insight, saying the retailer has identified the profitability of various customer segments, which will help pinpoint future opportunities to increase profits. "This was a significant effort requiring the allocation of cost to each member based on their actual purchase behavior," Wedge said. "I know of no other retail chain in America with as accurate and comprehensive an understanding of their customers."

BJ's also completed a new site-selection model that leverages its understanding of customer patterns and, Wedge said, will allow the retailer to place clubs closer together geographically than it used to believe possible and will allow for greater expansion opportunities in existing markets. The company intends to open new locations later this year in Newark, Del.; Old Bridge, N.J.; Jacksonville, Fla.; and Miami Lakes, Fla.

2ND-QUARTER RESULTS

Qtr Ended: 7/30/05; 7/31/04

Sales: $2 billion; $1.84 billion

Change 7.7%

Comp-store 3.2%

Net Income $30.5 million; $28 million

Change 8.8%

Inc/Share 44 cents; 40 cents

52 Weeks: 2005; 2004

Sales $3.75 billion; $3.45 billion

Change: 8.7%

Comp-store: 4.4%

Net Income: $49.1 million; $44.1 million

Change: 11%

Inc/Share: 71 cents; 63 cents