Member fees help BJ's post profit

Don Hogsett, June 2, 2003

Losing money in its core retailing operation, and profitable only because of membership fees, BJ's Wholesale Club Inc. reported that first-quarter profits were slashed by more than half, to $11.3 million from $23.1 million a year ago.

Sales at the nation's third-largest operator of warehouse clubs shot up by 15.7 percent, to $1.4 billion from $1.2 billion last year, with growing sales of groceries and gasoline offsetting declining sales of general merchandise sales.

Same-store sales increased by 5.7 percent. However, skewing the comps, sales of gasoline accounted for 4.7 percent of the 5.7 percent increase in same-store sales.

Despite the strength at the top line, higher costs and weaker margins put earnings under crushing pressure. Average gross margin deteriorated by 130 basis points, or 1.3 percentage points, to 7.2 percent from 8.5 percent a year ago. And, even with a gain in sales of almost 16 percent, gross margin dollars declined by 1.7 percent, to $104.1 million from $105.9 million, weakened by the margin erosion.

Costs climbed higher by 20.1 percent, well ahead of the gain in sales, to $113.9 million from $94.9 million during the same period a year ago. Measured as a percentage of sales, costs increased by 30 basis points, or one-third of a percentage point, to 7.9 percent from 7.6 percent a year ago.

With costs running well ahead of margins, the retailer generated an operating loss from its core retailing segment — excluding membership fees — of $9.8 million, compared with a year-ago profit of $11.0 million. Making the difference between profit and loss, it took in membership fees of $33.6 million, up 7.1 percent from last year.

Putting earnings under further pressure were a number of one-time items, including a $1.3 million one-time charge stemming from an accounting change. Another drag, BJ's recorded a $149,000 loss from discontinued operations, compared with a $379,000 loss a year ago.

Further depressing earnings, BJ's recorded interest expense of $68,000, compared with $298,000 in interest income a year ago.

Mike Wedge, ceo, commented, "BJ's results for the first quarter reflect the substantial investments we are making in our business to reinvigorate sales. On a comparable club basis, food sales increased by 3.2 percent for the quarter. The improved trend in food sales indicates that our investments in quality and pricing are beginning to yield positive results. General merchandise sales decreased by 2.5 percent, due in part to a weaker economic climate as well as cooler weather in the Northeast."

BJ's Wholesale Club Inc.

Qtr. 5/3 (x000) 2003 2002 % chg
a-Net sales, excluding membership fees of $33.6 million, up 7.1 percent from $31.3 million last year. Total sales, including membership fees, rose by 15.5 percent, to $1.5 billion from $1.3 billion.
b-First-quarter results include $68,000 in interest expense, compared with $298,000 in interest income during the same period a year ago; a gain of $814,000 on contingent lease obligations, compared with a prior-year loss of $1.4 million; an after-tax loss from discontinued operations of $149,000, compared with a year-ago loss of $379,000; and a one-time charge of $1.3 million stemming from a change in accounting for asset retirement obligations.
Sales $1,441,671a $1,246,369a 15.7
Oper. income (EBIT) 19,793 39,059 -49.3
Net income 11,267b 23,054b -51.1
Per share (diluted) 0.16 0.32 -50.0
Average gross margin 7.2% 8.5%
SG&A expenses 7.9% 7.6%

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