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Highlights From BJ's Q3 Conference Call: Membership Fee Income Increased by 3.2%; Traffic Grew by 5%

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November 18, 2009 1:01 PM EST

BJ's Wholesale Club (NYSE: BJ) reports Q3 EPS of $0.45, even with the analyst estimate of $0.45. Revenue for the quarter was $2.51 billion, which compares to the estimate of $2.48 billion.

Highlights From BJ's Q3 Conference Call:

(CFO) For Q3 of 2009, non-GAAP normalized net income was $24.6 million versus $23.0 million in 2008, an increase of 7.0%. Non-GAAP normalized earnings per share in 2009 were $0.45 per diluted share versus $0.39 per diluted share in 2008, an increase of 15.4%.
In Q3 of 2009, we took a pre-tax charge of $11.7 million, which was $6.9 million post-tax, of $0.13 per share to settle our wage and hour related litigation. I want to emphasize that we expect this to be a one-time charge and have no material impact on going forward payroll expense.
Earnings growth for Q3 on a non-GAAP normalized basis, reflected the benefits from the 3.9% merchandise comp sales increase, a modest increase in merchandise margin rates and strong expense control, partly offset by increased pre-opening expense and increased investments in our IT roadmap system project.
Adjusting for the wage and hour settlement, our non-GAAP normalized earnings of $0.45 per share hit the midpoint of our guidance range, despite gasoline profit coming in at about $0.04 per share below plan.
Offsetting this shortfall on gasoline profit, we had expense savings in utilities and advertising expense.
Total sales for Q3 were $2.45 billion compared to $2.40 billion last year, an increase of 2.0%. This was unfavorably affected by gasoline sales that were about 34% below last year.
Q3 comparable club sales decreased by 2.5%, which included an unfavorable impact from gasoline sales of 6.4%. Comp merchandise sales, excluding gasoline increased by 3.9%, which was essentially at the midpoint of our guidance range of 3 to 5%.
During Q3, comp sales of food increased by approximately 5% and general merchandise increased by approximately 2%. In the first nine months, food increased by approximately 6% and general merchandise increased by approximately 1%.
The increased deflation was particularly evident in perishables, which are the 4% comp increase in the third quarter versus a 6% increase in the second quarter and a 12% increase in Q1. However, unit sales of perishables remain very strong in Q3 and more than offset price deflation.
Membership fee income increased by 3.2% in dollars versus last year. Other revenue increased by 7.6%. Cost of sales, including buying and occupancy, decreased by five basis points.
SG&A expense increased by 81 basis points and pre-opening expense was $2.0 million versus $1.0 million last year. And now for those detail. Q3 MFI grew 3.2% versus last year, which is greater than the 2% growth in Q2 and the 0.8% in Q1.
Merchandise margins, excluding gasoline were 19 basis points above last year, which was in line with our guidance.
SG&A expense increased 81 basis points and increased 11.6% in dollars versus last year.
Excluding the usual and non-recurring items for both years, SG&A expense dollars increased about 9.8% versus last year as compared to 8.1% increase in the first half.
Invested in a roadmap technology project was a post-tax expense of about $1.7 million or $0.03 per share, or about $0.01 per share above last year. Pre-opening expense was $2.0 million this year versus $1.0 million last year, or about $0.01 per share above last year.
Next, I'd like to provide an update on this year's three major IT initiatives. First, the prototype for our new store register system has been built and is running in the lab. Second, our payroll and human resources project is projected to be completed in the first quarter of next year. And third, our data center conversion is estimated to be completed in the third quarter of next year.
While these projects are running a bit behind our original estimates, we believe our conservative and deliberate approach to these complex projects will reduce the risk of business disruption. We continue to be very excited about the potential benefits of new capabilities and efficiencies that these systems will bring to our business.
Moving to the balance sheet. Average inventory per club at the end of October decreased by 4.4% versus last year.
The accounts payable to inventory ratio at the end of Q3 was 73.4% versus 68.2% last year. This reflects the benefits of lower merchandise inventory levels and fast return [ph] versus last year.
We ended Q3 with cash of $55.1 million versus $52.8 million last year. We did not buy any treasury stock back during Q3, but still expect to achieve our guidance of $100 million for the full year.
(CEO) Our merchandise comp sales increase of 3.9% on top of last year's 6.6% increase was an outstanding achievement. It was also our 13th consecutive quarter of merchandise comp sales increases.
Our traffic grew by 5% on top of 5% increase in last year's Q3. This followed 4% increase in Q2 and 7% increase in Q1.
We are on track to open our seventh club of the year in late January in Metro New York.
Growth of traffic, unit sales and membership renewal are leading economic indicators for us. In recent trends, in each of these metrics, are very encouraging.
Looking out to 2010, we will continue to focus our attention and resources on areas of support our long-term growth and profitability.
The investments include chain expansion, club renovation, our technology roadmap and team member training and development. Our preliminary expansion plans call for 79 new clubs, including two in Massachusetts, one in Metro New York, one in Orland, Maryland and a club relocation in Rhode Island.
(CFO) Our Q4 merchandise comp sales guidance of 4 to 6% increase is not planned to slow evenly by month within the quarter. For November and December combined, we are planning a comp sales increase in the 5 to 7% range. But for January, we are planning a comp increase of only 2.5 to 3.5%.
The Q4 roadmap investments are planned to be above $0.03 per share this year versus $0.01 per share last year. Using the midpoint of our earnings guidance, the non-GAAP normalized comparison will be $0.98 per share this year versus $0.89 per share last year, an increase of about 10%. And post-tax
net income would be $53.7 million this year, versus $51.3 million last year, an increase of about 5%. (Consensus is $0.97)
On the same basis, net income would be $137.7 million in 2009 versus 126.0 million in 2008, an increase of about 9%.
For the year, we're planning a combined roadmap and pre-opening investments to be a total expense of about $11 million post-tax or $0.20 per share. This compares to about $5 million post-tax or $0.08 per share last year. We are planning for capital expenditures in the range of 180 to $200 million.
(Q&A) Laura, can you please dive into the comments running stronger general merchandise sales as of -- in terms of what you're expecting right now in the fourth quarter? And also potentially stronger deflation than you originally expected? (A)Well, I mean, basically we have not seen -- take the deflation question, we have not seen any meaningful rebound pricing in the perishable areas that we had experienced the deflation. And so that's just a matter of timing and when that's going to come around, I think it's definitely a reflection of overall weak demand on the part of commodities. But in terms of general merchandise, I think that we've sort of said in our sales releases that we've seen some modest improvement in general merchandise sales. We believe that the consumer has a little bit more confidence this year than they did a year ago. I think last year was -- the uncertainty was a real strong headwind. I think that there are still quite a few economic challenges, but we believe that we'll have a stronger ability to deliver sales in that part of the business based on what we've seen in the last few weeks or so.
And on the general merchandise side specifically, you have in the last few months, obviously you have seen a nice pick-up there. Is there anything that you're doing specifically in terms of categories whether it be toys or jewelry, et cetera, that is leading to kind of market share gains, there are stronger trends? And could you elaborate on those?(A)Well, I mean, I think that we've continued to focus on quality, value brands, I mean really the usual drill, I think that as the economic times is more challenging, we're looking more attractive to manufacturers in general. I think our merchants have been working very hard on clarity of offering. Our presentations in club are very strong. I think that we focused on making sure that price points in each category were well-positioned, where we think that members appetite is. So I mean, I think that we've got a lot of very strong planning in place, which I talked about in my remarks, and we will -- likely have benefit from that. We'll know a lot more in a couple of weeks after we move through our Thanksgiving period in the early part of holiday sales.
And then last question, the MARMs have been in place for sometime now, but obviously your membership trends continue to be quite strong. Are there any other initiatives in place that you could call at this time in terms of what's driving that, or is that really just a continuation of your momentum really with the MARMs? (A)I think that we -- when I travel to the clubs which -- I make a point when I'm talking to the peoples of membership desk and I do think that they have a very consistent and friendly approach to talking to members about taking a membership and that's working. We also have seen rewards membership growing nicely as we focused a little bit more on that this year. And as I said again in my remarks, I think the traffic, the unit velocity and the renewal rates all speak to the fact that our members are getting a better experience that each time they come in.
You said to look at the holiday, there seems to have been some different promotions coming, whether it's yours or Wal-Mart. Are you seeing -- what are you seeing from the promotional environment from where you stand actually heading into sort of the Black Friday weekend?(A)Well, certainly on the general merchandise part of business, it's been extremely aggressive and very, very early. I just think that everyone is trying to grab some dollars as early in this season as they can. I don't think that, that's critical for our members. I think that our members have a little bit more discretionary income. And another thing to mention is that, we are very food driven. We have big food holidays in Q4. Obviously the biggest one coming up next week, Thanksgiving. So we will actually drive a lot of traffic versus the retailers that don't have on their side.
Okay. I mean, and I guess just sort of following up on that a little bit, you talked about, you gave the regional comps versus telling Northeast or Southeast, is there any big differences in sort of the basket between those two areas? Are you seeing as far as different shopping patterns emerging or coming together? (A)Not really. This is Frank. I mean the basket is slightly smaller down the Southeast, but I mean, certainly not of a material nature. And we're not really seeing differences and changes. I mean our thoughts as you can tell, Southeast market has been very strong for us really for last number of quarters.
A question I have is on the gasoline business, Frank when you look at the gas business gallon versus pricing, can you just maybe give us a little bit insight in terms of how that is really trending for you and sort of where the surprises are coming and how you're managing through that? How you're planning for fourth quarter? (A) Certainly, we're cycling through and will be cycling through a -- for a little bit more. Some pretty unprecedented historical results last year, as you know the third quarter we made an extraordinary amount of income and we were pushing an extraordinary amount of gallonage through at the same time. We are suffering through that, we are -- I mean the comp gallon is down pretty significantly versus last year, but the work we've done is; we're not really seeing that having a huge impact on sales in the clubs a little bit, but not a lot. So the good news is, I think we are cycling through that. We still have got a little bit more to cycle, not so much on the pricing, but on the gallonage.
So, again, it continues to be a business we're very happy with, but it certainly has some variability from quarter-to-quarter.