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Author: StuyvesantGrad70 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 87  
Subject: Q2 Conference Call Part One Date: 8/19/2004 5:15 AM
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BJ's Q2 2004 Conference Call, Part One

Merchandise
Began direct purchase of produce in 31 Southeastern clubs.
Direct purchase of produce in all clubs by early next year will cause a reduction in prices, much higher quality and better assortment.
New merchandise in: international foods, ethnic foods, paper products, juices and snacks.

New Leadership
Hired Karen Stout as Executive Vice President of Merchandising.
She has 25 years experience in the retail grocery business.

Store Openings, Remodeling and Expansion
Opened a new Club in Vorhees, New Jersey in June.
New Clubs in Philadelphia and Norcross Georgia will open within 2 weeks.
12 Clubs being remodeled.
Installed rotisserie chicken departments in 5 Clubs.
Installed a slicing deli department in one Club.
Now operate 18 pharmacies, compared to 12 a year ago.

Rewards Membership program
Strong growth in Rewards Membership program.
Rewards Members pay an annual fee of $75 in exchange for a 2% merchandise rebate, up to $500.00.
Rewards Members accounted for 2 percent of our membership and 6 percent of our sales.
Spring trial in membership acquisition this year created double-digit comp increases in new memberships and the highest record of conversions to paid memberships in BJ's history.

Private Brands
Sales of private brands increased by 40 percent on a same Club basis over last year.
Private brands sales penetration rose from 5.5% of merchandise sales last year to 7.2 percent this year.
On track to achieve our goal of a 9 to 10 percent run rate of private brand sales by the end of the year.

American Express Credit Card Use
In Q2 the average American Express transaction was 20% higher than the average transaction with other credit cards. Strong growth in Express Credit Card use as a percentage of total transactions.

Kissemme, Florida Concept Club
Sales at Kissemme Club, which opened last November, outpace sales at other Orlando Clubs by 30%.
Kissemme Club sales were higher than any of our other northern Florida Clubs.
Plan to open next Concept Club in Cape Coral, Florida, at the end of this year, or early next year.

New Concept: Pro-Foods Restaurant Supply
We will be testing a new concept this Fall, called Pro-Foods Restaurant Supply.
Will open two new stores in New York City, exclusively for the food service businesses.
Pro-Foods is not going after the same market as Sysco Corporation, which supplies hotels, chains, Hospitals, and other large institutions on a delivered basis.
Pro-Foods target is the professional food service or restaurant business with one to four locations, largely without delivery.
The market size for this business segment is $80 Billion and is highly fragmented.

Pro-Foods Store Openings
The first store to open will be 56,000 square feet facility in the Bronx.
The second store will be 68,000 square feet in Long Island City, Queens.
Pro-Foods has its own buyers and operators.
Functions as a separate organization from BJ's Wholesale, Inc.
This concept will leverage BJ's expertise in logistics, merchandising, operations and financial control.

Pro-Foods Business Model
The merchandise margins will be slightly higher than our Wholesale Clubs.
There will be free memberships.
A broad merchandise assortment to support one stop shopping in this category.
This is a test.
Our goal is to exploit an adjacent market segment, allowing us to utilize our expertise with small businesses, without cannibalizing sales at BJ's Clubs.
BJ's will continue to focus on the individual consumer.
Learn more at their website WWW.Pro-Foods.Com

Expansion Plans
New Clubs in Philadelphia and Norcross Georgia will open within 2 weeks.
Clubs under construction in Plymouth MA, Hyanis MA, Warrington, PA, and Levitown, NY.
Planning for 7 to 9 new Clubs and 15 renovations this year.

Q3 Financial Guidance
Sales increase of 10% to 12% in Q3.
Comp sales increase of 6% to 7% in Q3, with gasoline sales contributing 1% to 2%.
Membership Fee Income will increase 14% to 16%.
Diluted EPS of $0.28 to $0.32, compared to $0.29 last year.

Q4 Financial Guidance
Sales increase of 11% to 13%.
Comp sales increase of 7% to 8% in Q4.
Membership Fee Income will increase 13% to 15%.
Diluted EPS of $0.69 to $0.73.

Full Year Financial Guidance
Sales increase of 11% to 13%.
Comp sales increase of 7% to 8%.
Membership Fee Income will increase 11% to 13%.
Diluted EPS of $1.61 to $1.67, compared to $1.47 last year.
Capital Expenditures of $150M to $160M.
Cash Flow from Operations $50M to $70M.

Questions and Answers

Q: It looks like the best Membership Fee Income growth in some quarters, why?
A: It's been growing for some time. A very strong Spring Membership Acquisition program, the Rewards Program has been building (started it in Q2 last year). We have run the Spring Membership Acquisition program for 10 years, and to see a higher percentage of people converting to paid membership when the free trial ends, than we've ever had in our history is very gratifying.

Q: Fresh Food has been strong, why?
A: Renovations and remodels, relocating the bakeries to the back of the clubs, making a fresh headquarters department in the back of the clubs, a lot of additional refrigerated cases, the slicing delis, the meal solutions under the Welsley Farms label. All the stores we are building today have an expanded fresh area. Many of the clubs we are renovating are being expanded by taking the tire departments out of the clubs, as an appendage to the building, and giving all of that additional space to the fresh area.

Q: How were the Pro-Foods locations selected?
A: We did extensive research. We analyzed the amount of restaurants that were in each area.
The Long Island City location is right outside the Mid-Town Tunnel (connecting to Manhattan).
These are not retail locations in shopping plazas, they are located in industrial areas.
They will only be opened to licensed restaurants and businesses.
The general public will not be allowed to shop in the building.

Q: Why now? Why the possible distraction of a new food service concept, when the BJ's business is still un-penetrated in, I don't know, 70 percent of the country? You're not opening any BJ's units in new markets in 2005, what is the thinking about opening in new markets beyond 2005?
A: We don't view what we're doing in Pro-Foods as a distraction to what we do every day. We define ourselves as a highly efficient operation, that has great logistical expertise, financial control, and has a lot of legacy knowledge as to how to service small business sets in a membership model. Pro-Foods is really exactly what we do at BJ's, it's just servicing a different customer set. With Member Insight, we're getting much better at understanding customer sets. There sill be some synergies between Pro-Foods and BJ's. Our buying “pencil” will get bigger as a result of this, it will make us a bigger player in food, which is a growing part of our business. We still have a long term growth plan of 10% square footage at BJ's. We want to be very intelligent about that chain expansion. We're not going to grow just for the sake of making a number. We've been criticized in the past for going to a lot of different places at the same time. Our focus today is to build out markets, to be the number one or two player in every market that we service, and continue to refine our concept clubs in Kissemme and Cape Coral, to operate a prototype that will have a high degree of success so we will be able to go into new markets successfully.

Q: I have no doubt that Pro-Foods has its synergies, but again your BJ's is your core concept, the concept that you know, and your in the process of nicely recovering some of the margins that have been eroded over the last couple of years. Is this 10 percent growth plan really going to be in the cards beyond 2005? Are you still sticking to that?
A: Yes we are. The Southeastern market of our company, which is the youngest market, is the fastest growing market in our trading areas. We have a lot of opportunities in the Southeast. We have a lot of opportunities to continue to grow the core business. Pro-Foods is going to be headed by a senior executive at BJ's, Henry Reagan, who has his own team. All of our manager, our buyers and myself are making sure we continue to execute our strategic plan at BJ's.
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