Correction: ProFoods website is actually WWW.ProFoods.ComMembershipsQ: How much of the 11 percent gain in the second quarter in Membership Fee Income are driven by the rewards sign up? A: At 2 percent of our membership base, it's not a material factor in our guidance.Pricing and CompetitionQ: Do you see any change in pricing from your two main competitors? I know you made some adjustments, particularly last year, both reducing prices and improving quality, which is, in effect, a price reduction, what do you have in store for any kind of price changes?A: Our competitors did get more aggressive about a year ago, we have not seen that accelerate or change, there may be a new lead item or a new SKU that comes out, like the new Gillette razor that was footballed around for a period of time that they get aggressive on, but beyond that kind of thing, the pricing environment from about a year ago is largely unchanged. As you know, we took some significant margin reductions some period of time ago, to make sure our pricing was correct. We continue to monitor that. The goal with private brands is to create additional margin opportunities for us, a portion of which we can use to make sure that we're subsidizing those lead items, to make sure that we're priced more aggressively. Overall, we don't plan any changes in pricing in the back half (of the year) and we continue to monitor it closely. We continue to work on improving our quality mix. We are looking at a review of the men's business after this front half season. A couple of years ago, in men's, we were at about a 30 percent mix of Levi's and Dockers and Nautica and Timberland and Chaps and brands like that. That mix is now about 74 percent of those brands. So we continue to push up quality. We said we would do it in apparel, and we're also doing it in consumer electronics. Stock RepurchasesQ: You have a couple of dollars a share in net cash, you're generating better and better cash. I didn't hear about stock repurchases, but looking at the cash flow statement, it looks like you did, could you talk about your plans for that cash and for stock repurchases?A: Some of the favorable cash flow was just due to the timing of opening up some Clubs. We didn't open them as quickly as we would have liked to. A good use of excess cash would be to buy back stock. We bought back $10M or $11M in the second quarter, and it is part of our plan. ProFoods Business ModelQ: I don't understand exactly what the ProFoods business is. Is this competing with a Sysco, who is a distributor, or Smart and Final? How can I get an understanding of what the concept is?A: ProFoods Restaurant Supply, even though it will take credit cards, is kind of defined as a cash and carry type of business. It is a business that is focused on food service distributors and restaurants. Typically focused at a tier of restaurants smaller than what a Sysco or US Food Service would deliver (to). The prices, because they are cash and carry, tend to be lower than the delivered price from Sysco. I think Sysco, in some markets, has a $1,500 minimum delivery order. Our average transaction, we're estimating, will be in the $350 range. It's daily purchases for restaurants that have one, two, or three locations. If they get much more, than five locations, then they would tend to be a delivered food service type segment. We are not competing in the Sysco world, rather we are taking a market that we believe to be about $80B in size, that is largely serviced by a lot of individual operations, highly fragmented, and we are trying to develop a chain to service that segment. Credit Card Claims ReserveQ: You have $16M in claims for this credit card identity theft thing, what gets you to the $6M charge?A: The $16M includes $6M of actual credit card claims, also an estimate for certain credit card replacement and account monitoring charges. We can't predict whether there will be future claims. We have recorded this charge in this quarter from the information that's currently available to us…. There is no conclusive proof that BJ's has had a breach. The claims come to BJ's through our third party processor. We don't deal directly with Mastercard or Visa… We have no real knowledge of the quality of the claim, or what makes up the totality of the claims. We have calculated what we think is a reasonable reserve, based on what we know today.Q: Then you will fight these charges?A: Absolutely.ProFoods Versus CompetitorsQ: Switching to Profoods, it sounds like they're going to be 55,000 to 65,000 square feet. When you look at a Gordon's Food Service or a Smart and Final, they're considerably smaller than that, less than 20,000 square feet. What is the additional space going to be for? Is there going to be a little bit of the Club impulse buy? A: The big difference between us and a Smart and Final or a Gordon's Food Service is that ProFoods is intended to be a complete one stop shop. The big difference will be the amount of space devoted to frozen food, and refrigerated food. Literally you would be able to walk into the coolers and shop aisles and aisles of produce, hams and roast beef for slicing delis. So probably 20 percent of the space will be under refrigeration or frozen, and a big emphasis on produce as well. So fresh is a big piece. From what we've learned about the market, the small restaurant operators do not like to order their produce from suppliers, because they're afraid of the quality, it's one of the places where they like to go in and see exactly what they're buying. Q: Are you going to sell restaurant equipment?A: It will be a small piece of the business. We will have special order programs for huge industrial refrigerators, gas ovens and stoves. The business is intended to be largely a consumable model.Q: How about impulse merchandise buying? Is that part of the business model at all?A: There will be small wares, but it won't be like a Club where we look for impulse purchases of jewelry or electronics. None of that kind of thing. This will be business focused. The kind of operation that will sell 55 gallon steel drums of MSG. A very different type of thing from what we do in our core business.Q: That sounds like a hell of a lot of flavor enhancer. A: (Laughter).Q: What do you anticipate the occupancy cost will be in the Bronx location versus a BJ's in a similar location?A: The model is built on no membership fee, slightly higher margins, slightly higher S,G&A. We will get returns consistent with what we get in our core business. Florida Hurricane ImpactQ: Is there any impact on the Florida stores with the hurricane?A: No. None of our buildings were affected, other than landscaping at Kissemme Florida. We had emergency generators. When we lost power, we did not loose any product. ProFoods Savings and One Stop ShoppingQ: What are the savings that potential customers could garner from going to ProFoods?A: It will be below the delivered price folks can get. The big attraction for the restaurant operators and the food service operators and the distributors that will buy from us, is this one stop shop ability. Today, they cannot, from any wholesale club in America, buy the items that they need. So if they don't get deliveries, they are forced into this highly fragmented of Mom and Pop type restaurant service companies. That in the end is what will make the difference. Time is very much as important to these members as the absolute lowest cost. Keep in mind that ProFoods Restaurant Supply is a test, something that we are gong to watch very closely. Our key focus at BJ's is on our core business, which continues to be very, very strong, and we believe has healthy growth opportunities ahead of it. ProFoods Potential Store CountQ: I understand that it is a test, but obviously you guys wouldn't be looking at it if you didn't think it had significant potential. Do you care to discuss that now? What could the potential store base be?A: No, we think that would be very premature at this point.Inflation and CompsQ: On the core business, during the quarter, how much did inflation influence your comps? What is your expectation for that as you look at the back half of the year? What are the gas margins that you are expecting in the back half of the year?A: We've moved from a slightly deflationary area in the food side, to maybe a slight inflationary, but that is offset by a continuing generally deflationary environment in general merchandise. The overall impact of inflation on our business is really negligible. There are certain categories, certainly milk and the dairy categories, with the rise in butterfat (prices) that have some pretty decent inflation over a year ago. We're also seeing in fresh meat, a little inflation, and in paper products, we're beginning to see some price increases from both Proctor and Gamble, and Kimberly Clark, and I think that's the result of some of the increase in energy costs rippling through. Generally it's not a meaningful contribution to our comp sales.As far as gasoline goes, it's been an unusual year for us. In the first quarter when prices went straight up for almost the entire quarter, it was difficult for us to make the little bit of income that we normally like to see. We were a little bit short of plan in the first quarter. Second quarter we had some volatility which helped us a lot. Some downward pricing at times made us able to earn a little bit more than planned. This is a business (selling gasoline) that we love, we would love to put in every location we could, because it's a great marketing vehicle. ProFoods MarketingQ: On ProFoods, what would be the marketing approach in terms of getting your format known to potential customers that you will be targeting?A: What's been going on for a month and half or so, is that we've been signing up members to the concept, showing them price lists, showing them product lists, getting people to join, again the is no membership fee. They have to be properly licensed, because this will not be open to the public. There will be some price item advertising, flyers and that kind of thing done with monthly specials. It will be a little bit different than the core Club model, the monthly specials seem to work very well in the restaurant business because if you have chicken on special, the restaurants will put chicken on the menu. The direct sales force that will sign up the members also will work on sales development with these independent operators, understanding what other types of items that they want.ProFoods LocationsQ: For Profoods, on the question of how many stores you see over time, if it is successful, do you see this as a national business, do you see this as stores in markets that BJ's does not operate in?A: This is an $80B segment. We do not think that the real estate strategy for this needs to link totally with the BJ's strategy, however, keep in mind, we are piggy backing on our current logistics, so we don't see us jumping into geographies that are outside our logistics network. ProFoods Does Not Compete With Wal-MartQ: What are the types of savings at ProFoods compared to BJ's or a super Wal-Mart or Super Target?A: They're items that are not available at BJ's, Super Target, Super Wal-Mart. We're talking about distribution that has maybe 30 different styles of number 10 cans of pizza sauce. Where a BJ's or one of the Club competitors might carry a few SKU's. You're talking about selling pizza boxes for the pizza operations, a huge business in styrofoam food trays that restaurants use for take-out. There is no comparison at all to what is sold at Wal-Mart or Target, it's a completely different concept, focused on the restaurants.Q: In terms of the fresh and frozen grocery component, there is likely to be all kinds of overlap. A: Well, again, we're going to sell five gallon pails of ice cream in the frozen area, frozen foods are going to be food service types of frozen. Produce will be sold in cases. It won't compete in any way with Wal-Mart or Target, because that's not where restaurants are going to go to buy these kinds of items. We will sell fresh fish, we will be in meat, but we will sell meat by the case, so we will not sell retail cuts of meat, a very different model.Credit Card Claims Are Not InsuredQ: With respect to the credit card reserve, are any of these expenses insurable? A: No.Capital Allocation and ProFoodsQ: ProFoods sounds like a huge opportunity, especially relative to the size of BJ's. The question I was going to ask has to do with return on capital. I guess you kind of answered it. You said the return on capital is about the same as what you expect to get at BJ's. My question is to try to get a look at how you all think about capital allocation. My thinking would be you've got this huge opportunity with BJ's that is so under penetrated that you wouldn't do something different unless it offered a higher return on the next dollar invested. If for no other reason that if you think about risk adjusting it, it's really kind of lower, because BJ's you know, you've got that model, it's improving every day, and you can look out at the future and know where it's going to be over the next five years. This is still as you say, a test, and I know you've emphasized that. Why wouldn't you say we're not going to something like this with our dollars unless it's actually incremental or accretive to our return on capital? Q: This is a test at a couple of locations. We are throwing off a fair amount of free cash and we feel we have plenty of cash to be able to grow the core business, we feel we have plenty of places to go, with 10 percent square footage growth. As we've said over the years, that 10 percent growth is what we feel comfortable with, nothing more. As far as the capital allocation model, it's a test and we would rule it out unless we got returns in excess of our cost of capital.New ManagementQ: I know Karen Stout hasn't been there for very long, could you share with us any initial impressions she had, what changes if any, we could expect to see on the merchandising side? Given her background more in the food and grocery area, was she behind the ProFoods initiative? A: We've been working on ProFoods for some period of time. She did not have anything to do with that. She has no involvement with ProFoods. That is being done by a separate organization within BJ's. Karne has been impactful in the produce roll-out that we're in the process of doing, where we're going from third party produce to higher quality produce sourced directly at better prices. She's been down to the Florida Clubs watching the produce transition. Karen has a lot of experience in the fresh business and the private brand area, both of which are growing rapidly at BJ's. We're working to improve global sourcing of general merchandise. ProFoods StaffingQ: You mentioned that ProFoods will be a separate organization, where is the staff for that organization coming from, internally or from outside of BJ's?A: A combination of both. Buyers and the store staff of ProFoods has been recruited independently of BJ's.ProFoods' Future Locations Q: Do you have any additional test sites in mind for ProFoods? A: Because of the long lead time of development, our real estate people are doing the scouting work, and we did a lot of scouting work before we decided on these initial locations, we have no other active deals in the hopper, until we get an opportunity to evaluate this test.Q: Would you consider converting any existing BJ's into the ProFoods format?A: It's way too early to even talk about that, but the BJ's locations are much bigger, and tend to be in great retail locations, where the restaurant supply concept will be in more industrial or warehouse tyoe of locations.
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