BJ's Profit Beats Expectations on Strong Food Sales

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BJ's Wholesale Club Inc. (BJ) Tuesday reported a better-than-expected 16 percent increase in quarterly profit because of strong demand for fresh food and store-brand merchandise, sending its shares up 5 percent.

The No. 3 U.S. warehouse club operator behind Costco Wholesale Corp. (COST) and Wal-Mart Stores Inc.'s (WMT) Sam's Club (search) said gasoline sales also boosted profit.

BJ's results stand in stark contrast to Costco, which warned last month that its profits would miss Wall Street forecasts because of weaker earnings from gasoline sales.

Warehouse clubs use their low-price gasoline stafits in the face of rising costs, but the retailer declined to answer an analyst's question on how its gasoline strategy differs from Costco's.

BJ's earned $18.6 million, or 27 cents per share, in the first quarter ended April 30, compared with $16.1 million, or 23 cents per share, a year earlier.

Results in the latest quarter included a gain, net of charges, of $1.1 million, or 2 cents per share, which BJ's said was not included in its earnings forecast of 22 cents to 25 cents per share.

Analysts, on average, expected a profit of 24 cents per share, according to Reuters Estimates.

While Costco and Sam's compete for small-business owners, BJ's has catered to individual shoppers and has added goods and services such as gourmet food and children's play areas. Analysts said the strategy was paying off.

After seven consecutive quarters of declining gross margin, BJ's has now turned in four straight quarters of higher profitability, Merrill Lynch analyst Daniel Barry said.

Quarterly sales rose 10 percent to $1.8 billion, while sales at stores open at least a year -- a key retail measure known as same-store sales -- increased by 5.8 percent. Gasoline sales contributed 70 basis points to the same-store sales increase.

On a conference call with analysts, BJ's said food sales were up 9 percent while general merchandise was flat, hurt by weak demand for best-seller books, furniture and seasonal items including air conditioners and fans.

The retailer said its sales of store-brand or "private label" merchandise were up 59 percent from a year earlier, helped by new products. BJ's recently added new lines of private label camping equipment, infant and children's clothing and low-priced men's and women's apparel.

At the end of the quarter, private label accounted for 10 percent of food and general merchandise sales, up from 7 percent a year earlier.

BJ's said it was looking into adding organic and natural foods to its stores and would offer those products in a few locations beginning this summer.

The retailer said it recorded a charge in the latest quarter to increase reserves for claims by credit card issuers that want the retailer to reimburse them for fraudulent credit card charges and other costs stemming from a possible security breach at BJ's stores.

BJ's had said in August that banks were seeking up to $16 million in reimbursement after it said a possible breach of its computer systems may have resulted in customer credit card information theft. At that time it set aside $6 million to establish a reserve.

BJ's said it was "vigorously contesting" claims that it should pay for fraudulent credit card charges.

Its stock rose $1.30 to $29.60 in New York Stock Exchange trading.