BJ's Wholesale Club Holdings, Inc.
Q4 2008 Earnings Call Transcript

Published: 4 Mar 2009

[Operator:]

Good morning and welcome to the BJ's Wholesale Club, Inc. fourth quarter and year end earnings results conference call. There will be some formal remarks made by the company, and then we will open up for questions. At this time I'd like to turn the conference to Cathy Maloney, Vice President of Investor Relations. Please go ahead, ma'am.

[Cathy Maloney:]

Thank you, [Augusta]. Welcome to the BJ's Wholesale Club fourth quarter and year end conference call for the year ended January 31, 2009. With me this morning are Herb Zarkin, Chairman of the Board, Laura Sen, President and CEO, and Frank Forward, Chief Financial Officer. Before we begin, let me remind you that the information presented and discussed today includes forward-looking statements which are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from these forward-looking statements. The risks and uncertainties related to such statements include levels of gas profitability, levels of customer demand, economic and weather conditions and other factors detailed in our fiscal 2008 10-K and subsequent 10-Q for fiscal 2009. While the company may elect to update its forward-looking statements, the company specifically disclaims any obligation to do so, even if the company's estimates change. During this call we will be referring to non-GAAP financial measures that are not prepared in accordance with generally accepted accounting principals. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in our press release, which is posted on our Investor Relations website at www.bjsinvestor.com. With that, I'll turn the call over to Frank Forward, CFO.

[Frank Forward:]

Thank you, Cathy. Good morning, everyone. For the fourth quarter ended January 31, 2009, net income was $52.7 million or $0.91 per diluted share. Fourth quarter results included post-tax income of $1.3 million or $0.02 per diluted share from favorable state income tax audit settlements. Comparatively, for last year's fourth quarter ended February 2, 2008, net income was $50.2 million or $0.80 per diluted share. Adjusting for the unusual item this year on a non-GAAP basis, EPS was $0.89 per share this year versus $0.80 per share last year, an 11.3% - and net income was $51.3 million this year versus $50.2 million last year, an increase of 2.2%. In summary, the fourth quarter reflected strong increases in comp sales and customer count, gasoline income slightly above last year, and strong expense control. However, this was partially offset by merchandise margin rates that were below [LY]. Most importantly, BJ's continued to gain market share despite the difficult macro environment, merchandise comp sales excluding gasoline increased 6.4%, driven by an 11% increase in food and perishables and customer count increased 6%. Perishables itself had a 13% comp increase. General merchandise comp sales were flat to last year, which we consider a good performance relative to the retail universe. For the year ended January 31, 2009, net income was $134.6 million versus $122.9 million in 2007, an increase of 9.5%. And EPS was $2.28 per share versus $1.90 per share, an increase of 20%. The full year 2008 earnings included unusual items netting to income of $2.8 million post tax of $0.05 per share. This included post-tax income of $3.3 million or $0.06 per share for various favorable state tax audit settlements, offset by expense of $0.5 million post tax or $0.01 per share from the club closing reserve recorded within the discontinued operations line. The full year 2007 earnings included unusual income items of $6.5 million post tax or $0.10 per share. These unusual income items in 2007 included $3.6 million or $0.05 per share from favorable income state tax audit settlements, $2.4 million or $0.04 per share for Pro Food's lease reserve adjustment, and $0.6 million or $0.01 per share from the sale of pharmacy assets. Adjusting both years for the unusual items that I just discussed, on a non-GAAP basis our 2008 earnings were $2.23 per share versus $1.80 in 2007, an increase of 23.9%. And post-tax net income was $131.8 million versus $116.3 million, an increase of 13.3%. However, as we discussed in our last conference call, the 2008 full year GAAP and non-GAAP results also included earnings from the third quarter that we don't expect to repeat next year of about $5.8 million post tax or $0.10 per share. This is composed of an extraordinary level of gasoline income, partly offset by expenses for severance, sales tax audit settlements, and extra bonus costs related to the gasoline income. In addition, full year results included about $0.08 per share of expense from investments made in three areas - the road map technology project, [inaudible] rates, and remodel. Now I'll move on to the fourth quarter sales detail. Total sales in Q4 increased 3.2% to $2.50 billion compared to $2.42 billion last year. Comparable club sales in Q4 increased 1.7%, which included an unfavorable impact from gasoline sales of 4.7%. Comp merchandise sales excluding gasoline increased by 6.4%, which was near the midpoint of our guidance range of 5.5% to 7.5%. For the full year, total sales increased 11.5% to $9.80 billion versus $8.79 billion in 2007. Full year comparable club sales increased 9.4%, which included a benefit from gasoline sales of 3%. Comp merchandise sales excluding gasoline increased by 6.4%. Next I'll break out comp club sales by major market, including the impact from sales of gasoline. I'll begin with the region, then read across four columns, beginning with the Q4 comp and Q4 gasoline impact, then full year comp then full year gasoline impact. New England - 0.5%, negative 4.5%, 6.9%, 2.0%. Upstate New York - negative 1.3%, negative 8.3%, 13.1%, 5.3%. Metro New York - 6.3%, negative 0.9%, 8.5%, 0.9%. Mid-Atlantic - 1.3%, negative 3.7%, 9.3%, 3.8%. Southeast - negative 0.8%, negative 7.6%, 10.6%, 4.4%. Total comp - 1.7%, negative 4.7%, 9.4%, 3.0%. Excluding the sales of gasoline, Q4 traffic increased by approximately 6% and the average transaction increased by approximately 1%. For the full year, traffic increased by approximately 5% and the average transaction increased by approximately 2%. We estimate the negative impact on comparable club sales from new competition and self-cannibalization was worth approximately 1% for both the fourth quarter and the full year. Regarding the impact of inflation and deflation on our sales, for the full year 2008 we estimate there was a net inflation impact of about 2% to our sales, which is slightly lower than our previous estimate. In Q4 we did start to see some deflation, particularly in categories such as dairy products, oils and beef. Nonetheless, in many categories with deflation we are seeing strong increases in unit sales, so in these categories we're still driving increases in comp sales dollars. In other words, BJ's ability to offer strong value and gain market share from other retail channels is more than offsetting the deflationary impact on sales. For the fourth quarter comp sales of food increased by approximately 11% and general merchandise sales were about flat to last year. Departments with strong fourth quarter sales included breakfast needs, computer equipment, dairy, fresh meat, frozen, health and beauty aids, household chemicals, paper products, pet food, prepared meals, produce, healthy snacks, small appliances, and video games. Departments with weaker fourth quarter sales included apparel, cigarettes, domestics, electronics, furniture, jewelry, pre-recorded video, sporting goods, storage and water. Now let me go through some of the fourth quarter income statement detail. MFI increased by 0.3% versus last year. Other revenue increased 4%. Cost of sales, including buying and occupancy, decreased by 33 basis points. SG&A expense increased by 32 basis points, and preopening expense was $2.1 million versus $1.2 million last year. For MFI and membership fee income, the Q4 MFI dollars increased 0.3% versus last year. The modest MFI growth primarily reflects both the timing and lack of new club openings. Even though we opened three new clubs in Q4, because of the deferred recognition of MFI revenue, most of the new club MFI falls into the next year. MFI growth also reflects a decision to invest in lower membership fees in our underperforming Atlanta market. I should mention that this initiative did help to drive strong double-digit sales growth in Atlanta. Membership renewals did soften somewhat in Q4; however, we believe are just seeing members delay the timing of their renewals. February 2009 renewals came in well above plan, which would support our belief that what we saw in Q4 was just a timing difference. For the year, the renewal rate for Inner Circle members was 83%, up from last year's 82%. This increase was at the high end of our guidance range of 0.5% to 1%. Our renewal rate of business members was 87%, about flat to last year. In Q4 we also saw good comp increases in both paid, new Inner Circle, and business member signups which we attribute to the success of our holiday trial member acquisition program. Other revenue in Q4 increased 4% versus last year, which primarily reflected an increase in propane and food court revenue. Cost of sales as a percent of sales decreased by 33 basis points versus last year. Although this was in line with our guidance for a decrease of 28 to 38 basis points, we got there in a different way than planned. The mix impact of low margin gasoline sales was more favorable than planned, but merchandise margin rates were below last year versus a planned increase. Let me go into some detail for each of these factors. First, the mix impact of gasoline on our margin was 63 basis points favorable to last year as compared to our guidance of 18 basis points favorable. Sales of low margin gasoline were below plan, which resulted in a favorable mix impact. And the profit from gasoline came in about $0.02 per share above last year, slightly better than our guidance of being about flat to last year. Merchandise margins excluding gasoline were 20 basis points below last year versus our guidance for an increase of 8 to 18 basis points. Our guidance assumes that strong sales of high margin perishables would drive an increase in overall Q4 margin rates. While we did achieve our plan for perishables, this was more than offset by the following unfavorable factors

[Herb Zarkin:]

Thank you, Frank. Hello, everyone, and thanks for joining us this morning. I'm here today as Chairman of BJ's Board of Directors and former CEO to introduce my successor, Laura Sen, on her first earnings conference call as BJ's Chief Executive Officer. This management change, which went into effect on February 1, was part of a planned transition. Laura has spent her entire professional career - some 30 years - in retail and 16 of those years have been here at BJ's. Her promotion to CEO was based upon the Board's recognition of her passion for the business, her skill as a leader and manager, and of course her success in running BJ's daytoday operations as President and Chief Operating Officer for the past year. Laura has built a cohesive leadership team that has coalesced around a set of values and a shared vision for the BJ's future. So on behalf of the Board of Directors, it's a great pleasure to officially pass the baton to Laura Sen.

[Laura Sen:]

Thank you, Herb. It's an honor to be leading the company where I've spent more than half my professional life. I'm also very grateful to be among colleagues whose experience and judgment I rely upon every day. In 2008 the search for better value was a major driver of our strong comparable club sales increases as consumers reacted to rapidly increasing food and gas prices during the first half and collapsing financial and real estate markets during the second half. At the same time, an equally important driver of our sales was the close collaboration among our team members. The buyers, marketing team, club operators, IT department, and logistics specialists worked together to deliver a clean, organized, well presented and friendly club experience. Our success is a clear case of preparation meeting opportunity. BJ's continued to gain market share from the supermarket and restaurant channels in 2008. Comparable club sales of food increased by 11% for the fourth quarter and 10% for the full year, strong evidence that our members are consistently spending more of their food and consumables budget with us. Sales of perishable food - BJ's highest margin merchandise category - continued to outpace all other departments throughout the year, driven by consistently strong demand in produce, meat, bakery, dairy, frozen, deli and prepared food. With thoughtful planning, good communication and careful execution, our team members were able to maintain high standards of quality and presentation while expanding our capacity for selling perishable items. For BJ's buyers, the number one priority is to provide our members with the best value on the highest quality merchandise. Let me give you a few examples of how our merchants added freshness and differentiation in the perishables area in 2008. First, there were lots of new offerings of higher quality fresh and frozen appetizers, entrees and desserts, including several catering brands not available in supermarkets. Our members responded very positively to these items, particularly during the holiday season. We also saw very strong sales of restaurant brands from our expanded assortment of high profile names, including Cheesecake Factory, Panera, Legal Sea Foods, Boston Market, Fresh City, and Todd English. And our buyers have expanded the assortment of pack sizes designed for smaller households. It may surprise even those of you who follow BJ's closely to know that our members can buy a half gallon of milk, a pound of butter, a single melon, a seven-inch dessert or even a single loaf of [inaudible] Artisan Bread. And finally, some of our share gains came from our 20% sales increase in organic and natural food. As you might expect, general merchandise sales results were more mixed. Comp club sales for the fourth quarter were flat and increased by approximately 1% for the year. Jewelry, furniture, DVDs and, to a lesser extent, apparel and domestics, had negative comp sales for much of the year. On the other hand, computers, video games, toys and small appliances had comparable club sales increases. Sales of televisions fluctuated during the year, but had significant comp sales increases in December and January. Consumer electronics sales benefited from an extensive merchandise reset that was completed during the third quarter in order to improve visibility of those items during the holiday season. That investment more than paid for itself in increased sales of video game hardware and software, desktop, notebook and netbook computers, and GPS, and we continue to see strong sales of those items in February. Sales of small appliances exceeded our expectations during the fourth quarter as consumers responded to items that helped save them money as well as certain novelty appliances. Our gasoline sales were also mixed throughout 2008 due to dramatic swings in oil prices that led to turbulent market conditions at the retail level. During the fourth quarter gasoline sales had a negative impact on comp club sales of nearly 5%. That followed a 5% positive impact in Q3, an 8% positive impact in Q2, and a 4% positive impact in Q1. For the full year, gasoline sales contributed approximately 3% to our 9.5% comp sales increase. Turning to marketing, our investments in 2008 focused on attracting new members and increasing the renewal rates for existing members. We were successful on both counts. A number of factors contributed to these positive results. First, we benefited from the increased productivity of our biannual member acquisition program. Second, we did a better job of communicating with our existing members using a variety of media, including a re-vamped quarterly journal, e-mail, coupon books, catalogs and in-club signage. Third, we were more visible in the communities we serve. There was a higher level of participation in community service initiatives by our team members, we had an enhanced outreach to potential business members, and a more active public relations program, which resulted in a significant increase in media coverage. Next I'll talk about operations. Our team members do a great job of maintaining high standards of merchandise presentation and cleanliness throughout the sales day every day. To support that effort, training and development continued to be a top priority at all levels. General managers were given more autonomy to run their clubs and receive more management effectiveness training to help them succeed in their objectives. I'll briefly list some of their achievements. First, shrink and salvage rates improved, demonstrating great control. The clubs kept up with growing demand for perishable food by upgrading or expanding the refrigeration space and by increasing the frequencies of delivery. Working closely with logistics and merchandising, club operators also helped to facilitate a transition from two perishable suppliers to one, a move which has resulted in both improved efficiencies as well as cost savings. Sales at club-operated food courts increased over the course of the year as a result of more consistent quality and the introduction of new products such as Oona's Pizza, Ben & Jerry's Ice Cream, and Green Mountain Coffee. The transition and execution of holiday merchandising went much more smoothly than in the years past as a result of improved communication between all the divisions and a more efficient use of resources. This smoother transition not only improved our members' shopping experience, but also saved costs. In logistics I'd like to highlight two outstanding achievements. First was the smooth installation of a new warehouse management system at the Burlington, New Jersey crossdock, the largest of our three distribution facilities. To complete such an enormous effort without any negative impact on club sales is truly impressive. Again, it could not have succeeded without close cooperation and support from our IT and merchandising team. The second accomplishment, which also came as a result of excellent teamwork, was a significant reduction in inventory levels versus the prior year. Average inventory per club decreased by 3.7% on a 9.4% comp sales increase. And finally I'd like to review our progress on the IT road map, a multiyear initiative to upgrade or replace vital data center and computer systems. First, in the next month or so we expect to choose a vendor to manage our data processing. Second, a vendor has been selected for the new POS system and a pilot program is scheduled to begin during the back half of the year. And third, a major upgrade of our PeopleSoft HR system as well as power conversion to ADP is scheduled to go live in the third quarter. With that I'll now turn to our plans for fiscal 2009. Our top priorities are to continue to go after market share and to invest in growing our chain. For BJ's, economic downturns create both challenges and opportunities. We're strategically looking to take advantage of this downturn to gain market share and we are very optimistic about BJ's long-term prospects. That is why we will continue to invest in our people, our IT system, and in chain expansion. For 2009 we're planning for a 5% to 7% increase in merchandise comp sales, driven primarily by food and consumables. The search for value has never been more important to our members, who still do the bulk of their food shopping in supermarkets. Our goal is to be the first stop for grocery shopping, with supermarkets being used for fill in. From that perspective, the opportunity for market share gain is tremendous. On the other hand, with the prospect of deflation, increased price competition, reduced consumer discretionary spending, and tough comp comparisons, our ability to achieve a 5% to 7% merchandise comp is likely to come at a cost of flat margins. But we're operating the business for the long term and we believe that the market share gains we make during a troubled economy will endure when the economy improves. I cannot emphasize enough how committed we are to developing BJ's future leaders from within our organization. We want our team members at all levels to know that hard work and dedication can lead to career advancement. To that end we have made team member development a job requirement and formalized programs to help with career planning. And finally, our investments in chain expansion call for 6 to 8 new clubs in 2009, almost double the number we opened in 2008. Three of the clubs - Pelham Manor, New York, North Bergen, New Jersey, and Clairemont, Florida - are scheduled to open in the first half of the year. We will discuss our second half expansion plans during our first quarter conference call in May. And with that, I'll turn the call back to Frank.

[Frank Forward:]

Thanks, Laura. I'll go into guidance for next year and first quarter. For the fiscal year ended January 30, 2010, we are planning for GAAP earnings in the range of $2.26 to $2.36 per diluted share and net income in the range of $123 million to $129 million. To help better understand this guidance, here is how we're thinking about it

[Laura Sen:]

Thanks, Frank. In conclusion, these are challenging times for consumers and businesses, yet I have a tremendous amount of confidence in our team and in the opportunities we have to increase market share. Our plan calls for strong sales growth, and we've found that with robust sales we typically come up with new efficiencies. And we will continue to operate the business for the long term by investing in our people, the new technology, and in chain expansion. And with that, I'll open the call for questions.

[Operator:]

Thank you. (Operator Instructions) Your first question comes from Deborah Weinswig - Citigroup.

[Deborah Weinswig:]

Frank, you had said that with regards to CapEx spend in 2009 that there would be increased spending on club maintenance capital to improve club conditions. Can you please provide some more color around the spend?

[Frank Forward:]

We'll be doing some large renovations in three or four clubs. We're continuing to do a number of smaller renovations in a number of different clubs. We'll continue to add some capacity in some of the perishable areas. We still have to finish out all the bathroom renovations through the chain. On top of that, there's a number of other things that the operations folks are working on that we think will cost us a little bit. Again, the goal here is to improve the club conditions.

[Deborah Weinswig:]

And then just kind of broadly speaking, can you provide us an update in terms of the insulator businesses and any new initiatives there?

[Laura Sen:]

I think that we are clearly focusing on food court and demos and really, I think, taking a much more strategic approach to the organization behind that and how we look at that. I don't really have any specifics to unveil at this point on that subject, but I think that we know those are not the centers of excellence that we could bring them to and that's what our work is going to look like.

[Deborah Weinswig:]

I believe it was stated on the call that as we think about gross margins for 2009, there will an investment in price. Can you talk about what you're seeing with regard to the competitive landscape and also what are you seeing with regard to deflation currently?

[Laura Sen:]

I would say that the competitive landscape certainly during holiday was challenging more broadly across all retail, I would say, and particularly in the club channel. But our process has not changed. We go out and do our competitive shopping every month. We will be with it 100 to 150 basis points of competition. And we're not really seeing any major challenges with that. In terms of deflation, I think Frank covered what we're seeing in dairy, in meat, in oils. I think there's some in trash bags. But it's more than being offset by unit increases in those categories.

[Operator:]

Your next question comes from Charles Grom - J.P. Morgan.

[Charles Grom:]

Laura, should we look for any changes to the spring membership push or your MARM initiative in '09? MFI was a little bit light. It sounds like Atlanta is the issue once again, similar to last quarter. But Costco reported this morning and their membership was a little bit softer, too. So I was just wondering what you guys are thinking on the spring membership push as well as the MARM front?

[Laura Sen:]

As you know, we've been doing the member acquisition program for about 15 or more years and that will continue in its typical rhythm for the spring and for the fall. We're always testing different things, but I'm really not at liberty to disclose anything about that right now.

[Charles Grom:]

And the MARM initiative will stay intact?

[Laura Sen:]

Yes.

[Charles Grom:]

And then just on the gas, the past couple of months the impact of the comp's been negative, call it by 800 basis points. Can you talk to how much of that is price versus the number of gallons that you're selling?

[Laura Sen:]

Well, it's clearly a combination of both. Obviously, the demand ramped up when prices were soaring back in the spring and summer. It's not as certainly big a destination purchase as it was when gas was $4.00 a gallon, but it's a combination of both.

[Frank Forward:]

But we are seeing comp down - decreases. And obviously huge deflation in the pricing, too.

[Charles Grom:]

I know you said that 2% overall net inflation benefit. Have you been able to dissect it for food in '08 and I guess along the lines of what you're thinking for '09 for food inflation?

[Frank Forward:]

Generally the food inflation is a little bit higher than that. Again, this is a very difficult number to quantify, as I think I've mentioned in the past. That 2% number, again, it's a little higher because we still haven't cycled through some of the price increases that we saw early and generally a lot of those consumable prices are holding. But, again, we're also seeing deflation in meat, some of the other categories, dairy and other categories. Again, as far as the guidance for the next year, deflation certainly will be an impact on it, but like Laura said, we're seeing example after example where the value that we have, even though there is deflation, we're still seeing pretty strong unit increases, so overall we're seeing a comp increase in these categories.

[Laura Sen:]

Right. Plus I would add that if you look at the entire basket, prices year-over-year are still higher than they were a year ago.

[Charles Grom:]

Just on your decision to invest a little bit more in price, is that sort of an offensive or a defense strategy? Clearly a lot of the supermarkets are now starting to invest more in price. Just wondering if you could flesh that out for us.

[Laura Sen:]

It's certainly not offensive. We do not lead on pricing. Our goal is to be competitive and make sure that our value proposition overall is appropriate for our members and that we're delivering on our promise when we sell to the membership. But, I mean, a good deal of what we sell is not found in other warehouse clubs, so we're looking out at food, drug and mass channels to do our competitive pricing as well.

[Operator:]

Your next question comes from Mark Lipacis - Morgan Stanley.

[Mark Lipacis:]

As you approach the margins in the perishables categories, if you are seeing deflation in some of those categories do you typically try to defend the gross margin rate or do you manage to gross margin dollars?

[Laura Sen:]

Certainly we need to - to achieve our plan we need to maintain the rate, but the governing factor is competition. We can't go for a rate that is not reasonable in light of what our club competitors, super center and supermarket competitors might be doing. That being said, there are a handful of commodities that are very, very sensitive and the rest are not so sensitive.

[Mark Lipacis:]

You had a very strong traffic gain for February and also pretty strong in the quarter as well. Do you think that is more being driven by grocery competition dynamics or do you think you're picking it up from clubs?

[Laura Sen:]

I would say probably grocery. What I attribute our very strong comp sales to is our own internal business improvement. When I look at what the operators have done to deliver a great member experience, what the merchants have done to shift the mix to be more appealing to our members and to drive frequency, when I look at the support we've gotten from IT on certain initiatives and all the back office support we get through logistics and the rest of the people here in the home office, it's really a team effort. And it's been a huge success and I believe that we're going to see dividends from that for a long time to come.

[Mark Lipacis:]

Your major competitor mentioned that they were cutting prices during the quarter to try to drive traffic during the holidays. Did you see any of your price gaps widen out with them during the quarter?

[Laura Sen:]

I would say not.

[Operator:]

Your next question comes from Adrianne Shapira - Goldman Sachs.

[Adrianne Shapira:]

Could you spend a little time on the SG&A control? Impressive in terms of the management of the dollar growth rate and going forward. Perhaps spend some time sharing with us the details in terms of where specifically you see continued expense control opportunity.

[Frank Forward:]

In the fourth quarter we saw some just very good expense control almost in every line up and down the P&L. Payroll was pretty consistent and what we planned for, but where we saw the savings, there was a little bit in utilities, a little bit in supplies. Again, sort of go up and down the line of various expenses in the club, just very good cost control up and down the line. And we're expecting to see that going into next year.

[Adrianne Shapira:]

So a lot of little opportunities? Could you bucket it out, sort of maybe one, two, three?

[Frank Forward:]

Really, not. It really is a lot of little opportunities.

[Adrianne Shapira:]

And then just some clarity on the membership renewal. It sounds as if it softened in the fourth quarter, came back strong in February. Was there anything you did specifically in February to jump start that renewal rate?

[Frank Forward:]

Well, we certainly have been putting an effort in the clubs to talk to the members. We've talked about - since you've followed us over the last couple of years, we instituted a group of folks we call MARMs, and that's been helpful. Again, just good operational communication with our members post Christmas.

[Adrianne Shapira:]

Okay. I guess I was wondering if there was anything new this February versus last February.

[Frank Forward:]

Not really.

[Adrianne Shapira:]

And then just lastly on the margin point, you're clearly seeing some deflation. I'm wondering if you could share with us some insight into the vendor negotiations that you're having, what's happening there on the price? And it sounds as if you're looking to invest more on price, but perhaps give percentage wise of the outcome of those negotiations, how much perhaps would be an opportunity on the margin line versus how much the member would save?

[Laura Sen:]

I think the opportunity comes in the mix of sales, and we have successfully grown perishables disproportionate to the rest of the business. The opportunity comes in the SKUs that we carry that are not carried by other warehouse clubs. And I think the opportunity comes in our sourcing strategies, whether it's for general merchandise in terms of overseas sourcing or whether it's developing unique items and private. We're not running out saying Tyson you've got to reduce your prices or we're not going to buy anymore from you. That's not our game.

[Operator:]

Your next question comes from David Schick - Stifel Nicolaus & Company.

[David Schick:]

As you move along with road map - and I guess it came in slightly differently than you thought, but not too much - are there any new things on the planning horizon for that project?

[Frank Forward:]

We're certainly spending most of the time right now in the three areas that we talked about on the call - choosing a new vendor to do our data processing, doing the work replacing all our registers in all the stores, and putting in a new human resources and payroll capability. Those are the things we're really working on. There are some other things that we've been starting to look at, look out 12 to 18 months. They're really not much to talk about right now because we still need to make some of those decisions.

[David Schick:]

But anything else would be incremental to what you've talked about today?

[Frank Forward:]

What I just listed is going to be a pretty full plate for the next 12 months.

[David Schick:]

The second is just simply on gas. Has there been any change in the behavior of consumers who are buying gas? Are they in club and the basket size? Do they stop in or just cherry pick gas?

[Laura Sen:]

We don't see any evidence of that.

[Frank Forward:]

Like I said, our comp gallonage actually decreased over the last couple of months, whereas obviously February kind of speaks for itself with an 8.2% comp increase.

[Operator:]

Your next question comes from Bob Drbul - Barclays Capital.

[Bob Drbul:]

A couple of questions. The first one is on the store opening plan, do you have any flexibility around the seven clubs that you're planning in the back half of the year and can you maybe talk about your expectations for 2010?

[Laura Sen:]

I'm not sure what you mean. Would we try and add some or push some off, is that what you mean?

[Bob Drbul:]

Yes, either.

[Laura Sen:]

We're actually trying to open as many as we can. We're not trying to hold off in any way, if that's the question. We believe that there may be more real estate opportunities out there and, as they come up, we'll try and choose those that will be most productive for us. But we're not looking to back off of anything we're doing.

[Bob Drbul:]

Can you maybe talk a little bit about the penetration of private label and any signs that you're seeing on trade down within the consumer?

[Laura Sen:]

Yes. I think that the people who follow us know that we have not been as bullish on private label as perhaps we had been in the past, but looking at a stable universe of items year-over-year that do the most volume in private label, those did grow disproportionate to our comp sales increase for the chain. That being said, we have deleted a lot of private label items - about 20% again this year - which yielded about a 5% decline in overall private label sales. So there's a couple stories going on here where our core private label items are gaining share; our overall private label share is slightly down. I would say that we are continuing to look at the relationship between the sales of branded items versus the sales of private label items. And overall, our members are choosing pretty strongly for branded items in certain categories. However, we are rebuilding private label in a strategic way with destination items that are unique, yield very nice margins, and we feel good about that. So I think that we're taking a balanced approach.

[Bob Drbul:]

Having done $70 million already of the $100 million planned for the buyback program, what factors would lead you to increase your plans for buybacks in 2009?

[Frank Forward:]

Right now, again, we're planning for the $100 million. We really don't have much else to say. We're going to watch what the market does, obviously. If we think there's opportunities, we certainly have a fair amount of buyback authorization from the Board at this point in time. But again, right now the plan is for $100 million, which we've already bought $70 million.

[Operator:]

Your next question comes from Daniel Binder - Jefferies & Co.

[Daniel Binder:]

A couple of questions. First, I'm not sure if you said it earlier, but do you have a single point estimate or a range of numbers in terms of what you think the net impact from inflation will be in '09? The second question is can you give us a little bit of color [inaudible] right now and what you've bought already, how you think the rest of the $30 million will be bought over the rest of the year. Is it going to be wrapped up by Q1 or do we spread it out over the next few quarters? And then, third, I'm just curious how early spring goods are selling.

[Laura Sen:]

On inflation, I think we believe it'll hover around 2%, but it's hard to have a crystal ball in terms of the future. I would say that major manufacturers are trying to hold their costs and we believe that we're treated fairly and equitably with the rest of the world, so that's what we see for now. I'll let Frank talk about the shares.

[Frank Forward:]

Right now, if you just want to model it, just model it out evenly over the course of the year.

[Laura Sen:]

In terms of early spring selling, I would say continued strength in TV and electronics and computers in the hard lines part of the business. In terms of spring, I mean, we just had a foot of snow yesterday or the day before, whenever it was, so the chance of that selling very well right now is low. But we feel that when we put out the right value, the members are buying pretty robustly. So we're seeing, again, with the right items, we do business.

[Daniel Binder:]

Inventory, well controlled. Any other opportunities and, perhaps more specifically, in your cash flow from operations estimate should we be assuming that working capital is a source or use of cash year-over-year? And my final question was with regard to MFI. As you build more stores in existing markets, presumably there'll be some cannibalization of existing members. Just kind of wondering what you think that looks like and what that does to the MFI per club.

[Frank Forward:]

As far as the working capital goes, as we've said, we're going to be opening up seven clubs this year  that's the plan anyway - and that will use up some working capital. Generally we use as a rule of thumb about $2 million inventory net of payables and that's when we open them up. The next question was -

[Daniel Binder:]

Just in terms of when you're modeling out the new store growth in existing markets, presumably there's some sort of member cannibalization. I'm just curious what you think that typically looks like with this kind of expansion.

[Frank Forward:]

We have modeled it out. Best guess right now, I'd say that it's not going to change materially from that 1% number that we've been seeing for the last year or so.

[Daniel Binder:]

1% member cannibalization?

[Frank Forward:]

1% sales cannibalization. The sales and members go pretty hand in hand.

[Operator:]

Your next question comes from Charles Cerankosky - FTN Midwest Securities Corporation.

[Charles Cerankosky:]

A question for you, Laura. In looking at the general merchandise comp the last few months and especially February, it's been, at least to me, better than expected, and I was wondering if you could talk a little bit more about the components. You've mentioned some are weak. What are you doing there that you're pleased with that reflects the long-term strategy rather than just some of these economic-driven shifts among categories.

[Laura Sen:]

What we're seeing in the general merchandise category, the consumable part of the business is still what's delivering the greatest gains, and those tend to be very large segments. So in health and beauty care and chemicals, we see great growth there. But we also see that our electronics reset that I talked about has been very successful. Our members are really understanding more clearly what we have. It's more visible. And the values that we've been able to offer are tremendous, I think. That's where our strategy is. I mean, I can't make them buy sweaters or T-shirts or whatever it is if it's 30 degrees out, but I think that our offerings are very nice and when the business turns around we'll get our share.

[Charles Cerankosky:]

Frank, you gave us a lot of numbers and I hope I got them down, but I think an operating cash flow number of I think it was $230 to $250 million. You said you'd be capital self-sufficient. But in thinking about the buyback plus the CapEx, just a quick look suggests some external financing might be required. Can you talk about that, please?

[Frank Forward:]

Sure. My definition of being capital self-sufficient is that we'll have enough cash coming in from operations to cover CapEx. So, again, we're estimating cash from operations would be about $230 to $250 million and a CapEx of around $180 to $200 million. So we'll be able to cover that. Now comes your question, well, over and above that, if we're going to buyback $100 million, would we have to go into debt? It's pretty much right around there. Our expectations right now is hopefully we could continue as we have the last couple of years finding ways to generate some cash from working capital for how we've been working with inventories. If we end up being in debt, I don't think it would be much, certainly pretty immaterial to a retail business.

[Operator:]

Your next question comes from Joe Feldman - Telsey Advisory.

[Joe Feldman:]

I just wanted to ask you just about product cost and sourcing. I know you've talked about deflation being a pressure in the competitive market, but what are the trends you're seeing in terms of sourcing costs and what's coming out of Asia these days? If you could get into that a little bit.

[Laura Sen:]

Yes. Certainly the rampant cost inflation that we saw from Asia in the fall timeframe has completely backed off because demand is way off over there, as you know, so I think that we're returning to much more what we'd say normalized pricing. And the lack of demand also helps us with things like ocean freight and so on, so I would say that we're more normalized. Other sourcing costs I would say are more commodity driven, as we've discussed, and we do not have the commodities running rampant as they did last year. And I think that those costs will stay down.

[Joe Feldman:]

And then also you've been asked a lot about product rationalization in the past and even touched on it today, but are there still opportunities for you guys to streamline in some categories? I understand the point of difference that you want to have with the other clubs and also to attract that grocery shopper, but I would still think there's some areas where you could be even more efficient in driving product margins a little higher.

[Laura Sen:]

Absolutely I agree. I think that what we're seeing as we migrate our assortment in various categories, the buyers themselves see that they can do more with less. That being said, we'll never be looking to the 4,000 to 5,000 SKU level. We definitely want more varieties of breakfast cereal and more varieties of soup and more varieties of coffee and peanut butter and household needs because that's how we're going to get the weekly grocer shopper. They need some choice. Our operators are very adept at handling the levels of assortment we have, and that point of differentiation is strategic.

[Operator:]

Your next question comes from Neil Currie - UBS.

[Neil Currie:]

You've performed a very successful turnaround of the business in the last couple of years by really simplifying the business and being a lot more customer focused, but still your productivity and sales per square foot lags your competitors, which maybe still gives you a big opportunity. What do you think the next steps are really for BJ's in moving the business forward on a longer term and what's the next phase of this story other than opening new stores?

[Laura Sen:]

Well, I think that in my view the real story is about getting the weekly grocery shopper. And I think that we're succeeding in getting the family in every week for their perishable needs and the deeper we get, the next tranche of those customers that we get will continue to yield the comp growth that we've seen. For me it is not a wholly different change in strategy; I think more of a migration toward really understanding which parts of our assortment are key to getting them in every week. And I think that's working.

[Operator:]

There are no other questions at this time. I'd like to turn it back to the presenters for any additional or closing remarks.

[Laura Sen:]

Thank you all for listening in and I'll look forward to seeing you very soon. Take care.

[Operator:]

This does conclude our call. We'd like to thank everyone for their participation. Have a great day.