Cheap gas burns away BJ's Wholesale Club's profits

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Cheaper fuel may be good for drivers, but it's hurting sales numbers at the warehouse clubs, which sell lots of gas. BJ's Wholesale Club (BJ), this morning announced its results beat expectations, but the nation's third-largest warehouse club chain cut its guidance for the rest of the year, blaming falling gas prices.

BJ's reported net income of $35.1 million, or 64 cents per share, down 3.8 percent from the same quarter last year. Sales for the second quarter dropped 5.2 percent to $2.51 billion and comparable sales dropped 7.7 percent. Most of the drop was blamed on gas sales, which fell 10.6 percent for the quarter; sales of other merchandise were up 2.9 percent.

Analysts had expected 62 cents per share and revenues of $2.56 billion for the quarter.

Wall Street had been down on the stock, saying falling food prices and softer sales of big-ticket items like electronics will keep punishing the warehouse chain for a while. BJ's management cut back its guidance for the rest of the year, citing gas prices. It now expects sales to rise 0.5 percent to 1.5 percent for the year and a drop of one percent to three percent in comparable sales. The forecast noted a drop of six percent to eight percent in gas sales will offset growth of four percent to six percent in sales of other merchandise.

Like most discounters, BJ's is weathering the recession by depending more on sales of must-buy stuff such as food, which has been hit by price deflation in this economy. And that's happening all over the discount store segment: Target (TGT) reported weak results yesterday, saying shoppers are coming into stores looking for more low-margin items such as food and not so much of the pricier home and apparel goods.

BJ's big rival, Costco Wholesale Corp. (COST), won't report again until October, but in its last quarter it was hit by lower sales and gas prices, too. Costco reported sales were down seven percent in the quarter ending May 10, but were flat once gas sales were factored out.

According to U.S. government figures, average gas prices around the country were $2.55 per gallon, $1.10 lower than a year ago.

That may be good news for drivers, but not for the warehouse clubs, which made a push years ago to leverage their low-price image into the gas station. It looks like the strategy is running out of gas.

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