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    BJ's Drops Pharmacies, Shakes Up Executive Suite

    NATICK, Mass. -- In the wake of less-than-stellar sales and a shakeup that saw the abrupt departure of chairman and c.e.o. Mike Wedge late last year, BJ's Wholesale Clubs, Inc. said yesterday that it was planning major business restructuring, including the closure of the company's two ProFood Restaurant Supply locations and all 46 of its in-club pharmacies; and the return of some familiar faces to its executive team.

    NATICK, Mass. -- In the wake of less-than-stellar sales and a shakeup that saw the abrupt departure of chairman and c.e.o. Mike Wedge late last year, BJ's Wholesale Clubs, Inc. said yesterday that it was planning major business restructuring, including the closure of the company's two ProFood Restaurant Supply locations and all 46 of its in-club pharmacies; and the return of some familiar faces to its executive team.

    E.v.p. and c.f.o. Frank Forward noted during a conference call yesterday that it would shut down its pharmacies "sooner rather than later" -- that is, in the next couple of months.

    In connection with both the ProFood locations and the pharmacies, the company said it would establish a reserve for certain closing-related expenses during the fourth quarter of 2006. BJ's estimated that the amount of the reserve would be in the range of $20 million to $22 million post-tax, or 30 cents to 33 cents per diluted share, of which $7 to $9 million would be cash expenditures.

    Chairman of the board and interim c.e.o. Herb Zarkin said the decision to close the pharmacies was "a combination of all sorts of issues," including stiff competition from the likes of Wal-Mart and CVS.

    Above all, however, Zarkin said the company wasn't seeing the growth of prescriptions on a regular basis, which its business model had led it to expect. Ultimately, "it didn't make a lot of sense to keep on putting the investment in," saidd Zarkin, adding that he'd rather pump money into the company's more promising e-commerce business.

    He also said that former pharmacy space would most likely be allocated to house more HBC items.

    Zarkin outlined in broad strokes some of the strategies BJ's adopt to improve business, including rationalization to bring down the number of SKUs, now at 7,800; sharpened pricing to enable it to compete more effectively with its wholesale club competitors; a dramatic reduction of coupon use in favor of "great prices on high-quality items at all times"; more appealing presentation of merchandise, to showcase "wow" items, especially in nonfood, and allow end caps to more accurately reflect what's in the aisles; marketing programs that focus more on member acquisition and retention, and less on mass-media brand building and coupon marketing; and a "very selective" use of capital expenditure funds, with just nine to 10 new clubs slated for 2007, all in contiguous markets.

    BJ's said it will release more details on the restructuring at the occasion of its fourth-quarter filing in early March.

    In the area of executive changes, as well as Forward's decision to extend his tenure at the company for another three years, Laura Sen and Ed Gillooly have both rejoined the company, as e.v.p. of merchandising and logistics and s.v.p. of marketing and membership, respectively.

    Zarkin said the moves are about "reuniting a management team that worked so well together during BJ's most productive and profitable years. Together with Ed Giles as e.v.p. of operations and our senior executives in logistics, information technology, real estate and human resources, we have a management team with a deep understanding of the wholesale club model and a proven record of success with BJ's."

    Sen, who served as e.v.p. of merchandising and logistics from 1997 to 2003, replaces Paul Bass, who will retire from the company next month after 15 years of service. Gillooly, who is returning to a position he held for 11 years until his retirement in 2002, will report directly to BJ's president and c.e.o.

    Additionally, Alison Corcoran, formerly e.v.p. of member insight and marketing, has left the company.

    During the conference call, Zarkin said BJ's would launch a search for a permanent c.e.o. in the next week or 10 days.

    The company's December 2006 sales grew 5.0 percent to $1.014 billion, from $965.6 million last year. On a comparable-club basis, sales rose 0.6 percent for the month, including a contribution from sales of gasoline of about 100 basis points. In December 2005 BJ's reported a comparable-club sales increase of 1.4 percent, including a contribution from sales of gas of 40 basis points.

    Other December 2006 comparable-club sales information was as follows: Excluding sales of gasoline, traffic decreased about 1 percent, and the average transaction amount was essentially flat compared with last year; food sales rose about 2 percent and general merchandise sales dropped about 3 percent; and strong-performing merchandise categories vs. last year included Christmas, electronics, paper products, plastic bags and wraps, produce, small appliances, soda and water, storage, and video games, while among the weaker categories compared with last year were apparel, frozen foods, furniture, giftware, jewelry, prerecorded video, snow removal, tires, toys, and watches.

    For January 2007, BJ's expects comparable-club sales to rise 1 percent to 3 percent, including a contribution from gas sales of about 1 percent. The company now expects that lower-than-anticipated sales and margins during the fourth quarter will have an adverse effect on fourth-quarter and full-year earnings of approximately 18 cents to 20 cents per diluted share.

    Based on management's current forecast for fourth-quarter sales and margin results, and such factors as the establishment of the aforementioned reserve in relation to the ProFood and pharmacy closings, BJ's lowered its earnings guidance for the fourth quarter of 2006 to a range of 17 cents to 25 cents per diluted share, from 83 cents to 87 cents. The company now expects to report earnings in the range of $1.07 to $1.15 per diluted share for the full fiscal year ending Feb. 3, 2007, and offered preliminary earnings guidance of $1.60 to $1.70 per diluted share for the year ending Feb. 2, 2008.

    The company operates 171 BJ's Wholesale clubs in 16 states.

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