| Less than two months after BJ's Wholesale Club Inc. said it would go head-to-head with discounters offering cheap generic medicines, the struggling Natick chain yesterday disclosed plans to shutter its 46 in-store pharmacies.
The decision surprised analysts, but company officials said the retreat is necessary so that BJ's can focus on improving its core business and expanding sales through its website. BJ's was a late comer to the pharmacy market, opening its first stores in 2002, as a way to boost sales and woo consumers who would be willing to pay the club's annual membership fee for lifestyle drugs, like Viagra, that were 20 percent cheaper than at a typical drugstore.
But competition grew increasingly fierce over the last few years, as chain stores, discounters, and rival warehouse clubs expanded their pharmacy businesses. At the same time, a new Medicare initiative reduced reimbursement rates to drugstores and also made payments less promptly , creating real hardships for retail pharmacies, according to Laura Miller , senior economist for the National Association of Chain Drug Stores.
Wal-Mart Stores Inc. set off a pricing war last fall when it introduced $4 generic prescriptions at its stores around the country, with Target Corp. and BJ's soon launching their own versions. BJ's promoted its generic drug program just days before chief executive Mike Wedge abruptly resigned in November. Wedge, who helped spearhead the pharmacy initiative, was lauded for increasing sales, but overall progress of the business had not come as quickly as hoped and expected, according to a statement released by two BJ's executives after Wedge quit.
In an earnings call yesterday, interim chief executive Herb Zarkin said a confluence of factors led to the pharmacy failure, including the generic drug pricing. BJ's entered the business too late, and didn't have the convenience of locations that other competitors offered, Zarkin said.
"We haven't seen the [prescriptions] grow on a regular basis," Zarkin said. "It just didn't make a lot of sense for us to keep on putting the investment in."
BJ's, blaming weaker sales and margins, also lowered its fourth-quarter earnings guidance yesterday to a range of 17 to 25 cents per share, down from its previous guidance issued in November of 83 to 87 cents. BJ's also said former executives Laura Sen and Ed Gillooly are returning to help turn around the business while the company searches for a new chief executive.
Yesterday's news drove shares of BJ's stock down 4.1 percent to close at $30.55.
BJ's, which has 171 club stores in 16 states, plans to close the pharmacies over the next two months and use the space for better-selling items that attract shoppers. Over the next year, Zarkin said, BJ's will reduce use of coupons, narrow merchandise assortment, and push upscale with some food products, like cheese.
The chain's troubles have made it fodder for takeover speculation for more than a year, with the latest initiatives renewing talk that the chain may be preparing itself for a sale. BJ's, which has repeatedly denied that it is putting itself on the auction block, is the smallest of the nation's three leading warehouse chains, behind Costco Wholesale Corp. and Wal-Mart's Sam's Club.
"There's a very legitimate case for it being sold -- they're not big enough to compete with the Sam's and Costcos," said David Strasser , an analyst with Banc of America Securities. |
