BJ's Q4 Earnings Call Transcript

123jump.com Staff
17 Mar, 2010
New York City

Sales rose 9.6% to $2.74 billion & net income rose 4.5% to $55.1 million or $1.01 a share. Comparable club sales rose 4.6%. The accounts payable inventory ratio at the end of January was 71.6% versus 67.9% last year. Cost of sales including buying & occupancy was flat to last year in basis points.

BJ''s Wholesale Club, Inc. ((BJ))
Q4 2009 Earnings Call Transcript
March 3, 2010 8:30 a.m. ET

Executives

Cathy Maloney – Vice President of Investor Relations
Laura J. Sen – President and Chief Executive Officer
Frank D. Forward – Executive Vice President and Chief Financial Officer

Analysts

Daniel Binder – Jefferies & Company
Chuck Cerankosky – Northcoast Research
Nathan Rich – Citigroup
Charles Grom – J.P. Morgan
Robert Drbul – Barclays Capital
Peter Benedict – Robert W Baird
Adrianne Shapira – Goldman Sachs
David Schick – Stifel Nicolaus
Laura Champine – Cowen and Company
Robby Ohmes – Bank of America/Merrill Lynch
Joe Bark [ph] – Morgan Stanley
Charles Ruff – Insight Investments
Michael Exstein – Credit Suisse
Joseph Feldman – Telsey Advisory Group

Presentation

Operator

Good morning and welcome to the BJ''s Wholesale Club Incorporated Fourth Quarter Earnings and Fiscal Year Results Conference Call. There will be some formal remarks made by the company and then we will open up the call for questions. At this time, I would like to turn the call over to Vice President of Investor Relations, Miss Cathy Maloney. Please go ahead.

Cathy Maloney

Thank you. Good morning everyone. With me are Laura Sen, President and CEO and Frank Forward, Chief Financial Officer. Before we begin, let me remind everyone that the discussions we are having include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual results, events and our performance to differ materially from those indicated by such statements.

The risks and uncertainties include, but are not limited to levels of gasoline profitability, levels of customer demand, economic and weather conditions, the rate of inflation or deflation, federal, state and local regulation in the company''s markets, federal budgetary and tax policy, litigation, competitive conditions and other factors discussed in the company''s most recent annual report, which is on file with the SEC. Forward-looking statements represent our estimates only as of today. 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 today''s call, we will be referring to non-GAAP financial measures. These measures are not prepared in accordance with generally accepted accounting principles. The GAAP normalized earnings comparisons which we will discuss today exclude various items as detailed in the reconciliation to the most directly comparable GAAP that is included in the Form 8-K we submitted this morning, a copy of which can be accessed on our website at www.bjsinvestor.com.

We believe our non-GAAP normalized presentation provides a meaningful comparison of operating results. The 8-K, we submitted to the SEC this morning also includes an exhibit called supplemental information, which contains detailed sales information for the fourth quarter and full year ended January 30, 2010 as well as detailed earnings guidance for the first quarter and full year ending January 29, 2011.

Now, I''ll turn the call over to Frank Forward.

Frank D. Forward

Thank you, Cathy. Good morning everyone. For the fourth quarter of 2009, non-GAAP normalized net income was $51.6 million versus $51.3 million in 2008, an increase of 0.4%. Non-GAAP normalized earnings per share in 2009 were $0.95 per diluted share versus $0.89 in 2008, an increase of 6.7%. For the full year on a non-GAAP normalized basis, net income was a $135.6 million versus $126.0 million in 2008, an increase of 7.6%.

Non-GAAP normalized earnings per share in 2009 were $2.48 per diluted share versus $2.14 in 2008, an increase of 15.9%. We had two income items in Q4 that we considered unusual. First, we recorded income of $3.0 million pretax, $1.8 million post tax or $0.03 per share attributed to payments we and many other retailers, received from a class action settlement involving the credit card interchange fees charged by MasterCard and Visa.

Second, as you may recall, beginning in 2004, we established reserves related to claims against us as a result of the theft of credit card data from our systems. The legal claims arising from these alleged data breaches have been resolved and in the quarter we took into income $2.9 million or $1.7 million post tax or $0.03 per share as an adjustment to those reserves.

In summary, our fourth quarter non-GAAP normalized net income reflected strong merchandise margins and membership fee income being mostly offset by soft merchandise comp sales, increased investment costs in the business, particularly in technology and the clubs and by gasoline income that was $0.02 per share below last year. Total sales for the fourth quarter were $2.74 billion compared to $2.5 billion last year, an increase of 9.4%.

Fourth quarter comparable club sales increased by 4.6%, which included a favorable impact from gasoline sales of 2.3%. Comp merchandise sales excluding gasoline also increased by 2.3%. We estimate that the merchandise comp sales were unfavorably affected by about 1.5% from the combined impact of severe northeast storms the weekend before Christmas and a timing shift of the Super Bowl. And as I''ll cover in more detail later, we continue to be significantly impacted by deflationary pressures, particularly in perishables. However, despite these headwinds on sales, our Q4 comp traffic increased 4% which reflected continued market share gains.

We estimate the negative impacts on comparable club sales from new competition and self cannibalization was worth approximately 1.5% in the fourth quarter, which is similar to the estimated 1.4% impact in the third quarter, but higher than the 0.8% in the first half. The higher impact in the second half of 2009 reflects more self cannibalization from new BJ''s Clubs opening this year in existing markets, particularly in Metro New York and Philadelphia. I should mention that the Q4 impact is also more consistent with the levels seen in 2007 when we were opening more new clubs than we did in 2008.

During the fourth quarter versus last year, comp sales of food increased by 3.7% and general merchandise was flat. For the full year, food increased approximately 6% and general merchandise increased by approximately 1%.

In the fourth quarter, we estimate that deflation unfavorably affected our merchandise sales by about 2.5% to 3%, which is similar to the third quarter, but much higher than the 1% to 2% unfavorable impact in the second quarter and the flat to plus 2.5% in the first quarter. The increased deflation was particularly evident in perishables, which had a 12% comp increase in Q1, 6% in Q2, 4% in Q3 and 3% in Q4. However, unit sales of perishables remained strong in Q4 and more than offset price deflation. Worth mentioning at this point, is that we expect perishables deflation will begin to cycle in the second quarter of 2010.

Now, let me go through the fourth quarter income statement detail. MFI increased by 3.6% in dollars versus last year. Other revenue increased by 17.3%. Cost of sales, including buying and occupancy, was flat to last year in basis points. SG&A expense increased by seven basis points and pre-opening expense was $2.7 million versus $2.1 million last year.

Now for the details, fourth quarter MFI grew 3.6% versus last year, the largest increase of any quarter this year. This reflected the benefit from opening more new clubs as compared to 2008 and increased renewal rates in comp clubs.

For the year, the inner circle renewal rate was 83% or up about 30 basis points versus 2008. Our renewal rates for business members was about 87% or essentially flat to prior year. Fourth quarter inner circle comp new member sign-ups increased 1% versus last year and business comp club new member sign-ups increased by about 4%. So we saw some nice results in that area of the business.

Cost of sales as a percent of sales was flat to last year. The major factors being merchandise margins, excluding gasoline, were 35 basis points above last year or slightly above our guidance range of 23 to 33 basis points. This reflects a combination of favorable comparisons to last year''s high level of general merchandise markdowns, and this year we managed our inventory more conservatively for the holiday season. Partly offsetting this, Q4 margins were unfavorably affected by increased competitive pressures in perishables and consumables.

Increased sales of low margin gasoline had an unfavorable mix impact of 40 basis points versus last year. This compares to about 100 to 115 basis points favorable impact, mix impact seen in the first half of 2009 and essentially no impact in Q3. By the fourth quarter, we had cycled last year''s sharp drop in gasoline prices that occurred in October, 2008.

Buying and occupancy expense decreased five basis points versus last year, due to leveraging from sales increases including higher gasoline sales and utilities costs that were slightly below last year due to favorable electricity rates. This was partially offset -- partly offset by the impact of new club openings on occupancy expense and higher maintenance and depreciation costs.

SG&A expense increased seven basis points and increased 10.3% in dollars versus last year. This SG&A expense was reduced by $3.0 million, pretax income related to the MasterCard Visa settlement. Excluding this item, SG&A expense would have increased by 18 basis points or about 12% in dollars.

Growth in underlying SG&A expense dollars was primarily driven by increases in club payroll, medical inflation, advertising and IT road map costs. The increase in club payroll is due to a combination of the impact of new club openings and investing payroll in our comp clubs to drive perishable sales.

The investment in technology projects were worth about $0.04 per share above last year. Later on the call when I discuss guidance for next year, I''ll provide a detailed update on our technology initiatives, including the progress made in 2009, our planned initiatives for 2010 and the places where we expect to see benefits from our technology efforts. Pre-opening expense was $2.3 million this year versus $2.1 million last year or about $0.01 per share above last year.

Moving to the balance sheet, average inventory per club at the end of January increased by 4.2% versus last year. It was impacted by the timing shift of pre Super Bowl sales, which fell into February 2010. In other words, we had the inventory related to these sales on hand at the end of January 2010 versus having sold through most of it at the end of January 2009.

Excluding this timing shift, we estimate our average inventory per club increased by about 2%. The accounts payable inventory ratio at the end of January was 71.6% versus 67.9% last year. This reflects the benefits of faster inventory turns as compared to last year.

We ended the fourth quarter with cash of $58.8 million versus $51.2 million last year. In the fourth quarter, we repurchased approximately $57 million of treasury stock, bringing our total repurchases for the full year to approximately $127.5 million.

Capital expenditures for the full year came in at about $176 million as compared to our guidance range of $180 million to $200 million. We were capital self-sufficient for the year and generated cash flow from operating activities of about $298 million.

We also evaluate cash flow by looking at our non-GAAP normalized operating income plus depreciation, plus non-cash stock incentive expense. This statistic was about $364 million in 2009 or about a 7.7% increase versus the $338 million in 2008. Now, I''ll turn the call over to Laura.

Laura J. Sen

Thank you, Frank, and good morning, everyone. I am very proud of our performance for the fourth quarter and full year. We continue to see a great return on our investments aimed at improving our member experience and I intend to continue to invest in BJ''s to deliver great value, improve our market position and secure our future.

Our strong sales and earnings throughout 2009 reflected an extraordinary level of collaboration among our team members in the club, cross stocks and home office support as well as our merchandising, operations, logistics and marketing departments, who all share common goals to provide outstanding value to our members. I want to extend my heartfelt thanks to all of them for delivering BJ''s excellent 2009 results. Let me review some of the highlights of 2009. Then I''ll talk about our plans for 2010.

First, improvements in assortment and presentation contributed to comp club sales increase -- comp club sales increase of 6% in food, despite significant price deflation across a number of high volume departments. Consistently strong growth in perishables drove member frequency as well as robust sales in grocery and general merchandise.

Within perishables, the largest unit increases were in dairy, fresh bakery, frozen, prepared foods and produce. Product innovation and improvements in quality on the part of our vendors, particularly in frozen and prepared foods, were major factors in our success. New and better brands, quality and freshness helped to grow other key areas, including produce, milk, eggs and dairy.

The higher penetration of perishable foods together with strong inventory management contributed to gross margin expansion throughout the year. Sales of non-edible consumer packaged goods were remarkably strong throughout the year. We had month after month significant comp sales gains in health and beauty aids, household chemicals, paper products and pet foods. Comp sales of general merchandise increased by 1% in 2009, following a 1% increase in 2008. General merchandise departments with the strongest gains in 2009 included computers, domestics, GPS, housewares, small appliances and television.

Our investments in club operations also contributed to the improvement of our member shopping experience in 2009. We made major investments to renovate our clubs, which allowed us to significantly expand our assortment of perishable foods. We also upgraded refrigeration cases with LED lighting to provide a better presentation. In addition, we continued our program of rest room remodels and fixture upgrades throughout the chain.

We made a bigger commitment to team member training in 2009. I''m very excited about our new members first curriculum developed by our five zone Vice Presidents, because it provides our customer facing team members with the tools they need to grow the sales while creating a better experience for our members.

Career development is important to our team members and vital to our continued success. We have always preferred to grow our own leaders. So in 2009, we launched the BJ''s leadership academy, an unprecedented investment in developing our talent. So far, more than 700 of our managers have taken foundations of management, the first course in the leadership academy curriculum.

Also within operations, asset protection was another area of investment in 2009. Through the implementation of new processes and procedures, this team achieved a substantial savings in shrink. Their performance and behind the scenes effort was truly outstanding. For the year, our shrink was less than 18 basis points of sales. We believe this is the lowest shrink in retail.

In information technology, our achievements included the transition of our internal payroll system to ADP, major upgrades to our PeopleSoft HR system, initial testing of our point of sales system and the installation of a new warehouse management system at our Jacksonville, Florida cross docks.

In marketing, we significantly increased BJ''s visibility at our trade areas, through effective public relations, advertising, community involvement, charitable giving and social media outreach. We believe that these programs contributed to increased membership renewals and sign-ups.

Our member acquisition program, which runs for periods of approximately three months in the spring and fall, is our primary marketing vehicle. In 2009, we saw increases in paid memberships, as well as in spending by new members. We also saw a 20% increase in rewards memberships and we plan to continue our focus on this growing member segment in 2010.

Moving now to chain expansion, we opened seven new clubs, up from four in 2008 and we initiated major renovations in two of our oldest clubs Medford, Massachusetts and Salem, New Hampshire.

BJ''s corporate giving is aligned with our mission to support programs that primarily benefit children and families. We have consistently increased our contributions through a number of new programs and I would like to mention just a couple of them. First, to mark the occasion of BJ''s 25th anniversary, we conducted a chain-wide food donation challenge and collected more than 30 tons of grocery products in our clubs.

The collected items were donated to 45 food bank members of Feeding America, the nation''s largest hunger relief organization. In turn, BJ''s charitable foundation donated 1 million meals to the food bank partners. Recently, when the earthquake struck Haiti, we again partnered with our members to collect vital supplies at our clubs and the BJ''s charitable foundation made a $100,000 donation to Doctors Without Borders.

The success of our business model depends on our ability to use our resources efficiently and minimize waste. New environmentally aware initiatives in other channels have long been standard practice in BJ''s Wholesale Club. In 2009, we found new and better methods for recycling cardboard and other packaging. We also reduced energy consumption by harvesting daylight from skylights and installing LED lighting in our refrigeration cases.

And now let me talk about the year ahead. In 2010, we''re planning for seven to nine new clubs, including the relocation of our Johnston, Rhode Island club. Three of this year''s new locations will be 85,000 square feet and the rest will be approximately 120,000 square feet.

During the first half, in addition to the Johnston relocation, we plan to open an 85,000-square foot club in Quincy, Massachusetts and 120,000-square foot club in Waltham, Massachusetts. We will update you on the status of the remaining 2010 openings during our first quarter conference call in May.

We''re planning for five or six major club renovations compared to two last year as well as many minor club renovations, mainly to upgrade and expand refrigeration cases, which will allow us to serve our fast-growing perishable businesses. We will continue to invest in talent management and leadership training to ensure continuity of skills and corporate values, as we add clubs and to build our bench for the future.

In the area of merchandising, we expect food and consumables to be the primary drivers of our sales in 2010. Our positioning as the wholesale club of choice for families gives us an edge over our club competitors in this area because we offer wider assortments in almost every department, as well as package sizes that are more suitable to small households.

Compared to supercenters, BJ''s has the advantage of significantly better value on higher quality merchandise, particularly in meat, produce, bakery and prepared foods. And compared to supermarkets, we offer savings of approximately 30% on a basket of like items. So we will continue to build on these strengths in 2010.

I should add that we expect a small increase in general merchandise this year due in part to improved sales of summer seasonal versus last year, as well as continued growth in computers, domestics, electronics, housewares and small appliances. With that, I''ll turn the call back to Frank for more details on our outlook for fiscal 2010.

Frank D. Forward

Thanks, Laura. Our plans for 2010 reflect what we believe is a unique opportunity to invest in the business, which will put BJ''s in position to achieve sustainable long-term sales growth and market share gains. We believe the investments in club renovations, expansion in perishables capacity, club payroll and technology will help us do that. As I''ve mentioned before, we estimate that the food and drug market in the United States is a $750 billion market and we have plenty of opportunity to increase our share of that.

For the fiscal year ended January 29, 2011, we are planning GAAP earnings in the range of $2.54 to $2.64 per diluted share and net income in the range of $133.1 million to $138.1 million. Using the midpoint of our guidance range, on a non-GAAP normalized basis, the comparison would be $2.59 per share in 2010 versus $2.48 per share in 2009, an increase of about 4.4% and net income would be $135.6 million in 2010 or essentially flat to the $135.6 million in 2009.

In summary, we are planning for a 2.5% to 4.5% comp merchandise sales increase, continued strong perishable sales, continued strong growth in membership fees and increases in merchandise margin rates. We expect the merchandise margin gains to come from expense efficiencies in logistics, improved merchandise acquisition sourcing, and mix benefits from strong sales in perishables.

However, we expect the benefits from these items to be offset by increased costs from our investments in technology initiatives, club renovations and club payroll. Additionally, included in the plan is a potential pretax expense of about $4 million related to a relocation of our home office. The investments in renovations and club payroll are needed to continue to enhance our members in-club shopping experience and drive perishable sales growth, which drives member frequency and market share gains from supermarkets.

The investments in technology will help generate revenue growth and cost savings, although a significant portion of our lifecycle replacements of infrastructure needed to run daily operations. In 2010, we plan to increase our technology spending on both our road map strategic initiative and our lifecycle replacement of technology capital in general.

Going forward in our conference call, we will discuss our total technology costs without trying to distinguish between strategic versus lifecycle, because in the end, it''s the total increase in technology costs that affects our earnings growth. In 2010, we plan to spend a total amount of technology capital of about $68 million versus $58 million in 2009 and $31 million in 2008.

We are planning for total technology expense to grow by about $20 million pretax. This includes both normal payroll growth and IT department staff growth. It also includes a $7 million increase in depreciation expense.

If you were to look back over the past few years, our total technology expenses increased by about $10.5 million in 2008 and by about $7 million in 2009. During those years, however, there wasn''t much growth in technology depreciation, so one of the big step-ups in 2010 costs is much higher depreciation expense.

Now, I''ll provide an update on our technology projects and give you an idea of what benefits we are getting or expect to get from these investments. In 2009, we made good progress on most fronts. Earlier in the year, we completed the rollout of WMS, our warehouse management system.

WMS is the back bone to our logistics system, which enables us to be as good as we are in inventory management and replenishment. It also plays a big part as to why our accounts payable to inventory ratio and offside cash flow has been so strong.

Very recently, we completed the initial phase of upgrading our human resource system and converted our payroll processing to ADT. This lays the groundwork to create systems for strategic development of our team members and to offer our team members enhanced benefits.

We also completed the design and construction phases for replacing our store registers, which we expect to beta test in three stores later this year and hopefully begin a rollout soon thereafter. While obviously this is still some time away, we expect the new registers to greatly improve the member experience, provide some significant marketing opportunities and reduce maintenance costs.

We''ve also already done a considerable amount of upfront work in advance of this year''s projects. The major ones being some significant improvements in our eCommerce site, where we expect to take advantage of our membership model and create more flexibility and marketing to members.

We will also provide an improved store front to allow us to support our growth plans for this business. ECommerce sales, while still small, grew over 60% last year and we plan for another 40% growth this year. And in the clubs, we are also replacing our self check-out registers mostly for lifecycle and reduced maintenance reasons. However, these registers will also be more efficient for the clubs and provide a better member shopping experience with wider lanes and improved signature pin pass.

We will also be replacing our gasoline systems to give us more flexibility and marketing to members, improved gasoline profitability and add some security enhancements. Finally, we will be doing the upfront research on what is the right direction to go to replace our finance, merchandising and membership systems.

We have also been undertaking a transition of our mainframe data center. That project has been more difficult technically than the initial schedule anticipated and we are working on a revised plan for such services. Overall, we feel we''re making very good progress and we have a plan for the current year that balances the risks of needing to rely on those technologies versus the costs necessary to upgrade.

In 2010, we''re planning for total capital expenditures of between $215 million and $235 million versus the $176 million in 2009, with most of this increase being driven by the increased investments in technology and club renovations. We estimate that depreciation expense in 2010 will be in the range of $130 million to $136 million as compared to $113 million in 2009.

The depreciation increase is driven not only by the increased capital investments in technology and club renovations, but also by an increased level of new club openings, both in 2009 and 2010. We are planning to be capital self-sufficient again in 2010 and to generate cash flow from operating activities of about $290 million to $310 million, which will fund most of our capital spending in our planned $100 million of share repurchases.

We are planning non-GAAP normalized operating income plus depreciation and stock incentives in 2010 to be in the range of $380 million to $390 million or about a 4% to 7% increase versus the $364 million in 2009, so our ability to generate cash flow remains strong.

Now, I''ll provide some more detail about our guidance assumptions for the full year. Regarding sales, our merchandise comp sales guidance of 2.5% to 4.5% increase assumes that with the impact of cannibalization and competition will increase to about 2% to 2.5% versus the 1.5% levels seen this last quarter. This is higher than normal, but we think it is a one-year impact due to the increased cannibalization, particularly in Metro New York where we opened up a number of high volume clubs in 2009.

By 2011, we expect to cycle through this and return to around a 1.5% level. Cannibalization does unfavorably affect our comps, but our new club sales in these markets are running strong. This is consistent with our market club string strategy of infilling new clubs in existing markets to achieve local food market dominance.

We are planning for perishable sales to increase by 4.5% to 6.5%. As I mentioned earlier, we expect to cycle perishables deflation during the second quarter 2010 and we expect to continue to see strong unit growth in perishables during all of 2010.

General merchandise sales are planned to increase between 2% and 3%, which is partly driven by easier comparisons to weak seasonal sales in Q2 of 2009, which was hurt by unseasonably cold and rainy weather, but also by expectations of stronger sales in computers, electronics, domestics and housewares.

Regarding membership fee income, we are planning for MSI dollars to increase 4.5% to 5.5% in 2010 as compared to 2.4% in 2009, and 1% in 2008. This growth is driven by a combination of new club openings, increases in renewal rates and further growth in our rewards membership program.

We increased our rewards membership fee from $80 to $90 in February 2010, with only about a 5.5% penetration rewards to our total member base, we view this program as an opportunity to drive member loyalty, sales and MSI growth. Renewal rates for inner circle members are expected to increase by about 50 to 70 basis points. We are planning business renewal rates to be about flat.

Regarding gross margin, we are planning cost of sales sold to increase by about zero to 20 basis points. This assumes the mix of gasoline sales will have an unfavorable impact of about 15 to 25 basis points, but of course that depends significantly on what happens to the price of gasoline during the year.

We are planning merchandise margins, excluding gasoline, to increase 15 to 25 basis points. Driven by the mix benefit of strong perishable sales, efficiencies and cost of savings and logistics and improved acquisition and sourcing of merchandise, partly offsetting this, we expect the competitive environment to continue to be as challenging as ever.

Buying and occupancy costs are expected to increase by 10 to 20 basis points, with this increase coming from higher depreciation expense and higher occupancy costs related to new club openings. Regarding SG&A expense, in 2009, SG&A expense included expense of $11.7 million related to the wage an hour class action settlement and income of $3.0 million related to the MasterCard Visa litigation settlement.

Using the midpoint of our 2010 guidance range and excluding these items from 2009, we expect SG&A expense as a percent of sales to be slightly in basis points and up about 11% in dollars. The growth in SG&A dollars is primarily driven by higher payroll in fringe in the clubs and home office, by higher medical and workmen''s comp insurance expense and by the potential pretax expense of about $4 million related to a possible move of our home office that I mentioned earlier.

The increase in club payroll reflects both new club openings and investments in perishables payroll in the existing clubs. The growth in home office payroll is primarily driven by increased staffing in our technology department to support investment initiatives in that area.

Now, I''ll provide some comments on our assumptions related to the guidance for the first quarter of 2010. We are planning Q1 merchandise comp sales to increase between 3% and 5%. The benefit from the timing shift of the Super Bowl is estimated at 0.6%. However, in Q1, we also faced tough sales comparisons. The merchandise sales comp in Q1 of 2009 was 7.4%, the strongest of any quarter last year.

We do not expect merchandise comp sales to flow evenly during the quarter. As you saw in our sales release earlier, released today, February merchandise comp sales were up 3.9%. However, a calendar shift of the Easter holiday should help March by about 2% and hurt April by about 2.5%. Thus, we are planning merchandise comp sales at about 4.5% to 5% -- March merchandise comp sales of about 4.5% to 5% and April of about 0.5% to 1.5%.

Additionally, we expect gasoline to benefit comp sales in March and April by about 3% to 4%. Merchandise margin rates in Q1 are planned to decrease about 5 to 15 basis points, mostly due to last year''s perishables margin benefiting from higher than normal levels. In Q1 last year, as we started to see some cost deflation, both BJ''s and our competition maintained retails for a while, which created a higher margin levels.

SG&A expense dollars are planned to increase about 10% to 12%. If you adjust for the unusual items last year, this increase is consistent with our guidance for the full year. It is primarily driven by the same factors that affect the full year, namely the increases in club and home office payroll, fringe and insurance.

The Q1 technology expenses are planned to increase by about $5 million pretax. We expect the $20 million increase for the year to be roughly equal by quarter. So for the first quarter, using the midpoint of earnings guidance for 2010, on a non-GAAP normalized basis, the earnings comparison would be EPS of $0.43 per share versus $0.45 per share last year, a decrease of about 4.4%.

On the same basis, net income would be $22.5 million in 2010 versus $24.3 million in 2009, a decrease of about 7.4%. We are guiding for a decline in the first quarter net income primarily due to the difficult comparison to last year''s high merchandise margin rates and to the increases in technology costs.

As a reminder, last year''s first quarter, on a non-GAAP normalized basis, had an increase in net income of 42% as compared to about 8% for the full year of 2009. With that, I''ll turn it back over to Laura for closings remarks before we go to questions.

Laura J. Sen

Thank you, Frank. In closing, let me say that our investments in improving our member shopping experience are generating strong sales momentum. We have every reason to be confident in our guidance for 2010, since all of our leading indicators, comp clubs, traffic, membership renewals, new club performance and unit growth in perishables and consumables are all positive. And as always, we expect that we would -- with the right momentum, we could do better. Let''s go to Q&A.

Question-and-Answer Session

Operator

If you would like to ask a question today, please do so by pressing the star key followed by the digit one on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off. Once again, that is star one to ask a question. We''ll take our first question from Daniel Binder with Jefferies.

Daniel Binder – Jefferies & Company

Hi, good morning. Couple questions for you. First, on the SG&A growth, I think you said $20 million was related to increased technology spend, which I think is about $0.03 per share. I was wondering if you could just break down a little more detail with the other areas costing you on a year-over-year basis, payroll I think was the other major one, medical and workers'' comp as well?

Frank D. Forward

As we said, the total -- the $20 million is the increase on technology, about $7 million of it is depreciation, we''re not going to break out exactly all the detail, but certainly pieces in there has been sort of the normal payroll increases and we''re also staffing up the technology department, the IT department, to give us the capacity to do the initiatives that we have planned.

Club payroll continues to be increased. Again, it''s a little bit higher as a percent of sales than we''re finding and it is a little bit higher than percent of sales than last year. Again, you got to remember a good piece of that is going to be the investments to run the perishable business, because running the perishable business is -- we do get better margins, but we do have to have additional payroll to service that department, too. Additionally, as I mentioned, about -- there''s an increase in there of about $4 million related to the possible move to the home office.

Daniel Binder – Jefferies & Company

Is the -- sounded like the remodel cost follow the clubs are up year-over-year. Is that a significant part of the SG&A increase also?

Frank D. Forward

That goes into cogs, Dan.

Daniel Binder – Jefferies & Company

Okay.

Frank D. Forward

But we are going from having two remodels, which we really didn''t even complete last year. We are finishing those two and we have on the books a total of five. So it''s going to -- there will be a pretty big increase, that''s the capital side. There were also expense portions to that to get the club ready to do the renovations.

Daniel Binder – Jefferies & Company

Okay.

Frank D. Forward

That''s the plan.

Daniel Binder – Jefferies & Company

And then just a follow-up question, on merchandise strength, you cited I think electronics as one of the categories. I was just curious what that source of optimism is given some weakness in TVs recently. Is it just less deflation or is it new technology? What''s…

Laura J. Sen

The acquisition of the Apple brand to the clubs is going to be brand-new comp sales for us all year long. So we have that starting in November during the fourth quarter, but for the first three quarters of the year, it''s incremental comp sales.

Daniel Binder – Jefferies & Company

Okay. Great. Thanks.

Operator

We''ll take our next question from Chuck Cerankosky with Northcoast Research.

Chuck Cerankosky – Northcoast Research

Good morning, everyone.

Laura J. Sen

Good morning, Chuck.

Chuck Cerankosky – Northcoast Research

When we look at -- let''s get one thing out of the way. The possible move of the headquarters, can you talk a little bit about that? Is that something that if it doesn''t happen in fiscal 2010, it goes into fiscal 2011 and how far are you moving, where to, that kind of thing, and what are you looking at in terms of the risks and disruption of systems, that sort of thing?

Frank D. Forward

Well, we''re not expecting any disruption to systems. It''s going to be more around -- we see it as a big benefit to getting all of our folks. You visit us in the home office. We''re in five different buildings. We''re actually taking advantage of what we think is going to be, what is a very good home office market, I don''t want to mention the square footage rent, but it''s going to be a lot less than what we''re paying now, but there is some upfront costs for moving and some other pieces to it. We still have to sort of work on a plan for how we''re going to do this, but the location most likely is something pretty close in. It''s about 10 miles away from where we are right now.

Chuck Cerankosky – Northcoast Research

All right. Well, if you could spend less than you''re currently spending now in your headquarters, it''s great.

Frank D. Forward

Well, again, other than the upfront piece, it will be less rent.

Chuck Cerankosky – Northcoast Research

Thank you. In looking at your, your outlook for general merchandise in fiscal ‘10, how do you feel about the economy and consumers'' willingness to spend a little more on discretionary items?

Laura J. Sen

Well, the usual story pertains there and that is when we have the right item, it doesn''t really seem to matter what the economy is doing. And we have that -- last year second quarter was really a nonevent in terms of weather, for selling patio and air conditioning and so on. So we know there''s a lot of upside there. In terms of discretionary spending, I think it''s creeping along, but I don''t see any major turnaround, at least into what we''re seeing in today''s results.

However, again, February was very hard to read. All you in New York know what happened to us and I thought our comp was actually quite respectable given the headwinds of the weather and our traffic was also very respectable, given the fact that we had some clubs that were nearly, not quite, but nearly closed for a day or so.

Chuck Cerankosky – Northcoast Research

Laura, any thoughts on what you might do differently in apparel, if anything?

Laura J. Sen

Well, I think that we''ve already seen the benefit of doing a better job with having cleaner inventories and transitioning earlier. We''re always working on brand acquisition and that''s a major initiative for us.

Chuck Cerankosky – Northcoast Research

Okay. And you said your new members are spending more, or spent more in fiscal 20…

Laura J. Sen

Yes, big success story. I think that in terms of activating them to use the club, the team at the membership desk had a bunch of tools that we used and they really went out and spent quite a bit more. And I think that again is a leading indicator for us.
Chuck Cerankosky – Northcoast Research

All right. Thank you.

Operator

We''ll now move on to Deborah Weinswig with Citi.

Nathan Rich – Citigroup

Hi, this is actually Nathan Rich filling in for Deb today. Thanks for taking my question. First, just wanted to talk about the rewards membership. It seems like it''s going to be a much bigger focus for you in 2010. Just wondering what you guys are planning to do to drive conversions to the rewards membership?

Laura J. Sen

Basically the training that''s happened in the field has educated team members to identify the kinds of shoppers in clubs who would be likely to be interested in the rewards membership. We found that when you address the right message to the right member, their acceptance is surprisingly strong and we believe that getting the home office marketing with the club team members all on the same page and getting these conversions done is a success story. We know these members spend more, renew at a higher rate, so all good things can happen from this, obviously have a higher membership fee attached to all of that.

Nathan Rich – Citigroup

Great, thanks. And then you mentioned that with the new POS system, that it would bring new marketing opportunities. I was just wondering if you could share any details on those?

Frank D. Forward

Again, we are quite a few years away from it, I wanted to sort of give a litany of different things that we''re working on with the different initiatives. But certainly we think that it''s going to provide a lot of benefits, again, our technology that we have out there is 18 to 20 years old and really just sort of limits us on how we can do things. Being able to do a better job with warranties, being able to do a better job with how we do couponing, where we touch the member we think will be a better experience for the customer and a good piece of that is how we market and talk to them.

Nathan Rich – Citigroup

Great. Thanks so much and best of luck.

Operator

Moving on, we''ll go to Charles Grom with J.P. Morgan.

Charles Grom – J.P. Morgan

Hi, thanks. Just a question on EBT, your comp trend throughout the month for the past seven or eight months has been really interesting to watch as you start off strong and you end up pretty soft. When you cycle that in May, I believe, is there going to be an issue there that we should be thinking about?

Frank D. Forward

As you mentioned, Chuck, we started taking EBT in May. It has grown over time. It continues to grow. I think the phenomena that you''re talking about certainly has sort of -- from our analysis, sort of, changed some of the timing during the month, but we don''t think it''s just EBT. We also think it''s payroll timing, too. The last couple months -- well, directionally, I think you''re correct. The last few months isn''t necessarily the best month to be looking at. The storms really have played havoc to all the comp increases going from week to week. But directionally, I think you''re correct. Although again, when we started the EBT, it continued to grow, grew all through the year and continues to grow as we speak today.

Charles Grom – J.P. Morgan

Okay. Fair enough. On the $20 million investment, $7 million of which is depreciation, when you look out to 2011, is this going to be another year where we''ll see another $20 million, or is this, if you could help us out, is this sort of a peak in expenses to hit the P&L from all these initiatives?

Frank D. Forward

As we''ve talked about in the past, the capital is going to continue to be invested over time. We haven''t done -- we''re really not ready to talk about to the outside world where we are. There is a lot of pieces to it, particularly on the depreciation piece. As you probably know, the way depreciation works is you don''t actually start depreciating the capital until the assets actually come into use. So it makes projecting -- we''ve got projections, but it makes some of the projections a little difficult to do. So really again, just not ready to talk about the year afterwards, although certainly directionally we have plans to spend a lot on capital.

Charles Grom – J.P. Morgan

Okay. I hopped on a couple minutes late, so if you answered this, I apologize. Within the 9 basis points of gross profit expansion in the fourth quarter, can you break that down between merchandise margins, gas and buying and occupancy? I apologize if you answered it already.

Frank D. Forward

Yes, we did -- it was in the call, but happy to do it. Sorry. Got to look back at my notes real quickly here. Yes, how about if we get back to you and get you the numbers, is that okay?

Charles Grom – J.P. Morgan

Yes. That''s fine. Then my last question for Laura, when you talk about deflation abating by the second quarter, what are you looking at to give you the confidence to make that statement and can you give us a little bit of color sequentially in February relative to the past few months, what you''re actually seeing on some of the higher turning product categories? Are prices actually beginning to go up and is that giving you the confidence to say by 2Q, we think we''ll be there?

Laura J. Sen

Yes. We are seeing the milk, eggs, dairy products start to cycle year-over-year, and obviously most of our information and our point of view on this comes from our suppliers and what they foresee happening along with our own data on when we started to see deflation happening last year and starting to cycle through that. It''s kind of a mixed bag of how we make that judgment call, but that seems to be accurate directionally from what we''re seeing today and what we''re hearing from the manufacturers.

Charles Grom – J.P. Morgan

Okay. Thanks very much.

Operator

We''ll now take our next question from Bob Drbul with Barclays Capital.

Robert Drbul – Barclays Capital

Hi, good morning. Laura the question I have revolves around the competitive environment. Following up with Chuck''s question on deflation, how much of the competitive environment is really impeding you on the deflationary side, on the pricing side of it and sort of as you look to this sort of April-May time frame, is it just going to be in sort of the dairy pieces, or are there any categories where you do see inflation coming?

Laura J. Sen

Well, there''s a couple questions, I think, embedded in what you just asked. In terms of the competitive environment, we are seeing consistent, sort of, very sharp pricing on the highly visible items. That is -- I don''t think that''s related as much to deflation as -- inflation or deflation as people just trying to make price impression and gain traffic. So that''s sort of I think not inflation or deflationary related as much as market related and people just trying to get trips. So let''s set that aside. But in terms of the rest of your question, I''m not quite sure, if you could rephrase, it would be helpful to me.

Robert Drbul – Barclays Capital

Part of it, besides -- part of it was the competitive environment, how much of it was just pricing on sort of the input costs coming down. The deflationary costs on the input side, but also I mean the second piece of it was do you see, besides sort of milk, eggs, other categories where not only deflation is subsiding, but where you see any price increases in the next several months?

Laura J. Sen

I don''t think that we''re seeing much inflationary pricing, if that''s the question.

Robert Drbul – Barclays Capital

Yes.

Laura J. Sen

And I think what you may be referring to is last year''s environment when there was some price deflation happening. Competitors maintained their retail, particularly in fresh meat and I think we all were making a little extra margin, actually a lot of extra margin during that period. But we don''t see that happening again this year.

Robert Drbul – Barclays Capital

Got it. Thanks. I guess just sort of a bigger picture question for you, Frank. As you continue to invest in the IT systems, and I''m sort of wondering on the payback time or sort of how quickly you would expect to see the results improve and/or the benefits start to materialize from the heavy investment in the systems.

Frank D. Forward

Well to start with, just as we''ve talked about in the past, a good piece of what we''re doing really is correcting the under investment in our systems that happened over a number of years. Certainly, I think -- I''ve gotten very sensitive to it. I''ve seen an awful lot of reports of other companies over time, particularly retailers are putting a lot of money into technology. I think it''s the nature of the retail industry that tends to under invest sometimes in technology because it''s just, again, the nature of the retail industry. Put that aside, for the folks who have talked about overtime, we definitely think there will be benefits. Sometimes they are hard to quantify until they happen. Certainly some of the benefits we think we''re going to get out of the cash register systems, which again, are two or three years away really, we think are going to be real and very strong.

Certainly doing things like our self checkout registers, that''s something that our team members, our customers very much appreciate and being able to make a little bit better experience with some of the wider aisle and better pin pads. I think it''s going to make a more efficient transaction. It''s going to help the way our front line supervisors handle some of the self checkout transactions, going to make them a little bit more efficient. So there is a lot of benefits and some of them are just very difficult to quantify. But we do believe they are real. We do believe that it is needed for us to compete going forward in future years.

Robert Drbul – Barclays Capital

Great. I guess just one follow-up question on that, the massive undertaking that you have going on right now with this, is there one or two people that are leading it that have done something to this magnitude before? I guess on the level of detail…

Frank D. Forward

This is -- we call it an IT road map, but it really is a business road map. All the operators and folks within the, the leaders within the organization are a part of it and I needed to sort of co-lead each individual piece, the pieces that touch them. It''s a huge -- you''re right, it is a huge undertaking. I think we''ve learned a tremendous amount in the past year. We certainly had a few steps to the side. It certainly hasn''t been perfect as we''ve gone through this process, but the good news is I think we''re gaining a lot of experience and skill and for the projects going forward. And again, we really believe that there will be a lot of benefits, although sitting here talking to you, I don''t think I can qualify them quarter by quarter over the next few years.

Robert Drbul – Barclays Capital

Thank you very much. Good luck.

Operator

We''ll take our next question from Peter Benedict with Robert W Baird.

Peter Benedict – Robert W Baird

Thanks. Following up on some of Bob''s questions there, with the tech spend pickup, how long should we be thinking about this -- how long should we think about this going on beyond 2010 and generally, the size of the lift year-over-year should we be thinking about, is it $20 million incremental lift this year, kind of a peak situation, or should we expect similar lifts beyond 2010?

Frank D. Forward

Good question. Certainly we''ve done an awful lot of work internally. We''ve done some tentative five-year plans, as we sort of try to think about what the impact of this is going to be. We''re really just not ready to talk about quantifying what it''s going to mean on a year to year basis and for a bunch of reasons. Certainly, we need to be seeing as these systems come on, see what the benefits are. Again, as I talked about before, the timing of when some of these capital comes online affects how the depreciation expense is going to be. So, certainly right now we''re not ready to give that.

We are talking about probably continuing to have a $50 million to $60 million a year capital spend in IT, really for at least the next three or four or five years. But again, I don''t think this is any different from what the rest of the retail world is experiencing. And again, we think we''ll get a lot of benefits out of them.

Peter Benedict – Robert W Baird

Okay. Thanks. That''s helpful. Then on to the competitive pressures that Laura''s mentioning, is that coming out of the -- in the perishables area, is that coming out of the clubs, or is it more the supercenters and supermarket channel that''s doing that? And just help us, how has that played out in the market and how do you respond when you see that?

Laura J. Sen

Our pricing policies have been pretty consistent for the last three years, which is really to make sure that we are matching competition on all like items. In perishable, we''re seeing unit gains week in, week out, of almost 10%. So we know that we''re not -- and we see our share numbers growing every month, every time we measure it, virtually every category we trade. So -- and I think it''s -- the merchants are to be congratulated with those kinds of pressures to come up with some margin expansion. I think that we are increasingly important in the marketplace due to our size and we''ll continue to leverage that, and price ourselves appropriately.

Peter Benedict – Robert W Baird

Okay. And then just on to the 2010 outlook for the merchandise comps, I think 2.5% to 4.5% is the plan. Can you maybe talk to what the traffic and average ticket assumptions are behind that? And then also, just clarify the general merchandise comp plan for 2010. I thought you might have said 1% and then I thought I might have heard 2% to 3%. So just trying to clarify that. Thanks.

Frank D. Forward

The traffic should be somewhere around a 3% and the ticket should be somewhere around 0.5% to 1%, something on that order of magnitude. I''m sorry. What was the second part of your question?

Peter Benedict – Robert W Baird

What''s the outlook for general merchandise comps for 2010 versus…?

Frank D. Forward

We''re expecting something around a 1% to 2%...

Laura J. Sen

2% to 3%.

Frank D. Forward

2% to 3%.

Laura J. Sen

Yes. Last year for the full year it was 1% and then we''re looking at 2% to 3% for the, or the upcoming year.

Peter Benedict – Robert W Baird

Okay. Great. That''s helpful. Thanks so much.

Operator

We''ll now move on to Adrianne Shapira with Goldman Sachs. Please go ahead.

Adrianne Shapira – Goldman Sachs

Thank you. My first question on general -- on gross margins actually, just that 15 to 25 basis point lift is sounds like what is embedded in the 2010 guidance. Perhaps give us a sense of how you think about the merchandise margin, the mix shift, given what you''re lapping pretty tough compares. I understand you''re looking for it to be down in the first quarter, but in light of recent performance, what gives you the confidence in that margin expansion in light of what has been obviously pretty impressive results?

Laura J. Sen

Well, I think that there are some different pieces to that. Part of it is supply chain improvements and how we manage our distribution transportation, which is obviously completely invisible to the member. It''s really just a matter of finding efficiencies in what we do. Part of that is an improvement in mix, with better general merchandise sales and continued improvement in perishable sales, out stripping the other lower margin price of the business.

Yeah, warehouse management systems that we mentioned earlier and the technology investment is one way. Supply chain improvements are realized. As I said, we are bigger and bigger in terms of our clout with our major suppliers. We have wonderful relationships with them. We do a lot of joint business planning and we''re on the same page as trying to improve everybody''s business.

Adrianne Shapira – Goldman Sachs

Okay. I''m just wondering, in the fourth quarter, you hauled out intensified contenders on pricing, I''m wondering are you expecting that to moderate going forward and that also to be a source of opportunity on margins or how are you bracing for the competitive landscape as we head into 2010?

Laura J. Sen

Frankly, I think that the way I think about this is that our competitors have the same pressures that we have whether it''s technology costs or medical costs or operating costs. So, I mean, everybody''s going to be as sharp as they can on the highly visible items and everybody''s going to try to make some money on the rest of their mix. I don''t think it''s tremendously different. I think the economy has really put a very strong light on the winners and losers around who is going to get the business who is not. I would argue that we are.

Adrianne Shapira – Goldman Sachs

Okay. And then the next topic is just on the cannibalization, seems like you''re expecting a pretty significant uptick from the 1.5% run rate we''ve seen recently to about 2% to 2.5%, help and then expecting, well, one, is that what level is tolerable? And then it sounds as if post-2010 you''re expecting that to recede. Is the take away that new openings post 2010 will be in new markets versus existing markets? How should we be thinking about cannibalization in terms of what threshold is tolerable and then on a go-forward basis opening more new versus existing markets?

Frank D. Forward

How I would answer it is over the course of time, the 1.5% has been the pretty normal number during periods when we''ve been opening up clubs. So what we saw earlier last year was really sort of an abnormal low number because we weren''t opening up as many clubs. What''s a little different about very recently and what we expect to see over the next few quarters is we''re opening up some very large volume Metro New York clubs that we think is the absolute right thing to do in terms of creating market dominance in the area -- in an area where there''s a lot of opportunity because of the supermarket competition.

So again, we think we''re going to be opening up a couple more Massachusetts clubs. We''re going to be -- we just opened up a couple of Philadelphia clubs. Our modeling is just showing that it is going to be an increase this year and we expect it to drop down to more normal levels next year.

Laura J. Sen

I would chime in and say that it''s very much in keeping with our goal of becoming primary grocery destination to have a greater density of clubs. And when you look at metro New York, it''s a very underserved area and we''re seeing great success there.

Adrianne Shapira – Goldman Sachs

Thank you.

Frank D. Forward

And just to answer the other piece of the question, we do expect all the new clubs really for the next two or three years to be in all existing markets.

Operator

We''ll take our next question from David Schick with Stifel Nicolaus.

David Schick – Stifel Nicolaus

Hi, good morning. Quick question, sort of back to the questions on tech spending, is -- is this sort of -- you talked about the data warehouse. I guess put it that way, having to go back in and costing a little bit more, taking more time I think, Frank. As you go back in and this is, I guess, year two of this project and road mapping you said we''re going to kind of blend it and call it tech spending going forward. Is the nature of the product sort of like a house remodel, where you get in there and you look at everything under the surface? So now there''s just, there''s just so much more to do that that''s driving that, I think what you said was, in response to another question, $50 million or $60 million going forward? And will that be more disruptive, less disruptive, more payoff, less payoff, if I''m right and there''s more going on as you break open the walls?

Laura J. Sen

I would say that the data center project is probably the one where we have found it to be more difficult when we do open the walls up and I think we''re doing the prudent thing, stepping back, reassessing how to get that done. And I think that that will happen from time to time. Most of our systems are old enough that we could see right through the walls for the most part. This one, we just didn''t see all the technical complexity of it. We''ll get back to you when we know more.

David Schick – Stifel Nicolaus

So it''s not a -- that''s more of a one-off than there were certain things to do and now it''s a far bigger scope?

Laura J. Sen

I think that''s fair.

David Schick – Stifel Nicolaus

Okay.

Laura J. Sen

I think that''s fair. The other projects that we have, not to say they are going to be easy, but they are relatively straight forward in terms of what we know we need to install.

David Schick – Stifel Nicolaus

Right. It does seem -- and this is, I''m sure for everybody, with these types of spending, it does seem like versus sort of going into this project, there''s a larger scope now, I would say, than a couple years ago and I''m just -- yes, go ahead.

Frank D. Forward

I guess how I would answer, David, we''ve talked to an awful lot of different companies over when we look at this, and what we hear from virtually everyone of them is that by-- when they start, they start the road map project, once they get into it, it does always take longer and cost more money. But again, as I''ve mentioned before, we think the benefit -- what we get from feedback is the benefits are also more than what they expected. We think we''ll have the same experience over time.

David Schick – Stifel Nicolaus

Great. That''s helpful. Thank you.

Operator

Our next question comes from Laura Champine with Cowen Group.

Laura Champine – Cowen and Company

Good morning and thanks for breaking out some of the puts and takes on SG&A expense. I think you mentioned, Frank, that you expect roughly 11% SG&A growth. Can you cover what are the biggest increasing factors as, on a rate basis, and where do you have opportunities for cost reductions in 2010?

Frank D. Forward

Probably about 80% of what is in SG&A, just to put it in perspective, is payroll and fringe. So both payroll in the clubs, obviously, payroll in the home office. The two bigger pieces, again, as we talked about before, we''re going to continue to invest in the payroll in the clubs to drive that perishable business. We think it''s very important in terms of getting those market share gains and the -- all the new clubs that we''ve been opening, again, are pretty high volume metro New York clubs. We talked about that, because particularly in that impact on the competition cannibalization piece.

The impact on SG&A is that the payroll is at a higher level, too. When you are just looking at fewer SG&A growth, the high sales growth is driving high payroll growth. The other piece, again, as we''ve talked, is the payroll in the home office is very significant portion of it, probably two-thirds to three quarters of it, is being driven by the technology staff additions and technology payroll increases to drive our technology initiatives. And also, again, just to reiterate, we have included there that $4 million for the potential home office move.

Laura Champine – Cowen and Company

Perfect. Thank you.

Operator

Our next question comes from Robby Ohmes with Banc of America.

Robby Ohmes – Bank of America/Merrill Lynch

Thanks. Two quick questions. First, I was hoping maybe Laura, you could talk a little bit more about the smaller store format performance and I see you''re going to open three more of those this year. What''s working well there? And then maybe way into that, I don''t know, Frank, if you want to comment on this in terms of, again, the tech spending, but do you think you could see either related to tech spending or the smaller store format a more significant acceleration in your store growth either next year or the year after and how you are thinking