Good morning everyone and welcome to the BJ's Wholesale Club Incorporated Second Quarter Earnings 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 am pleased to turn the conference over to Ms. Cathy Maloney, Vice President of Investor Relations. Ms. Maloney, you may begin.

Thank you, Jim. With me this morning are Herb Zarkin, Chairman, President and CEO and Frank Forward, Chief Financial Officer. Before we begin, let me remind everyone that the discussions we are having this morning 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/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, economic, regulatory and weather conditions, competition, litigation and other factors outlined in the company's annual and quarterly reports which are on file with the SEC. 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. And with that, I'll turn the call over to Frank Forward. Frank D. Forward: Thank you, Cathy. Good morning everyone. For the second quarter ended August 4, 2007, net income was $36.3 million, up $0.55 per diluted share. Results for the second quarter of 2007 included income of $2.4 million post-tax or $0.04 per diluted share from the disposition of a lease on one of the two ProFoods Restaurants Supply locations we closed in January 2007 as well as income of $3.6 million post-tax, or $0.05 per diluted share from favorable income tax audit settlements. For the second quarter of 2006, net income was $26.4 million, up $0.39 per diluted share. Results for the second quarter of 2006 included a loss of $1.4 million post-tax or $0.02 per diluted share related to the discontinued operations of the ProFoods Restaurant Supply clubs. Adjusting for the unusual income in this year's second quarter and for the unusual expense in last year's second quarter, net income on an adjusted non-GAAP basis would have been $0.46 per diluted share for the second quarter of 2007 versus $0.41 per diluted share for the second quarter of 2006, an increase of 12.2%. This result was above the high end of our guidance of $0.39 to $0.43. The major factors affecting the quarter were improved sales momentum, particularly in perishables, strong gasoline profitability and good expense control, partially offset by some merchandise mix issues and higher bonus expense. I'll go through these factors in more detail in a moment. For the first half of 2007, net income was $49.9 million or $0.76 per diluted share. These results included post-tax income of $5.9 million or $0.09 per diluted share for the second quarter items I just described and post-tax income of $0.6 million or $0.01 per diluted share from the sale of pharmacy-related assets during the first quarter. For the first half of 2006, net income was $41.8 million or $0.62 per diluted share. These results included post-tax expense of $2.7 million or $0.04 per diluted share related to the discontinued operations of ProFoods and post-tax income of $2.1 million or $0.03 per diluted share for recoveries of House2Home bankruptcy claims. Adjusting for the unusual income and expense items in both years, net income on an adjusted non-GAAP basis would have been $0.66 per share for the first half of 2007 versus $0.63 per diluted share for the first half of 2006, an increase of 4.8%. Total sales for the second quarter increased 8.0% to $2.25 billion compared to $2.08 billion for last year's second quarter. Comparable club sales increased by 3.7% for the second quarter, including a contribution from sale of gasoline of 70 basis points and a detriment from lack of pharmacy sales versus last year worth approximately 40 basis points. Let me now next give comp club sales by major markets, including the impact from sale of gasoline. I'll begin with the region, then read across four columns, beginning with the second quarter comp, then second quarter gas impact, first half comp, then first half gasoline impact. New England 2.5 0.4 2.0 0.9 Upstate New York 4.3 0.7 3.9 1.1 Metro New York 6.0 0 4.9 0.1 Mid Atlantic 5.9 1.4 4.7 1.7 Southeast negative 0.4 1.8 0 2.1 Total Comp 3.7 0.7 3.0 1.1 For the second quarter, excluding sales of gasoline, traffic increased by approximately 1% and the average transaction increased by approximately 3%. We estimate the negative impact on comp club sales from competition in new BJ's clubs at approximately 1% to 1.5% chain wide and approximately 5% for the Southeast region, which continued to experience a higher level of competition and cannibalization than other BJ's region. During the second quarter, comp sales of food increased by 5.2% and general merchandise sales increased by approximately 8.5% versus last year. Stronger departments versus last year's second quarter included bakery, cheese, dairy, frozen foods, juices, meat, milk, office supply, produce, soda and water, storage and television. Weaker merchandise departments compared to last year included air conditioners, computer equipment, jewelry, residential furniture, tires and toys. The weakness in furniture and toys reflects the space reductions in those departments versus last year. Moving to the P&L. First, membership fee income and other increased by 7.9% in dollars over last year and reflected the continued benefit from the $5 fee increase we implemented in January 2006 as well as the 10 clubs we have opened over the last 12 months. As of the end of the second quarter, renewal rates are tracking to our plan of 87% for business members and 83% for Inner Circle members, about the same as last year. Rewards Members accounted for approximately 5% of all primary membership and approximately 13% of food and general merchandise sales, about the same level as last year. Cost of sales increased by 14 basis points and reflected a decrease in merchandise margin of approximately 17 basis points, an increase in buying and occupancy costs of approximately 7 basis points, partly offset by a favorable impact from strong gasoline margins worth approximately 10 basis points. Let me now provide some detail on cost of sales. The decrease in merchandise margin was due primarily to competitive price reductions taken earlier this year as well as an unfavorable mix of sales. While we continue to see strong growth in sales of high margin perishables, particularly produce and meat, we also experienced very strong sales in a number of below average margin departments such as televisions and books and weaker sales in a number of above average margin departments such as air conditioners and jewelry. The increase in occupancy expense was due in part to the impact of higher energy cost on our utility expense. The increase in gasoline margins versus last year was due to periods of decreasing gasoline prices during the quarter as compared to periods of increasing prices during last year's second quarter. SG&A expense decreased by 20 basis points versus last year due to the following factors: Our savings in pharmacy expense worth 14 basis points; a decrease in advertising expense worth about 9 basis points, which reflected a reduced level of spending on coupons versus last year; a favorable impact of 9 basis points from sub leasing BJ's former cross-dock in Franklin, Massachusetts. Last year in Q2, we booked an expense reserve worth 6 basis points when this facility was relocated and this year in Q2, we booked 3 basis points of income when we subleased it at a rent favorable to the reserve. A decrease of approximately 16 basis points in home office payroll, club payroll and share-based compensation expense. The home office payroll savings reflected the favorable impact of home office staff restructuring late last year. Partly offsetting these items were increased bonus accruals versus last year's unusually low level, worth about 29 basis points. Pre-opening expense for the second quarter was approximately flat to last year. Interest income was approximately $1.1 million versus $1.0 million last year. The income tax rate for the second quarter was 33.1% versus 39.0% last year. This decrease was primarily due to the favorable settlement of income tax audits mentioned earlier which benefited this year's tax rate by about 7%. Moving to the balance sheet. Average inventory per club at the end of the second quarter deceased by 2.5% versus last year. This decease was due to the benefits of our SKU reduction efforts and to not repeating last year's inventory buildup to support coupon-based marketing program. Our accounts payable inventory ratio at the end of the second quarter was 69.6% versus 65.4% last year. This improvement reflected the favorable impact on cash flow from our efforts to increase inventory turn. In the second quarter, we repurchased 1.2 million shares of common stock at an average cost of $35.52 per share for a total expenditure of approximately $43 million. In the first half, we have repurchased 1.7 million shares of common stock at an average price of $35.04 for a total of approximately $60 million. As of August 4, 2007, we had approximately $94 million remaining for share buyback under existing Board authorization. Now I will turn the call over to Herb Zarkin. Herbert J. Zarkin: Thank you, Frank, and good morning everyone. Thanks for joining us today. I am excited about the strength in our business during the second quarter. Operating results exceeded our expectations. On a non-GAAP basis, adjusting for the $0.09 of usual income, earnings per share of $0.46 were $0.03 above the high end of our guidance. This performance reflected the momentum that has been building over the first six months as a result of our initiatives to improve our mix of sales as well the success of our member acquisition and retention activities. Let's first talk about our efforts to improve the merchandise mix. During the second quarter, our focus on improving assortment and presentation drove strong comp sales increases in high margin, perishable foods, bakery, produce, meat, dairy, frozen, prepared foods, cheeses and deli. Comp sales of perishables increased by approximately 8% for the second quarter with monthly comp increases of 7.1%, 7.6% and 8.8% for May, June and July respectively. This compares to a comp sales increase of 3.2% in this year's first quarter. Another reason for our focus on perishable food is that the great values we offer give us a competitive advantage over supermarket and represents an opportunity to capture market share. To future capitalize on this opportunity, we are looking at all aspects of our fresh business, including logistics, labor, shrink, pricing and presentation. For example, in order to improve presentation and reduce salvage in perishables, Tom Gallagher, our Executive Vice President of Club Operations and his team, implemented a new labor scheduling program during the second quarter. What is significant about the program besides the benefit to our members for a better shopping experience is the involvement of club level managers in developing the program. This kind of teamwork supports our long-term goal of providing club level managers more opportunities to hone their merchandising and operational skills. Another way that we are working to improve presentation in perishables is by upgrading our refrigeration cases. This year approximately 55 clubs are slated for new and/or incremental refrigeration cases. Moving now to membership. I am very happy to report that the results of our spring member acquisition program, or MAP, as we call it, also exceeded our expectations. Since BJ's does very little advertising, the MAP program, which we run in the spring and fall of every year, is our primary marketing investment. The changes we made to this program this year generated more sales during the 15 weeks than we achieved in the 18 weeks program last year. Trial signups and conversions to paid membership increased significantly. Credit for this success goes to our Chief Marketing Officer and Executive Vice President, Ed Gillooly and his team who developed the program many years ago and who reenergized it this year. Credit also goes to BJ's team members in the field and in the clubs who reached out to help trial and first year members to appreciate all the benefits of BJ's wholesale Club membership. At this point, I would like to take a step back and review some of the highlights of the second quarter. We continue to improve our inventory levels through SKU reduction in departments where we have been over assorted, including apparel, dairy, jewelry, dry grocery and health and beauty aids. We also eliminated most of our indoor furniture SKUs. These actions in combination with reduced level of coupon promotions had a favorable impact on our accounts payable to inventory level and cash flow. In general merchandise, we saw continued strength in television. We also saw a sharp decrease in sales of air conditioners due to cooler weather versus last year. Unfortunately, both results had an unfavorable impact on our merchandise margin rate. We saw periods of falling gas prices, which resulted in higher gas income than we expected. As we have said in the past, the gasoline sales and profits can be quite volatile quarter-to-quarter, but generally even out over a longer period of time. We saw significant milk inflation and we held our milk prices longer than most of our competitors. This had a favorable impact on traffic in May and June and generated double-digit comp sales increases in milk. At the same time, we saw strong comp sales increases in other milk derived items including cheese and other dairy products. But these were not price-driven since we did not see the same inflation in these items that we saw in milk itself. Our comp sales of private brands increased by approximately 9% during the second quarter and represented a little more than 13% of total sales. Private brands are an important point of differentiation for us and another opportunity to build member loyalty. In previous calls, we have talked about BJ's commitment to provide quality and value on all private label items. Our newest private label brand, Earth's Pride Organics is a great example of this commitment. All of the Earth's Pride items are certified USDA organic. We currently offer 11 items including milk, butter, olive oil and broccoli, and the feedback from our members on these products has been wonderful. We are excited about the growth opportunities in organics and have given it top priority in our private brands group. Our strategy is to find everyday items such as the ones I just mentioned that we can convert to organic as well as to develop unique items that further differentiate us from our competition. We continued to strengthen BJ's management team during the second quarter by bringing in two seasoned executives with deep retail experience. Bob Eddy joined our finance team from PricewaterhouseCoopers where he had the opportunity to work closely with BJ's senior management team over a period of years. Bob reports to Frank Forward. Klinele Katuna [ph] joined BJ's as a Senior Vice President of Club Operations, a position held by Tom Gallagher before he became the Executive Vice President of Club Operations last January. Klinele [ph] joins us from Helzberg Diamond Shops at Berkshire Hathaway where he was a Divisional Vice President of Store Operations. Klinele [ph] reports directly to Tom Gallagher. We opened two new clubs during the quarter: one in Manchester, Connecticut and one in Haverhill, Mass, bringing the first half tie-up total to 3 out of the 5 planned new clubs for this year, 2007. And finally, as we announced this morning, we partnered with Barclays to launch a BJ's Visa Card. The new credit card comes with significant increases and benefits for our members and additional resources for marketing and advertising. We believe that BJ's Visa Card provides another enhancement and a point of differentiation while providing an incentive to our members to increase their shopping at BJ's. Moving to the second half of 2007. As I told you during our conference call last March, this year's lower level of couponing and members insight-driven marketing events will create some uneven comparisons month to month. However, it should also improve our profitability. For example, last year we ran an open house the last two weeks of August and the first week of September that we do not plan to repeat this year. That open house generated traffic and sales but had a negative impact on the bottom line. Second, our merchandise focus will shift somewhat to general merchandise, particularly in the holiday, seasonal and giftware categories, which represent a higher percentage of sales during the second half, especially during the fourth quarter. I should add that this does not diminish the importance of food in the back half. In fact, three of the year's biggest generators of food sales, Thanksgiving, Christmas and the Super Bowl, occurred during the fourth quarter. I am very excited about the new assortments and presentations that Laura Sen and her experienced team of planning. Let me give you a few highlights. First, this year the front of the club will showcase beautiful gift merchandise, including upscale European gift candies. Second, there will be more emphasis on new technology with larger flat-screen televisions, Blu-ray DVDs and players, digital photo frames and the latest in digital cameras. Third, compared to last year, our assortments in trim-a-tree, gifting and toys will be much cleaner and easier to shop. Our capital allocation plan for the second half will continue to focus on investments in our core business with the priority of maintaining higher standards of quality and presentation on our perishables. We plan to open two more clubs before the end of the year, one in Stratford, Connecticut and the other in Fort Lauderdale, Florida. And to improve our members overall shopping experience, we are making investments in fixtures, lighting and rest rooms. Our primary marketing investment for the second half will be our fall acquisition program, which will begin in mid-September and run through Christmas. Our member acquisition and retention mangers with the enthusiastic support of club level managers did an outstanding job of recruiting new members during the spring MAP program. Based on that success, we are forecasting improved results versus last year in the fall program. We plan to significantly reduce fourth quarter spending on TV and radio advertising because we did not see a return on our broadcast investment last year. And finally, I want to remind you that BJ's is planning to host an analyst and investor day on Tuesday, October 16th at Natick, Massachusetts. The program will include presentations from the EVPs of merchandising, operations and finance as well a tour of our Framingham club. For more information, please contact Cathy Maloney, Vice President of Investor Relations. With that, I will turn the call back to Frank who will talk about our outlook for the second half. Frank D. Forward: Thanks Herb. For the benefit of your P&L modeling, let me now provide you with detailed guidance for the third quarter, fourth quarter and full year. In the third quarter, we are planning on a total sales increase of approximately 6% to 7%. Our comp sales increased in the range of 1% to 3% including an unfavorable impact from gasoline sales of 50 to 150 basis points and an unfavorable impact of 40 basis points from the lack of pharmacy sales this year. On a non-GAAP basis, our merchandise comp sales excluding gas and pharmacy sales are planned in the range of 3% to 4%. Please understand that our guidance only reflects our best current estimate of the impact of gasoline sales on our comps. Given the extreme volatility of gas sales, it is difficult to predict the impact of gasoline and actual results could vary significantly from our guidance. For the month of August, we are planning comp sales in the range of negative 0.5% to positive 2%, including an unfavorable impact from gasoline sales of 150 to 250 basis points and an unfavorable impact from pharmacy of 40 basis points. On a non-GAAP basis, our merchandise comp sales excluding gas and pharmacy sales are planned in a range of 2.5% to 4%. Membership fee income and other to increase 7% to 9% in dollars. Cost of sales to increase by 27 to 37 basis points. Merchandise margins are planned to be flat to 10 basis points below last year. The impact of gasoline margins on cost of sales is planned flat to 10 basis points unfavorable to last year. Increased buying and occupancy costs make up the remaining increase in cost of sales, due primarily to higher utility expense and to higher occupancy costs from new club openings. SG&A expense to decrease 20 to 30 basis points. This decrease is primarily due to savings from home office staff reductions and pharmacy closings and to lower levels of advertising expense versus last year. Partly offsetting these factors is a planned increase in bonus accruals versus last year's unusually low level. Our guidance assumes an unfavorable impact of about $0.06 per share versus last year due to the combined effect of having lower gasoline income and higher bonus accruals than last year. Pre-opening expense of about $1.2 million versus $3.1 million last year, a savings of about $1.9 million or $0.02 per share. A tax rate of 40% to 41% versus last year's unusually low 36.9% rate which included a state income tax credit related to the relocation of our Massachusetts cross-dock facility. This tax credit was worth about $0.01 per share in Q3 last year. Interest income of $0.9 million versus $0.5 million last year and finally, diluted EPS in the range of $0.30 to $0.34 per share as compared to last year's $0.28 per share. Please note that last year's third quarter included $0.02 per share of expense related to ProFoods Restaurant Supply in discontinued operation. So, excluding the impact of ProFoods from last year, on a non-GAAP basis, our guidance is $0.30 to $0.34 per share versus an adjusted $0.30 per share last year. For the fourth quarter, which will include 13 weeks this year versus 14 weeks last year, we are planning for total sales to be in the range of flat to a decrease of 2% versus last year. The extra week last year will create an unfavorable impact worth about 7% to total sales. Our comp sales increase in the range of 1% to 3.5%, which includes an unfavorable impact from gasoline sales of 50 to 150 basis points and an unfavorable impact of 40 basis points from the lack of pharmacy sales. On a non-GAAP basis, the Q4 merchandise comp sales excluding gas and pharmacy sales are planned in the range of 3% to 4%. Membership fee income and other to increase 4% to 5% in dollars. As compared to the first half, the Q4 percent growth will moderate as we fully cycle through the benefits of last year's MFI fee increase. Cost of sales to decrease 5 to 15 basis points, which is an improvement relative to earlier quarters. This primarily reflects last year's merchandise margin being lower than normal due to the unusually high level of markdowns taken in Q4 last year as a part of our corporate restructuring. In addition, we are planning for a better mix of sales in Q4 this year with stronger results from higher margin departments such as perishables, apparels, jewelry and holiday seasonal items. SG&A expense to decrease 85 to 95 basis points due to the following factors: Last year's unusual charges of 86 basis points, which included 35 basis points of asset impairment charges, 31 basis points for pharmacy closing expense and 20 basis points for severance expense; expense savings from our home office staff reductions and pharmacy closings, worth about 13 basis points versus last year and lower levels of advertising expense and better leveraging of club payroll versus last year, worth about 20 basis points. Partly offsetting these favorable items in SG&A is a planned increase of about 30 to 40 basis points in bonus accruals versus last year's unusually low level. Pre-opening expense of $1.1 million versus $3.8 million last year due to the lower number of new club openings. A tax rate of 40% to 41% versus last year's unusually low 37.8% rate which included the remaining portion of the state income tax credit related to the relocation of our cross-dock. This tax credit was worth about $0.02 per share in Q4 of last year. Interest income of $1.5 million this year versus $0.1 million last year and finally, diluted EPS in the range of $0.70 to $0.74 per share as compared to last year's $0.18 per share. Just to remind everyone, Q4 of last year included unusual items totaling a net expense of $0.40 per share. These unusual items included income of $0.06 per share from the 53rd week, expense of $0.02 per share from ProFoods and discontinued operations and various other unusual expenses of $0.44 per share, which included the following: ProFoods' closing cost of $0.23 per share, asset impairment charges of $0.08 per share, pharmacy closing cost of $0.07 per share, severance expense of $0.04 per share and an increased credit card claim reserve of $0.02 per share. Adjusting for last year's unusual items on a non-GAAP basis, we are planning for Q4 diluted EPS of $0.70 to $0.74 per share versus $0.58 per share last year. So based on the factors I just outlined, our full year guidance is as follows. A total sales increase of 4% to 6%. This includes an unfavorable impact of 2% as a result of last year's 53rd week. Membership fee income in other dollars to increase 7% to 8%, cost of sales to increase 20 to 25 basis points, SG&A expense to decrease 45 to 50 basis points, pre-opening expense of about $4.5 million to $5 million, interest income of about $3.5 million to $4 million and an income tax rate of about 38.5%. Capital expenditures in the range of $110 million to $120 million, cash flow provided by operations less capital additions of approximately $150 million to $200 million, repurchases of BJ's stock of about $120 million, a level similar to last year and finally, assuming the above result, diluted EPS on a GAAP basis to be in the range of $1.75 to $1.85 per share versus $1.8 per share last year. This is higher than our prior guidance of $1.60 to $1.70 per share and reflects the favorable results in Q2. To aid in your understanding of our full year guidance, I will now recap how the full year as affected by the unusual items. For 2007, our full year guidance reflects $0.10 per share of income from unusual items, which includes $0.04 per share of ProFoods lease reserve adjustment, $0.05 per share from favorable income tax audit settlements and $0.01 per share of income from the sale of pharmacy assets in Q1. In 2006, the GAAP earnings per share of $1.8 includes a net expense impact of $0.42 per share from unusual items, which is composed of the following: expense of $0.43 per share for the previously mentioned items from the fourth quarter; expense of $0.08 per share from the ProFoods loss in discontinued operations; income of $0.06 per share from the 53rd week and income of $0.03 per share from the House2Home reserve adjustment. Adjusting for these unusual items in both years on a non-GAAP basis, the midpoint of our guidance would be $1.70 per share this year versus $1.50 per share last year, an increase of 13%. Let me now turn it over to Herb. Herbert J. Zarkin: An awful lot of information, Frank. Thanks. We are encouraged by the positive momentum in our business as we enter the back half of the year. We certainly are aware that there are concerns out there about the housing market, credit market and inflation. But obviously, we can't control macroeconomic factors. Our job is to do the right thing for our members by providing great value and ensuring a fun and rewarding shopping experience. If we stay focused on doing our best day in and day out, we are going to have a good year. I am often asked where there might be upside potential in our business plan. And for the second half of the year, the answer is in our sales. We are forecasting a merchandise comp sales increase of 3% to 4%. If there is an upside to that range, whatever profits come from those sales will go towards strengthening our core business and improving shareholder value. Now we'll turn it over for questions and answers.

Thank you, gentlemen. [Operator Instructions]. And we'll take our first question from Bob Drbul at Lehman Brothers.

Hi, good morning. Herbert J. Zarkin: Good morning.

Two questions. The first one is for Frank. On the P&L, there is a $2.205 million benefit. Does the $0.46 number exclude that $2.205 million number from discontinued operations or where is that and what is that? Frank D. Forward: The discontinued operations, if that's your question, that's basically the reclass of ProFoods, and we did not include that in the $0.46. I mean that's in -- when we do the comparison of $0.46 versus $0.41, we are not including ProFoods.

Okay. And on the -- as you look to August and September, can you quantify exactly how much the open house benefited the business last year, especially in traffic? Herbert J. Zarkin: We don't really quantify. We look at it and try to make judgments. We have a lot of good information on it. But based upon where we are now and what we think is going to take place, we think that we'll overcome that. And as we said, it wasn't very profitable, but we still think we can have a quarter that's in the 3% or 4% range give or take even overcoming these particular things that go on, more coupons sometimes, more open houses sometimes, television sometimes. These are all different things that go on. We did so many of them last year, they impacted us. We got through the first half pretty well with them and we think we are going to get through the second half well with them too, but we just don't give an exact number on them.

Okay, thank you. Good luck. Herbert J. Zarkin: Thank you.

We'll go next to Charles Grom at J.P. Morgan.

Hey, thanks very much. Good morning. I just want to ask Bob's question a little differently. Did the $0.03 benefit from the discontinued ops include the $0.04 benefit from the leases? And I guess net, should we look at this quarter as $0.46 EPS as opposed to the $0.43? Just a little bit confused there. Frank D. Forward: The answer to your question, I mean, yes, the benefit from leasing out that -- the Long Island city location for ProFoods is included in discontinued operations for the current year.

Okay. So the net EPS is really $0.46 then? Frank D. Forward: $0.46, right.

Okay. And then just to go a little bit higher level, just in terms of Wal-Mart, can you talk about your pack size overlap with Wal-Mart? Obviously, they are getting very price promotional. How are you planning for this in the back half of the year and I guess what are your expectations on pricing from them? Herbert J. Zarkin: Well, they have made announcements already that they've reduced about 16,000 items and they did the same last year with over 10,000 items. They carry 80-100,000 items. We don't match many of our items. Our items -- different pack sizes, different items, there is very few items that really overlap. But our basic concept is to have a value and great pricing and provide it to the member in such an attractive way. And we don't see a lot of their members -- their customers at Wal-Mart necessarily being our customers. They tend to cater a lower income customer than we do. So, they are definitely out there and we are aware of them out there obviously and we try to make sure we are as competitive as we can be in every category when we compete. But so far, we have been able to enjoy good sales and have good customer responses on all our products. So we feel pretty good with what we are doing given what Wal-Mart has said so far and done so far.

Okay, that's great. And just one more, during the quarter, you ran your free trial program a little bit differently. You outlined that in the quarter -- on the call, sorry. Can you give us some sense of your conversion rates this year versus last year? And then looking ahead, what are you going to tweak when you do the program starting in September through January? Herbert J. Zarkin: We made a tweak in the program this year by cutting down, now running the program so long. We feel that if you keep on running a program too long, it actually inhibits people from becoming members etcetera. We did talk about the fact that we were very pleased with a number of members that came -- people that came in, a number of people we converted etcetera, etcetera. But we never ever, ever give out or will give out the exact information. It's not -- it's very proprietary what we do and what achieve in terms of the conversion rates on these kind of events. This is very private information which we never give out to anybody.

But it did improve significantly, you said, I think -- Herbert J. Zarkin: Yes, we did.

Okay. Herbert J. Zarkin: We are very pleased with the performance of this MAP program this year. And actually, we are more excited about the back half program because we have -- those people that we put into place in the spring of this year that will be called MARMs [ph], the managers of -- members of acquisition and retention managers. They are now experienced, they are in place and last year we did not have those people in place in the fourth quarter. We did have during the fourth quarter last year. We had some in place in the spring this year. So we are putting up a bigger challenge out to our own team members in the clubs and our MARMs to do even a better job in the fall member acquisition retention program. So we are excited about that opportunity. We think it's a good opportunity there for us to even do better than we did in the spring.

Sounds good. Thanks.

We'll go next to Chuck Cerankosky with FTN Midwest Securities.

Good morning everyone. Good quarter. Herb, can you talk about your general merchandise categories year-to-date then and how you feel they'll improve in the second half of the year and the impact on margin as it hopefully becomes a bigger part of the sales picture, especially from the seasonal benefits? Herbert J. Zarkin: Well, as we have told everybody at the beginning of the year, our major improvement in the general merchandise categories will take place in the third quarter and the fourth quarter particularly, because that's when we could make the biggest impact on changing merchandise that was going to be coming in. And I've outlined some of the things that we are doing. We are continuing to see tremendous improvement in our television business year-over-year. We have seen the back-to-school business, any early business that we put in, whether it's ladies apparel, domestics, back-to-school supplies, those are all triggered very nicely for us now, kids apparel. We've seen all those -- and those are all starting new departments -- not new departments, but new categories brought in by new people or experienced people that are under the management of Laura and her team. So we have seen good checkouts on that kind of merchandise so far and so we are pretty excited about it. But once again, we have to wait and see what actually happens during the back half, but we think general merchandise will have a very good year this year. We are excited about it, especially in particular last year, we had everything going against us in terms of too much inventory, too many SKUs and not very good weather to sell a lot of the apparel kind of merchandise.

Thank you.

Deborah Weinswig at Citigroup, you line is open.

Good morning and congratulations on a great quarter. Herbert J. Zarkin: Thank you, Deb.

In terms of as we look back and think about the quarter, can you just talk about, Herb, what was the biggest difference in the quarter versus your original expectations? Herbert J. Zarkin: I think that we ramped up the perishable part. The whole back end of the business clicked for us. I think I told you in the call we had like a 3.2% perishable business, what we call perishable; it's really all frozen, dairy, cool, that kind of goods, the back part of the business was like 3.2 of comp, and then for the second quarter, it was in the 8%. So that ramped up awfully well, and that really was a combination of getting everybody in the organization, the logistics department, the buying organization, the field organization, everybody to do a spectacular job. Now with that said, we now it's where we want to be. I want to make it clear. We don't have all the items we want to have there, we are not set up the way we wanted to be, there is still plenty room for improvement. But we have to have that department really click, because that's the generator of people coming to our business to begin with. That's the first item on people's list when they go to a supermarket. They buy produce, they buy fresh milk, things like that, so eggs, butter, chicken. So we have to make sure that that business is really run very well. So that was very, very good for us and we are very pleased about that. And that drove some activity in other areas of our business as well. Even though we were up against a lot of couponing in the second quarter; we were able to overcome that. And we felt very, very good about the overall business up until like the middle of July. The end of July, we were cycling something we didn't have last year, and it affected us a little bit plus we had unseasonably cool weather for the rest of July, we didn't sell the air conditioners. But by and large, we are overall pleased with where we are, but not contempt to stay there. We are looking to still continue to improve.

Okay. And then can you also update us on where you are with your remodel program and just in terms of not only number of clubs, but what you are going to be changing inside the box? Herbert J. Zarkin: We've made some decisions to do a lot of things that we think are easy to do and quick to do; not just switching out different kinds of cases, refrigerated cases in the back, putting coolers in, fixing up the bathrooms and stuff like that. We are looking at a serious remodeling program. When I say serious, I am not talking about millions of dollars per club. We are looking at some of our clubs that are smaller blocks, that have old steel, that have -- that are tired, they have been around 15, 20 years, they are very good profit producers. We are not going to relocate those clubs. These are clubs we can't find another location to go to. So we'll probably spend some money in those areas, and we have a formal meeting this afternoon, as a matter of fact, to look at a couple of them right now. So we think there is -- but we'll tell you more about it in the third quarter when we get it in hand is what we are going to do. We wouldn't do anything like that. And if it were actually January, February and March, we certainly wouldn't attempt to do anything major. Switching on a case is one thing, but trying to do a major remodeling in a club is something that will take place sometime next year.

Okay. And then I believe on the last quarterly call conference call, you had talked about kind of the change in strategy in your jewelry department. Can you talk with where you are with that and do you see similar changes in any other category as well? Herbert J. Zarkin: Well, it's interesting. Our jewelry department, we were lugging a lot of inventory in the jewelry department from the beginning of the year, and we've taken some pretty aggressive markdowns on it this quarter, this past quarter, and we've seen some good sales coming out of those departments on that kind of merchandise. So we are -- I would say in another month or two or three, we might be reasonably gotten rid of most of that kind of goods. But we are seeing very good sales in the items that we are bringing in new, and that's kind of fun and it's good pick up, but it's overall the markdown of the inventory and the new sales don't give us the kind of margin that we used to have in jewelry and that we are used to having. But we expect for the fourth quarter the jewelry department to be in a fairly good position to give us the normal kind of margins that we expect to get and to have fun, exciting new items. Last year we had very high-end price points, if you recall. I talked to you about the number of watches we had in $2000, $3000, $4000, $5000, $10,000. This year, we are going to more friendlier [ph] consumer price points. We are not going to -- it's nice to have a watch that's 10,000 as well [ph], I like that watch, I want to have a $400 watch and they say, wow, I really want that watch. And so we are going to have much more of that in jewelry. Our price points will be completely different that last year. That's a big factor too.

Okay. And last question, I promise. Can you just talk about how important the MARMs were to in the MAP program success and kind of where are you in terms of them being rolled out to all the clubs? Herbert J. Zarkin: Well, the MARMs are very important to us, but equally important, and I want to make sure this is well understood, is the tremendous support that we got from all the team members in the club, the cashiers, the service desk people, the front door people. Everybody just really rallied around this program just spectacularly well and it was a total effort. Now the MARMs helped lead this, but there is no doubt that the field organization did a fabulous job in making this happen. And we had about 140 to 150 MARMs in place at the very end of the program. Our goal is to get to 160. We are being very selective as we hire for these jobs and it's a peculiar job and it requires, not a peculiar person, but a person with peculiar skills to do this kind of a job. So we'll enter the fall may be some ways in the same 150 or so MARMs, but they'll be more experienced and more important the team members that rallied around were experienced. That's why I am more excited about when the crush comes in this year from the flyers and the things, the mail, the things we do to get out to reach out to people to ask them to become members, we'll be even better off to service them and try to convert them right then and there during the season. So we are equally excited about that. We were very excited about the first half, but I think we are much more excited about the second half potential. Now that puts an awful lot of pressure on my friend Mr. Gillooly and Mr. Gallagher. But they are working with me [ph] for years and they are used to this kind of effort. So I am sure they will come through for us.

Well, good luck Mr. Gillooly and Mr. Gallagher and Herb, thanks again for a great quarter and congratulations. Herbert J. Zarkin: Thanks very much Deborah.

[Operator Instructions]. We'll go next to Christine Augustine at Bear Sterns.

Hi, thank you. Could you update us on your SKU rationalization program? You mentioned a new brand that you have for organic. So I am just kind of curious as to kind of where you are with the number of private labels. Are you happy with that level? Do you see some additional maybe new brands or new ones and then replacing other brands? And then my second question is with regard to the second half expectations for comps, how much of the comp increase is based on improving traffic comps? Thank you. Herbert J. Zarkin: First part. Number of SKUs overall is down dramatically from last year at this point in time. Our goal is to -- this is not a magic number and not a number that we necessarily will get to or not get to somewhere around 7000 SKUs on a normalized basis I think is a number that over a long period of time we'd like to get to. And we are in the low 7000 range now. So we are a few hundred SKUs on any given moment behind less than last year's several hundred; in some cases, more than some [ph] on the different times of the year. So we are pleased about that. In terms of the private label, this is an important part of our business. We had 23 or so brands when I came here. My goal was to get it down to 5 or 6. I have been vetoed by everybody on this, they all ganged up on me and they believe there is an opportunity for us to have maybe 10 or 11 private brands. And I am certainly not going to not let a brand like Earth's Pride not be put in just because arbitrarily I set a goal to have the number of private labels down. And so I backed down on that. But we are trying to find the right items to go into private label. Last year, we put a lot of items to private label that we weren't really, in hindsight, now proud of. So we discontinued a lot of those items and replaced them with better quality items under different names, and we are happy about that. So private label should continue to grow for us, but there is no mandate to make it grow by itself just for the sake of growing it. If there is a mandate to make sure that if an item is so unique and different, we can build members satisfaction with that product and differentiate ourselves nicely with that product, that's very, very important for us to do. So it's important for us.

So, Herb, I am sorry, you were at 23 brands. Where are you about now? Herbert J. Zarkin: 10 or 11.

Okay. So you are basically where you want to be? Herbert J. Zarkin: Well, not where I want to be, but that's a shame [ph]. I get vetoed -- the team tells me, Herb, you are wrong, and I've got to listen to the team. Laura Sen knows more about this particular thing than I know, and so we have a very unique -- if those who have ever seen us -- permitting to have [ph] you will see us in a couple of months I guess. We have a unique relationship here. I mean they can say anything they want, whenever they want to say it, and we all discuss it, and I backed down. Just because I say something, doesn't mean they are going to do it. If they tell me that I want to do it, you have the reasons why. That's the kind of management team we have. It's not just one person running the company; it's a team effort running this company. I mean I am responsible in the final analysis, but everybody is contributing and they are doing a great job on it. As far as the traffic is concerned, I would want to see the traffic always improve. A high successful company -- a good, successful company over a period of time with normalized gasoline situations, whatever that means, should be able to get more footsteps in the door. And our business, over a period of time, as we build more and more to the back end of the business, will indeed get more footsteps, the average transaction in theory might go down over a longer -- over a period of time. And every time I say that, we end up selling more television sets, which kind of drives the transaction up, average transaction up. But in reality, we want to see positive footsteps coming in the building and all things, member satisfaction, when they are a member, getting members in to try us, people to try us is important footsteps and more importantly, in converting them to members is a more important footstep. So it requires everything. And we'll be disappointed if we don't see in a consistent basis a movement towards getting trying to get positive footsteps into the door.

So for you to achieve the second half goal, would that require you to get kind of a 1% positive comp in traffic roughly? Herbert J. Zarkin: I don't need the 1%, depending on what we sell. If we sold all -- if jewelry sold like crazy and apparel sells fantastic, we make a lot of money on those products. If the back of the clubs all of a sudden generates 10%, 15%, 20% sales gain, traffic is not as important. But to have -- my ideal situation is not -- is to have in a perfect world, it happens once in your lifetime, the inventory is perfect, the expense control is perfect, the traffic count is perfect, the margin is perfect, everything is perfect that you get. We don't live in a perfect world. But I would judge myself probably harshly if we don't see, on a reasonable period of time, our traffic count getting up. I would feel that we'd have to find other ways to drive traffic. We have to have more traffic. That's the key of a successful business in my opinion.

Thank you.

And we'll go to Gregory Melich at Morgan Stanley.

Hi, thanks. A couple of questions. One, could you give some more color on food inflation and how that's impacted both the comps and margins in the quarter and -- Herbert J. Zarkin: Yes. The food inflation that we have seen is, as we talked about, was in corn-based products or anything that's related to corn, for feed and stuff like that. The biggest kicks we saw was skyrocketing prices of milk. We saw cheeses going up, which we talked about in the spring of the year, which we held for a long, long time. But they are not as powerful as the milk. The milk price is almost -- I won't say, they doubled, but they came close to doubling and that was very much [ph]. We haven't seen -- we've seen some inflation on some cereal products, but it's not really enough to make anything happen yet. We don't see the inflation in our business right now as impactful as it is perhaps in other businesses, so. And we are in a competitive environment, so we are -- people are reluctant to take prices up. So we have to find other ways to offset that, pack side, stuff like that. But we haven't really seen a big impact of inflation as of this moment in time.

So has it helped comps 100 basis points or something like that? Herbert J. Zarkin: Inflation, no way.

No way, okay. And on margins, it's competitive, it's maybe a little pressure, but nothing dramatic. Herbert J. Zarkin: Margin for us is how we purchase the merchandise, how we -- and what we sell it for and what we are repaying. And the biggest way that we can do better, especially in the back of the club is to make sure that the salvage is done very well. When you extra meat left over, too much meat left over, it gets salvaged. That costs -- that affects your margins. So we've made a big impact on both how we schedule people, how we ship the goods into the club, how they are presented. We can return -- rotate the inventories, do all those things; that helps our margin as well. But those are big improvement, opportunities for us to improve our margin without raising prices at all. It just actually lowers our cost and the net-net cost of goods when all is said and done.

Great. And then Frank on the CapEx, if you want to touch on this, it looks like the first half was light compared to the full year expectation. What's the -- given you got opened a bunch of clubs in the second half, what's really going to take the CapEx up? What is that spending on? Frank D. Forward: We've been -- we have plans of doing the refrigerated cases we talked about; that's going to be -- some money there is. It continues to be some just regular maintenance cap; maintenance, which will probably be around $40 million for the full year. We haven't really spent the half of that at this point in time, if you will. So that will be a little bit more back half weighted. So we are -- that $110 million to $120 million, it's still our estimate, probably going to end up being a little lower than that, but we are still maintaining that $110 million to $120 million estimate at this point in time.

Right. And then it just looks like -- and this my rough estimation here that maybe a quarter to a third of the buyback has essentially offset some options. Is that a fair run rate, would you say, going forward or was there something unusual in the quarter that made that sort of -- the shares didn't come down much? Frank D. Forward: We don't tend to look at it that way, Greg. I mean we use the excess cash to buy back stock. We bought relatively light in the first quarter, more heavier in the second quarter as the price started to drop down a little bit more opportunistic. And again, we expect to finish out at least that $120 million in the plan for the full year.

Okay. But that -- you look at it that's a gross number that you spend rather than trying to net? Frank D. Forward: Correct.

Okay. Thanks a lot. Herbert J. Zarkin: You're welcome.

Next we'll go to Adrianne Shapira at Goldman Sachs.

Thanks. Herb, you have called out the markets, and the Southeast obviously saw some worsening trends. You highlighted the cannibalization impacting that region and clearly you've talked about pulling back on growth in the area. But just talk about what other -- how the macro is impacting the region, or perhaps worsening due to what's happening in the housing market. Thanks. Herbert J. Zarkin: Well, there's no doubt that the housing market in Florida has not moved, and it's really driven by the people up north who can't sell their houses up here, the baby boomers, which really are all coming into age right now can't get down to Florida, or anybody south, because they can't sell their house up here. And that has a big impact on Florida, there is no doubt about it. And actually, as I said before, I think Florida is appreciating [ph], they had a net decline in population, God knows how many years, if ever, before. So that has an impact on it. But there has been a lot of guys that were building clubs, ourselves included, in anticipation of the continued arrival of all this population. So some of their locations that we are in in Florida and some of the locations other people in Florida, they tend to be on maybe places that are not built out yet or they tend to be right next to where we might be where there isn't a lot of population. So the combination of that has created a greater impact including our own clubs that we have filled in with has created an impact on our situation there. But the macro thing will get better sooner or later. I am not an economist, I took it in school, but the real world is things change and this will get through to. Our job, no matter what the outside situation is, is to do the best job we can do and pay attention to what we have to get done. And in doing that, we just -- we can't will it to happen, but we can make it happen a lot easier if we do just concentrate on those things we can control. So that's really where our energies are, trying to figure out what's going to happen in Florida next week, next month, six months from today in terms of the economic issue. It's not something I get any benefit of doing. I have to pay attention on how I am going to do the right thing for the members down there every singe day, get a better share of that market right now. That's what I have to do and that's what we are doing.

It makes sense, Herb. I am just wondering on, clearly, you've highlighted in Florida there are some macro issues. Have you seen any of that spill into any of the other regions more recently? Obviously, the comps have been very impressive and improving sequentially, but just any sort of cracks in the macro performance in any other regions? Herbert J. Zarkin: Well, we know here in Massachusetts nobody can sell a house either. I mean there are very people selling homes, by there [ph] and we see it in New York, here and every place. I mean it's not -- this is not an isolated issue. It's certainly up and down the East Coast. I don't attention to any great degree what's gong on in the rest of the country. But once again, there are people living in those houses, and those people are members of our club, or should be members of our club. In fact, we are going to go knock on their door and tell them they should be a member of our club. We want them to be members. We want them to have a great experience, and if we can get to them and get them into clubs, we'll get share of their wallet. And that's what we are trying to do. So once again, if it was a perfect world, we did everything perfectively, then I'd be worried about the macro. We still have plenty of opportunity to drive within our own trading areas a lot more people to our building and to expand and to become satisfied BJ's Wholesale Club members. So that's where we -- I can't emphasize enough. We have to do that for a long period of time to reach our full potential down the road.

Great. Thanks Herb. And I was just wondering on the competitive response, you had touched on Wal-Mart. But clearly, it sounds as if you are focusing on the supermarket customer. Any -- what is the response there as you've obviously sharpened your prices on some of traffic driving items? Herbert J. Zarkin: We see the supermarkets around here, particularly, trying to have some lower prices, run some 10-4 sales, do more promotional advertising, we have seen that. We have seen them take an item or two and football it around a little bit lower than we had in the past. But on balance, when a consumer comes in and buys from us, they don't have to wait for an ad, they don't have to wait for some special time. Our prices are substantially below on a mass market basket basis. So at least 30% lower on a market basket basis in the course of a shopping experience. So we feel pretty good about it. And remember, our cost structure is so much lower than the supermarket's cost structure that they have to have a higher cost, they have to have a higher cost structure to offer all the SKUs and offer all the services. But yet, we are giving the consumer a really good alternative and prices where -- supermarkets are -- and we are really doing well, and I think a lot of the supermarkets are doing much better too. I think that the whole marketplace has just picked up in terms of this kind of a thing I guess eating out. It's got much more costly, so maybe people are paying attention to the eating at home a little bit more. I can't prove that; that's just a gut reaction on my part. But we really offer a great value: 30%, 40% difference in most of the supermarkets that we are competing in.

Thank you.

Our next question will come from Krista Zuber at UBS.

-- have been answered, but just wanted to touch base on the status of full scale remodels. I think you said in the last conference call or so that you had kind of hoped to hold off on that and really until sort of 2008, 2009 time period when you, I think, became a little bit more stabilized. Could you just give us an update on that? Thank you. Herbert J. Zarkin: We will do some in 2008. I can't tell you if that'll be January, February, March. We are just beginning the process to look at it now. But there is a number of clubs we have out there that are 15, 20 years old. And I think they have an obligation -- we have an obligation to refurbish them and make them more attractive. And I think that it's the right thing for the member and it's the right thing to draw more members to them. So we'll be looking at that, and we'll report more on it in the third quarter as we get our plans all done. But that's part of the planning for next year definitely and the year thereafter. It will take more than one year to get all that done.

Thank you. Herbert J. Zarkin: Welcome.

David Schick at Stifel Nicolaus, your line is open.

Hi, good morning. Herb, you're talking about back-end operations and salvage working better and remerchandising and SKU reductions, all the stuff working better. You guys showed a mid-4s operating margin for a fairly long period of time 6, 7 years ago. Do you think an operating margin like that is achievable long term? Herbert J. Zarkin: Absolutely no. No doubt in my mind. Those days, we -- it was a whole different world out there. The competitive environment was completely different, the Wal-Mart super centers weren't as powerful as they are now, supermarkets were in disarray, there wasn't as much competitiveness in the wholesale club industry, we were spread out. That was a miracle moment where once again we had very high margin, the mix of sales, we had a lot of SKUs. It's a different model today. I don't expect us to ever to get anywhere close to those numbers again, certainly not my lifetime, and I expect to live a long, happy, healthy life, I hope. But, so that was a perfect storm going the right way, which was not perfect in the long run for the company because we, if you recall, we had to reinvent ourselves about 6, 7 years ago because we had gotten to such a high margin, we were no longer competitive. So we don't want to fall back into that trap again. If anything, Laura is taking prices down on a regular basis as we check competition, as we look at competition to see where we can reduce pricing and see how -- what we can do. We want to be more competitively priced against Costco and Sam's on a regular basis and against the supermarkets, we want to keep our reach [ph] that's very important to us. So we don't -- I don't see those kind of margins happening at all.

Okay. Second question, you talked about where you are generally on SKU reduction. How about the remerchandising, just in general, what inning do you think BJ's is in for where you saw it maybe 3, 6 months ago and where you want to be? Herbert J. Zarkin: I would say if you take the -- we'll take the general merchandise out for a moment, just talk about the food, perishable department, the edible dry groceries and the consumer product type deodorants and stuff like that, we are in pretty good shape in those areas. We are probably in the sixth or seventh inning as to where we want to go in those areas. In the merchandise for the other departments, that's -- we want to see how it comes out in the third and fourth quarter. So we are really still in the first or second inning because the goods are just starting to arrive now. We haven't seen any kind of real results other than the tip of the iceberg that came into the beginning of the season. So we are maybe in the first or second inning, or maybe in the fourth or fifth inning in some other categories.

Okay, that's helpful. Thanks. Frank D. Forward: Just as an aside, by the way, that job is never done. Even when you think you've got a perfect mix, you would still think or play with it. It's never done. It's an ongoing challenge all the time.

And lastly, we'll take a follow up from Chuck Cerankosky at FTN Midwest.

Thank you. Herb, as you have reduced the couponing this year, are there still any commitments left based on deals you struck with vendors, say, late last year or early this year? And as you reduced the commitments, are you seeing vendors respond to your expectation of just lower debt net cost to you? Herbert J. Zarkin: We have an ongoing relationship with most of our vendors, and they are very supportive. They may not always agree upfront as to what we were trying to do, but they understand that we have a good dialogue back and forth. We come to an agreement as to what -- how we want to run our business, how we want to market our business, what's important to us. And most of the vendor, or suppliers I would like to call them rather than vendors, are very, very supportive of what we want. And they end up getting us to whatever the right price is supposed to be based upon their rules and regulations that they have to follow as well. So we haven't seen any difficulty. They go through some bumps too; less coupons meaning less sales. Sometimes, we built up inventories last year, so they may be getting less sales with some of their products right now. But in the long run, it will all even out and they'll be happier running their business with us and we'll be happy running our business with them.

Thank you. Herbert J. Zarkin: Thank you. If there is no more further questions, thank you very, very much and we'll look forward to talking to you soon. I'll see you at the analyst meeting.

This does conclude today's earnings conference and we thank you all for your participation. You may now disconnect your lines and have a great day.