By Nicole Maestri

Shares of BJ's, the No. 3 warehouse club operator, had gained 20 percent this year before reporting second-quarter results. Investors had bet its sales would outperform most retailers as shoppers seek bargains in a weak economy.

Company executives said on Wednesday they expect to have to raise prices to offset inflationary pressures for food, fuel and other staple items.

"No rational retailer can accept these kinds of increases and expect to make a profit," said Chief Executive Herb Zarkin on a conference call with analysts. "It's just not going to work."

BJ's profit for the second quarter ended August 2 rose to $36.5 million, or 61 cents per share, from $36.3 million, or 55 cents per share, a year earlier.

Excluding a benefit of 3 cents per share for state income tax audit settlements, BJ's earned 58 cents per share in the latest quarter. Analysts, on average, had been expecting it to earn 57 cents per share, according to Reuters Estimates.

BJ's said its second-quarter earnings beat its own prior expectation by 6 cents per share, helped by the tax settlements and better-than-expected operations.

As a result, BJ's now expects full-year earnings per share of $2.10 to $2.20, up from a previous forecast of $2.04 to $2.14 per share. Analysts, on average, had been expecting it to earn $2.14 per share.

But for the second half of the year, the company said it was holding to previous forecasts and was cautious about the fourth quarter.

"The uncertainties out there give us less visibility into the second half than we would like, particularly in Q4, our largest profit quarter of the year," Chief Financial Officer Frank Forward said on the conference call.

SAME-STORE SALES JUMP

While investors may have expected stronger results and a better forecast, the retailer is well positioned to cater to shoppers who are looking for ways to save money on food and basic items, like paper towels, according to Stifel Nicolaus retail analyst David Schick.

"The stock had run a lot and expectations had gotten built in," he said.

Shoppers pay an annual fee to shop at warehouse clubs like BJ's, Costco Wholesale Corp and Wal-Mart Stores Inc's Sam's Club to get discounts on everything from fresh food to bulk-sized packages of toothpaste.

Many warehouse club locations also operate gas stations, which typically sell fuel cheaper than local competitors. The gas stations have been a lure to shoppers in recent months, as they have looked to offset surging prices at the pump.

BJ's quarterly net sales, which exclude membership fee revenue, rose 17.9 percent to $2.65 billion from $2.25 billion. Sales at clubs open at least a year, a key retail gauge known as same-store sales, jumped 15.5 percent, including an 8.1 percent contribution from sales of gasoline.

Membership fees and other revenue rose to $48.1 million from $46.8 million.

Excluding sales of gasoline, BJ's said customer traffic in its stores rose 5 percent.

For the third quarter, BJ's expects earnings per share of 36 cents to 40 cents, and fourth-quarter earnings per share of 86 cents to 90 cents. Analysts had expected earnings of 36 cents to 43 cents for the third quarter and 84 cents to 94 cents for the fourth quarter.

BJ's also said its board authorized an additional $200 million for share repurchases.

BJ shares dropped $2.78 to $37.90 on the New York Stock Exchange..

(Reporting by Nicole Maestri; Editing by Gerald E. McCormick, Dave Zimmerman)