BJ's Wholesale Club reported a smaller-than-expected decline in quarterly profit on Wednesday and raised its full-year profit outlook, helped by improved margins and expense controls.

But the No 3 U.S. warehouse club operator cut its sales outlook for the year, citing falling prices for staple food items like dairy and meat, and expectations that customer spending will remain restrained through the Christmas season.

Cowen & Co analyst Laura Champine said BJ's lowered sales forecast was to be expected. Grocery store chains like Safeway Inc and Supervalu Inc have said in recent weeks that deflation in food is taking a toll on sales.

(BJ's) customers are still buying food, but not as much on the discretionary items and there's no sign really of a pickup there, Champine said.

BJ's shares rose 0.2 percent in morning trading, and Champine said an increase in discretionary spending would be needed to drive shares much higher.

BJ's profit for the second quarter that ended August 1 fell to $35.1 million, or 64 cents per share, from $36.5 million, or 61 cents per share, a year earlier.

Analysts on average had been expecting earnings of 62 cents per share, according to Reuters Estimates.

As the recession pressures household budgets, warehouse clubs such as Costco Wholesale Corp , Wal-Mart Stores Inc's Sam's Club and BJ's Wholesale are attracting shoppers seeking low prices on staple items, like bread and paper towels.

People pay an annual fee to shop in the clubs and receive discounts on everything from cartons of fresh fruit to flat panel TVs and gasoline for their cars.

But the clubs are facing greater challenges compared with a year ago when high gas prices and food inflation spurred their sales.

BJ's second-quarter sales fell 5.2 percent to $2.5 billion, while sales at its clubs open at least a year, or same-store sales, dropped 7.7 percent.

Sales were strong in fresh meat, frozen food, household cleaners, pet food and paper products, but weaker in clothing, jewelry, and lawn and garden merchandise, it said.

The consumer is still very robust when it comes to food and consumables and very cautious when it comes to everything else, CEO Laura Sen said on a conference call.

Sales in the quarter were hurt by cold, wet weather in the Northeast, where many of its clubs are located, but BJ's said sales in the first two weeks of August have improved.

Given deflation and the moderating sales trends it saw in the second quarter, BJ's said it has become more cautious on its sales view for the remainder of the year.

It now expects merchandise same-store sales in the second half to rise 3.5 percent to 5.5 percent, compared with its previous forecast for a gain of 5 to 7 percent.

For the third quarter, it forecast earnings of 43 to 47 cents per share, while analysts are expecting 44 cents. For the fourth quarter, it expects earnings of 96 cents to $1 per share, compared with Wall Street's view of 97 cents per share.

For the full year ending January 30, 2010, it expects net sales to rise 0.5 percent to 1.5 percent, compared with an earlier view for a gain of 0.6 percent to 2.6 percent. It forecast full-year earnings of $2.46 to $2.56 a share, up from its prior outlook of about $2.44 to $2.54 a share.

Shares were up 7 cents at $31.39 in late morning New York Stock Exchange trading.

(Additional reporting by Dhanya Skariachan in Bangalore; Editing by Maureen Bavdek and Matthew Lewis)

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