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2: EX-31.1 Certification -- §302 - SOA'02 HTML 21K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 21K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 18K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 18K
11: R1 Cover HTML 69K
12: R2 Condensed Consolidated Balance Sheets HTML 118K
13: R3 Condensed Consolidated Balance Sheets HTML 35K
(Parentheticals)
14: R4 Condensed Consolidated Statements of Operations HTML 126K
and Comprehensive Income
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and Comprehensive Income (Parentheticals)
16: R6 Condensed Consolidated Statements of Stockholders' HTML 68K
Equity
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18: R8 Description of Business HTML 20K
19: R9 Summary of Significant Accounting Policies HTML 21K
20: R10 Revenue Recognition HTML 39K
21: R11 Debt and Credit Arrangements HTML 43K
22: R12 Commitments and Contingencies HTML 20K
23: R13 Stock Incentive Plans HTML 49K
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28: R18 Derivative Financial Instruments HTML 21K
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30: R20 Summary of Significant Accounting Policies HTML 23K
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(Exact name of registrant as specified in its charter)
_______________________________
iDelaware
i45-2936287
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i350 Campus Drive
iMarlborough, iMassachusetts
i01752
(Address
of principal executive offices)
(Zip Code)
(i774) i512-7400
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
iCommon Stock, par value $0.01
iBJ
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth Company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No i☒
As of May 19, 2023, the registrant had i134,369,427 shares of common stock, $0.01 par value per share, outstanding.
BJ’s
Wholesale Club®, BJ’s®, Wellsley Farms®, Berkley Jensen®, My BJ’s Perks®, BJ’s Easy Renewal®, BJ’s Gas®, BJ's One®, BJ's One+®, BJ’s Perks Elite®, BJ’s Perks Plus®, Inner Circle®, Same-Day-Select®, ExpressPay® and BJ’s Perks Rewards® are all registered trademarks of BJ’s Wholesale
Club, Inc. Other trademarks, tradenames and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. We do not intend our use or display of those other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties. Solely for convenience, trademarks, trade names and service marks referred to in this Quarterly Report on Form 10-Q may appear without the ®, ™ or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks.
DEFINED
TERMS
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires:
• "The Company", "BJ’s", "we", "us" and "our" mean BJ’s Wholesale Club Holdings, Inc. and, unless the context otherwise requires, its consolidated subsidiaries;
• "ABL Facility" means the Company’s senior secured asset based revolving credit and term facility that was terminated on July 28, 2022;
•"ABL Revolving Facility"
means the Company's revolving credit facility entered into on July 28, 2022;
•"ABL Revolving Commitment" means the aggregate committed amount of $1.2 billion under the ABL Revolving Facility;
• "First Lien Term Loan" means the Company’s senior secured first lien term loan facility that was amended on January 5, 2023;
•"Third Amendment" means the Company’s third amendment to the senior secured former first lien term
loan facility that was entered into on January 5, 2023;
• "fiscal year 2023" means the 53 weeks ending February 3, 2024;
• "GAAP" means generally accepted accounting principles in the United States of America;
• "ESPP" means the Company's Employee Stock Purchase Plan; and
• "the Acquisition" means the Company's acquisition
of the assets and operations of four distribution centers and the related private transportation fleet from Burris Logistics, LLC on May 2, 2022.
Preferred stock; par value $iii0.01//;
iii5,000//
shares authorized, and iiino//
shares issued
i—
i—
i—
Common
stock, par value $iii0.01//; iii300,000// shares
authorized, i147,380 shares issued and i134,376 outstanding at April 29, 2023; i146,347 shares
issued and i133,903 outstanding at January 28, 2023; and i145,941 shares issued and i135,195 outstanding
at April 30, 2022
Adjustments
to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
i54,190
i47,109
Amortization
of debt issuance costs and accretion of original issue discount
i324
i832
Stock-based
compensation expense
i10,007
i9,115
Deferred
income tax provision
i14,445
i6,299
Changes
in operating leases and other non-cash items
(i750)
i29,892
Increase
(decrease) in cash due to changes in:
Accounts receivable
i21,871
(i36,454)
Merchandise
inventories
(i153,455)
(i219,163)
Prepaid
expenses and other current assets
(i18,016)
(i3,566)
Other
assets
(i2,933)
i587
Accounts
payable
i85,979
i154,319
Accrued
expenses and other current liabilities
(i4,977)
(i58,780)
Other
non-current liabilities
(i3,630)
i1,668
Net
cash provided by operating activities
i119,132
i44,308
CASH
FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment, net of disposals
(i92,084)
(i90,533)
Net
cash used in investing activities
(i92,084)
(i90,533)
CASH
FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving lines of credit
i149,000
i115,000
Payments
on revolving lines of credit
(i154,000)
(i35,000)
Net
cash received from stock option exercises
i1,675
i2,306
Acquisition
of treasury stock
(i42,369)
(i51,342)
Proceeds
from financing obligations
i9,104
i8,072
Other
financing activities
(i986)
(i295)
Net
cash (used in) provided by financing activities
(i37,576)
i38,741
Net
decrease in cash and cash equivalents
(i10,528)
(i7,484)
Cash
and cash equivalents at beginning of period
i33,915
i45,436
Cash
and cash equivalents at end of period
$
i23,387
$
i37,952
Supplemental
cash flow information:
Interest paid
$
i14,540
$
i6,993
Income
taxes paid
i11,875
i10,925
Operating
lease liabilities arising from obtaining right-of-use assets
i26,189
i123,339
Non-cash
financing and investing activities:
Property additions included in accrued expenses
i24,754
i23,974
The
accompanying notes are an integral part of the condensed consolidated financial statements.
7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. iDescription
of Business
BJ’s Wholesale Club Holdings, Inc. and its wholly-owned subsidiaries is a leading warehouse club operator concentrated primarily in the eastern half of the United States. As of April 29, 2023, the Company operated i237 warehouse clubs and i167 gas
stations in i18 states.
The Company follows and reports based on the National Retail Federation’s fiscal calendar. The thirteen week periods ended April 29, 2023 and April 30, 2022 are referred to herein as the "first quarter of fiscal year 2023" and the "first quarter of fiscal year 2022," respectively.
2. iSummary
of Significant Accounting Policies
i
Basis of Presentation
The accompanying interim financial statements of BJ’s Wholesale Club Holdings, Inc. are unaudited and, in the opinion of management, reflect all normal recurring adjustments considered necessary for a fair statement of the Company’s financial statements in accordance with GAAP.
The condensed consolidated balance sheet as of January 28,
2023 is derived from the audited consolidated balance sheet as of that date. The unaudited results of operations for the first quarter of fiscal year 2023 are not necessarily indicative of future results or results to be expected for fiscal year 2023. The Company’s business, in common with the business of retailers generally, is subject to seasonal influences. The Company’s sales and operating income have typically been highest in the fourth quarter holiday season and lowest in the first quarter of each fiscal year.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year 2022, as filed
with the Securities and Exchange Commission on March 16, 2023.
i
Recent Accounting Pronouncements
The Company’s accounting policies are set forth in the audited financial statements included in the Company’s Annual Report on Form 10-K for fiscal year 2022. There have been no material changes to
these accounting policies and no accounting pronouncements adopted that had a material impact on the Company’s financial statements.
3. iRevenue Recognition
Performance Obligations
The
Company identifies each distinct performance obligation to transfer goods (or bundle of goods) or services. The Company recognizes revenue as it satisfies a performance obligation by transferring control of the goods or services to the customer.
Net sales—The Company recognizes net sales at clubs and gas stations when the customer takes possession of the goods and tenders payment. Sales tax is recorded as a liability at the point of sale. Revenue is recorded at the point of sale based on the transaction price on the shelf sign, net of any applicable discounts, sales tax and expected refunds. For e-commerce sales, the Company recognizes sales when control of the merchandise
is transferred to the customer, which is typically at the time of shipment. iThe following table summarizes the Company’s point of sale transactions at clubs and gas stations, excluding sales tax, as a percentage of both net sales and total revenues:
Point of sale transactions, excluding sales tax, as a percent of net sales
i91%
i92%
Point
of sale transactions, excluding sales tax, as a percent of total revenues
i89%
i90%
8
BJ’s
Perks Rewards and My BJ’s Perks programs—The Company’s BJ’s Perks Rewards membership program which was in place in fiscal year 2022, allowed participating members to earn i2% cash back, up to a maximum of $i500 per year,
on qualified purchases made at BJ’s. The Company also offered a co-branded credit card program, the My BJ’s Perks program, which allowed My BJ’s Perks Mastercard credit card holders to earn up to i5% cash back on eligible purchases made at BJ’s and up to i2% cash
back on purchases made with the card outside of BJ’s. Cash back was in the form of electronic awards issued in $i10 increments that could be used online or in-club at the register and expired isix months
from the date issued.
In the first quarter of fiscal year 2023, the Company rebranded the rewards program. The former BJ's Perks Rewards membership program is now the Club+ program, whereby participating members earn i2% cash back, up to a maximum of $i500
per year, on qualified purchases made at BJs and a i5 cent-per-gallon discount at BJ's gas locations. The Company's co-branded credit card program is now the BJ's One and BJ's One+ program, which allows cardholders with the opportunity to earn up to i5%
cash back on purchases made in BJ's clubs or online at bjs.com and up to a i15 cent-per-gallon discount on gasoline when paying with a BJ's One or BJ's One+ Mastercard at our BJ’s gas locations. Cash back is in the form of electronic awards issued to each member monthly on their credit card statement date. Earned rewards under these two programs do not expire.
Earned awards may be redeemed on future purchases made at the Company.
The Company recognizes revenue for earned awards when customers redeem such awards as part of a purchase at one of the Company’s clubs or the Company’s website. The Company accounts for these transactions as multiple element arrangements and allocates the transaction price to separate performance obligations using their relative fair values. The Company includes the fair value of award dollars earned in deferred revenue at
the time the award dollars are earned. This liability was $i36.6 million at April 29, 2023, $i34.7 million at January 28,
2023 and $i32.5 million at April 30, 2022 and is included in accrued expenses and other current liabilities in the condensed consolidated balance sheets. In the first quarter of fiscal year 2023, the Company recognized $i34.7
million of revenue that was included in the deferred liability as of January 28, 2023. In the first quarter of fiscal year 2022, the Company recognized $i30.3 million that was included in the deferred liability as of January 29, 2022.
Royalty revenue received in connection with the My BJ’s Perks
and the BJ's One and BJ's One+ co-brand credit card program is variable consideration and is considered deferred until the card holder makes a purchase. The Company’s total deferred royalty revenue related to the outstanding My BJ's Perks and BJ's One and BJ's One+ credit card program was $i4.1 million, $i17.9
million, and $i29.2 million at April 29, 2023, January 28, 2023, and April 30, 2022, respectively, and is included in accrued expenses and other current liabilities in the condensed consolidated balance sheets. The timing of revenue recognition of these awards is driven by actual customer activities, such as redemptions and expirations. As of April 29, 2023,
the Company expects to recognize $i4.1 million of the deferred revenue in fiscal year 2023.
In connection with the new co-brand credit card program, the Company has deferred approximately $i14.7 million
for funds received related to marketing and other integration costs as of April 29, 2023. The Company expects to recognize approximately $i6.3 million in fiscal year 2023, which is included in accrued expenses and other current liabilities. The Company expects to recognize approximately $i8.4
million thereafter, of which $i1.1 million is included in accrued expenses and other current liabilities and $i7.3 million is included in
other non-current liabilities in the condensed consolidated balance sheets.
Membership—The Company charges a membership fee to its customers, which allows customers to shop in the Company’s clubs, shop on the Company’s website, and purchase gasoline at the Company’s gas stations for the duration of the membership, which is generally i12
months. As the Company has the obligation to provide access to its clubs, website, and gas stations for the duration of the membership term, the Company recognizes membership fees on a straight-line basis over the life of the membership. The Company’s deferred revenue related to membership fees was $i192.7
million, $i183.7 million and $i185.2 million at April 29, 2023, January 28,
2023, and April 30, 2022, respectively, and is included in accrued expenses and other current liabilities in the condensed consolidated balance sheets.
Gift Card Programs—The Company sells BJ’s gift cards that allow customers to redeem the card for future purchases equal to the amount of the original purchase price of the gift card. Revenue from gift card sales is recognized upon redemption of the gift card because the Company’s performance obligation to redeem the gift card for merchandise is satisfied when the gift card is redeemed. Deferred revenue related to gift cards was $i13.1
million, $i14.1 million and $i11.2 million at April 29, 2023, January 28,
2023, and April 30, 2022, respectively. The Company recognized $i11.6 million and $i10.5
million of revenue from gift card redemptions in the first quarters of fiscal year 2023 and fiscal year 2022, respectively.
Disaggregation of Revenue
The Company’s club retail operations, which include retail club and other sales procured from our clubs and distribution centers, represent substantially all of its consolidated total revenues, and are the Company’s only reportable segment. All the
9
Company’s identifiable assets are in the United States. The
Company does not have significant sales outside the United States, nor does any customer represent more than 10% of total revenues for any period presented.
i
The following table summarizes the Company’s percentage of net sales disaggregated by category:
Unamortized
original issue discount and debt issuance costs
(i1,996)
(i2,120)
(i2,933)
Less:
Short-term debt
(i400,000)
(i405,000)
(i80,000)
Long-term
debt
$
i448,004
$
i447,880
$
i748,987
/
ABL
Revolving Facility
On July 28, 2022, the Company entered into the ABL Revolving Facility with an ABL Revolving Commitment of $i1.2 billion pursuant to that certain credit agreement (the "Credit Agreement") with Bank of America, N.A., as administrative agent and collateral agent, and the other lenders party thereto. The maturity date of the ABL Revolving
Facility is July 28, 2027. In connection with this transaction, the Company extinguished the ABL Facility.
Revolving loans under the ABL Revolving Facility are available in an aggregate amount equal to the lesser of the aggregate ABL Revolving Commitment or a borrowing base based on the value of certain inventory, accounts and credit card receivables, subject to specified advance rebates and reserves as set forth in the Credit Agreement. Indebtedness under the ABL Revolving Facility is secured by substantially all of the assets (other than real estate) of the Company and its subsidiaries, subject to customary exceptions.
As amended, interest on the ABL Revolving Facility is calculated either at the Secured Overnight Financing Rate ("SOFR") plus a range of i100 to i125 basis
points or a base rate plus i0 to i25 basis points, based on excess availability. The
Company will also pay an unused commitment fee of i20 basis points per annum on the unused ABL Revolving Commitment. Each borrowing is for a period of one, three, or isix
months, as selected by the Company, or for such other period that is itwelve months or less requested by the Company and consented to by the lenders and administrative agent.
The ABL Revolving Facility places certain restrictions (i.e., covenants) upon the Borrower’s, and its subsidiaries’, ability to, among other things, incur additional indebtedness,
pay dividends and make certain loans, investments, and divestitures. The ABL Revolving Facility contains customary events of default (including payment defaults, cross-defaults to certain of our other
10
indebtedness, breach of representations and covenants and change of control). The occurrence of an event of default under the ABL Revolving Facility would permit the lenders to accelerate the indebtedness and terminate the ABL Revolving Facility.
At January 28, 2023, there was $i405.0
million outstanding in loans under the ABL Revolving Facility and $i11.5 million in outstanding letters of credit. The interest rate on the revolving credit facility was i5.63%
and unused capacity was $i535.2 million.
As of April 29, 2023, there was $i400.0
million outstanding in loans under the ABL Revolving Facility and $i11.8 million in outstanding letters of credit. The interest rate on the ABL Revolving Facility was i6.08%
and unused capacity was $i645.0 million.
ABL Facility - Former Credit Agreement
The ABL Revolving Facility replaced the ABL Facility, which was comprised of a $i950.0
million revolving credit facility and a $i50.0 million term loan. The ABL Facility was secured on a senior basis by certain "liquid assets" of the Company and secured on a junior basis by certain "fixed assets" of the Company. The $i50.0
million term loan payment terms were restricted in that the term loan could not be repaid unless all loans outstanding under the ABL Facility are repaid, and once repaid, cannot be re-borrowed. The availability under the $i950.0 million revolving credit facility was restricted based on eligible monthly merchandise inventories and receivables as defined in the facility agreement. Interest on the revolving credit facility was calculated either at the London Interbank Offered Rate ("LIBOR") plus a range of i125 to i175
basis points or a base rate plus a range of i25 to i75 basis points; and interest on the term loan was calculated at LIBOR plus a range of i200 to i250
basis points or a base rate plus a range of i100 to i150 basis points, in all cases based on excess availability. The applicable spread of LIBOR and base rate
loans at all levels of excess availability stepped down by i12.5 basis points upon achieving total net leverage of i3.00
to 1.00. The ABL Facility also provided a sub-facility for issuance of letters of credit subject to certain fees defined in the ABL Facility agreement. The ABL Facility was subject to various commitment fees during the term of the facility based on utilization of the revolving credit facility and was scheduled to mature on August 17, 2023.
As of April 30, 2022, there was $i130.0 million outstanding in loans under the ABL Facility
and $i10.9 million in outstanding letters of credit. The interest rate on the ABL Facility was i1.89%, the interest rate of the term loan was i2.45%,
and unused capacity was $i859.1 million.
First Lien Term Loan
On January 5, 2023, the Company entered into an amendment (the “Third Amendment”) to the First Lien Term Loan Credit Agreement, with Nomura Corporate Funding Americas, LLC, as administrative agent and collateral agent and the lenders party
thereto. BofA Securities, Inc., Deutsche Bank Securities Inc., and Wells Fargo Securities LLC acted as joint lead arrangers and joint bookrunners of the Third Amendment.
The Third Amendment, among other things, extended the maturity date with respect to the term loans outstanding under the First Lien Term Loan Credit Agreement from February 3, 2024 to February 3, 2027. In addition, the Third Amendment transitioned the interest rate, immediately, from LIBOR to SOFR and changed the applicable margin from LIBOR plus i200
– i225 basis points per annum to SOFR plus i275 basis points per annum.
Voluntary prepayments are permitted. Principal
payments must be made on the First Lien Term Loan pursuant to an annual excess cash flow calculation when the net leverage ratio exceeds i3.50 to 1.00. As of April 29, 2023, the Company's net leverage ratio did not exceed i3.50
to 1.00, and therefore, no incremental principal payments were required. The First Lien Term Loan is subject to certain affirmative and negative covenants but no financial covenants. It is secured on a senior basis by certain "fixed assets" of the Company and on a junior basis by certain "liquid" assets of the Company.
The Company is involved in various legal proceedings that are typical of a retail business. In accordance with applicable accounting guidance, an accrual will be established for legal proceedings if and when
those matters present loss contingencies
11
that are both probable and estimable. The Company does not believe the resolution of any current proceedings will result in a material loss to the condensed consolidated financial statements.
6. iStock
Incentive Plans
On June 13, 2018, the Company’s board of directors adopted, and its stockholders approved, the BJ’s Wholesale Club Holdings, Inc. 2018 Incentive Award Plan (the "2018 Plan"). The 2018 Plan provides for the grant of stock options, restricted stock, dividend equivalents, stock payments, restricted stock units, performance shares, other incentive awards, stock appreciation rights, and cash awards. Prior to the adoption of the 2018 Plan, the Company granted stock-based compensation to employees and non-employee directors under the Fourth Amended and Restated 2011 Stock Option Plan of BJ’s Wholesale Club, Inc. (f/k/a Beacon Holding Inc.), as amended (the "2011 Plan") and the 2012 Director
Stock Option Plan of BJ’s Wholesale Club Holdings, Inc. (f/k/a Beacon Holding, Inc.), as amended (the "2012 Director Plan"). No further grants will be made under the 2011 Plan or the 2012 Director Plan.
The 2018 Plan authorizes the issuance of i13,148,058 shares, including i985,369 shares
that were reserved but not issued under the 2011 Plan and the 2012 Director Plan. If an award under the 2018 Plan, the 2011 Plan, or the 2012 Director Plan is forfeited, expires, or is settled for cash, any shares subject to such award may, to the extent of such forfeiture, expiration, or cash settlement, be used again for new grants under the 2018 Plan. Additionally, shares tendered or withheld to satisfy grant or exercise price, or tax withholding obligations associated with an award under the 2018 Plan, the 2011 Plan, or the 2012 Director Plan will be added to the shares authorized for grant under the 2018 Plan. The following shares may not be used again for grant under the 2018 Plan: (1) shares subject to a stock appreciation right ("SAR") that are not issued in connection with the stock settlement of the SAR upon its exercise and (2) shares purchased on the open market with the cash proceeds from the exercise of options under the 2018 Plan, 2011 Plan, or 2012 Director
Plan. As of April 29, 2023, there were i4,859,186 shares available for future issuance under the 2018 Plan.
On April 16, 2021, the Compensation Committee approved a modification to the equity awards agreements under the 2011 Plan, 2012 Director Plan and 2018 Plan. In the event that an employee
is terminated due to death or disability, the modified equity award agreements provide for: (i) full vesting of all time-based awards, including restricted stock awards and stock options, (ii) pro-rata vesting of all performance-based awards, including performance share units, based on actual performance as of the end of the applicable performance period, pro-rated based on the period of employment during the applicable performance period, and (iii) the extension of the post-termination exercise window for vested stock options.
i
The following table
summarizes the Company’s stock award activity during the thirteen weeks ended April 29, 2023 (shares in thousands):
a.Includes
i320 incremental Performance Stock awards granted in fiscal year 2020 with a weighted-average grant date fair value of $i24.35,
that vested in fiscal year 2023 at greater than i100% of target based on performance.
/
Stock-based compensation expense was $i10.0
million and $i9.1 million for the thirteen weeks ended April 29, 2023 and April 30, 2022, respectively.
On June 14, 2018, the Company’s board of directors adopted, and its stockholders approved, the ESPP, which became effective July 1,
2018. The aggregate number of shares of common stock that were to be reserved for issuance under the ESPP was to be equal to the sum of (i) i973,014 shares and (ii) an annual increase on the first day of each calendar year beginning in 2019 and ending in 2028 equal to the lesser of (A) i486,507 shares,
(B) i0.5% of the shares outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (C) such smaller number of shares as determined by the
12
Company's board of directors. The offering under the ESPP commenced on January
1, 2019. The amount of expense recognized for the thirteen weeks ended April 29, 2023 and April 30, 2022 was $i0.3 million and $i0.2
million, respectively. As of April 29, 2023, there were i2,524,665 shares available for issuance under the ESPP.
7. iTreasury
Shares and Share Repurchase Program
Treasury Shares Acquired on Restricted Stock and Performance Stock Awards
The Company acquired i356,202 shares to satisfy employees’ tax withholding obligations upon the vesting of restricted stock and performance stock awards in the thirteen weeks ended April 29,
2023, which were recorded as $i27.1 million of treasury stock. The Company acquired i229,900 shares
to satisfy employees' tax withholding obligations upon the vesting of restricted stock awards in the thirteen weeks ended April 30, 2022, which were recorded as $i15.5 million of treasury stock.
Share Repurchase Program
On November 16, 2021, the
Company's board of directors approved a share repurchase program (the "2021 Repurchase Program") that allows the Company to repurchase up to $i500.0 million of its outstanding common stock from time to time as market conditions warrant. The 2021 Repurchase Program expires in January 2025. The Company initiated the 2021 Repurchase Program to mitigate potentially dilutive
effects of stock options and shares of restricted stock granted by the Company, in addition to enhancing shareholder value.
The Company repurchased i204,040 shares for $i15.3
million and i570,506 shares for $i35.8 million during the thirteen weeks ended April 29,
2023 and April 30, 2022, respectively. As of April 29, 2023, $i303.4 million remained available to purchase under the 2021 Repurchase Program.
8. iIncome
Taxes
The Company projects the estimated annual effective tax rate for fiscal year 2023 to be i28.3%, excluding the tax effect of discrete events, such as excess tax benefits from stock-based compensation, changes in tax legislation, settlements of tax audits and changes in uncertain tax positions, among others.
The
Company’s effective income tax rate from continuing operations was i32.6% and i21.1% for the thirteen weeks ended April 29,
2023 and April 30, 2022, respectively. The increase in the effective tax rate was largely due to an immaterial adjustment to certain deferred tax assets related to prior periods, as well as lower excess tax benefits, offset by higher income in the current period.
The Company is subject to taxation in the U.S. federal and various state taxing jurisdictions. The Company’s tax years from 2018 forward remain open and subject to examination by the Internal Revenue Service and various state taxing authorities.
On August 16, 2022, the Inflation Reduction Act was signed into law in the United States. We are currently
evaluating the Inflation Reduction Act law to determine future impacts on our financial statements.
9. iFair Value Measurements
Certain assets and liabilities are carried at fair value in accordance with GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company uses a three-level hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than quoted market prices included in Level 1 such as quoted market prices
for markets that are not active or other inputs that are observable or can be corroborated by observable market data.
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Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Financial Assets and Liabilities
The fair value of the Company's long-term debt is estimated based on current market rates for our specific debt instrument. Judgment is required to develop these estimates.
As such, the estimated fair value of long-term debt is classified within Level 2, as defined under U.S. GAAP.
i
The gross carrying amount and fair value of the Company’s debt at April 29, 2023 are as follows (in thousands):
Carrying
Amount
Fair Value
First Lien Term Loan
$
i450,000
$
i450,734
ABL
Revolving Facility
i400,000
i400,000
Total
Debt
$
i850,000
$
i850,734
The
gross carrying amount and fair value of the Company’s debt at January 28, 2023 are as follows (in thousands):
Carrying Amount
Fair Value
First Lien Term Loan
$
i450,000
$
i450,482
ABL
Revolving Facility
i405,000
i405,000
Total
Debt
$
i855,000
$
i855,482
The
gross carrying amount and fair value of the Company’s debt at April 30, 2022 are as follows (in thousands):
Carrying Amount
Fair Value
First Lien Term Loan
$
i701,920
$
i701,323
ABL
Facility
i130,000
i130,000
Total
Debt
$
i831,920
$
i831,323
/
Assets
and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company measures certain non-financial assets and liabilities, including long-lived assets, at fair value on a non-recurring basis.
The Company believes that the carrying amounts of its other financial instruments, including cash, accounts receivable, and accounts payable, approximates their carrying value due to the short-term maturities of these instruments.
10. iEarnings
Per Share
i
The table below reconciles basic weighted-average shares of common stock outstanding to diluted weighted-average shares of common stock outstanding for the thirteen weeks ended April 29, 2023 and April 30, 2022 (in thousands):
Weighted-average shares of common stock outstanding, used for basic computation
i133,312
i134,244
Plus:
Incremental shares of potentially dilutive securities:
Stock incentive awards
i2,590
i2,458
Weighted-average
shares of common stock and dilutive potential shares of common stock outstanding
i135,902
i136,702
/
iThe
table below summarizes anti-dilutive awards that were excluded from the computation of diluted earnings for the thirteen weeks ended April 29, 2023 and April 30, 2022, as their inclusion would have been anti-dilutive (in thousands):
On November 13, 2018, the Company entered into ithree forward starting interest rate swaps (the "Interest Rate Swaps"), which were effective starting on February 13, 2019 and fixed the LIBOR component of $i1.2
billion of its floating rate debt at a rate of approximately i3.0% from February 13, 2019 until February 13, 2022. The Company elected hedge accounting for the interest rate swap agreements, and as such, the effective portion of the gains or losses were recorded as a component of other comprehensive income and the ineffective portion of gains or losses were recorded as interest expense.
The net of tax amount for the effective and ineffective Interest Rate Swaps was recorded in other comprehensive income and interest expense, respectively. There were ino gains or losses recorded
in other comprehensive income for the thirteen weeks ended April 29, 2023. For the thirteen weeks ended April 30, 2022, the Company recorded a $i0.8 million gain in other comprehensive income. There was ino
ineffective portion of gains in the thirteen weeks ended April 29, 2023. The ineffective portion of gains of $i0.3 million for the thirteen weeks ended April 30, 2022 was recorded in interest expense.
12. iAcquisitions
On
May 2, 2022, the Company completed the Acquisition to bring substantially all of its end-to-end perishable supply chain in-house. The total consideration paid by the Company in connection with the Acquisition was approximately $i375.6 million, excluding transaction costs. The
Company did inot record any transaction costs during the thirteen weeks ended April 29, 2023. The Company recorded transaction costs related to the acquisition of $i7.9 million
during the thirteen weeks ended April 30, 2022. These costs are included in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income.
i
The following table summarizes the consideration paid and the final fair values of the assets acquired and liabilities assumed (in thousands) in connection with the Acquisition:
Total consideration paid, including working capital adjustments
$
i375,581
/
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It
is impracticable to provide historical supplemental pro forma financial information along with earnings during the period subsequent to the Acquisition due to a variety of factors, including access to historical information and the operations of acquirees being integrated within the Company shortly after closing and not operating as discrete entities within the Company’s organizational structure.
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FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q should be considered forward-looking statements, including, without limitation, statements regarding our future results of operations and financial position, business strategy, transformation, strategic priorities and future progress, including expectations regarding deferred revenue, lease commencement dates, impact of infrastructure investments on our operating model and selling, general and administrative expenses, sales of gasoline and gross profit margin rates, and new club and gas station openings, as well as statements
that include terms such as "may", "will", "should", "expect", "plan", "anticipate", "could", "intend", "project", "believe", "estimate", "predict", "continue", "forecast", "would", or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited
to:
• uncertainties in the financial markets and the effect of certain economic conditions or events on consumer and small business spending patterns and debt levels;
• risks related to our dependence on having a large and loyal membership;
• domestic and international economic conditions, including high inflation rates or further increases in inflation or interest rates, supply chain disruptions, construction delays and exchange rates;
• our ability to procure the merchandise we sell at the best possible prices;
• the effects of competition in, and regulation of, the retail industry;
• our dependence on vendors to supply us with quality merchandise at the right time and at the right price;
• risks
related to our indebtedness;
• changes in laws related to, or the governments administration of, the Supplemental Nutrition Assistance Program or its electronic benefit transfer systems;
• the risks and uncertainties related to the impact of any future pandemic, epidemic or outbreak of any other highly infectious disease;
• risks related to climate change and natural disasters;
• our ability to identify and respond effectively to consumer trends, including our ability to successfully maintain a relevant omnichannel experience for our members;
• risks related to cybersecurity, which may be heightened due to our e-commerce business, including our ability to protect the privacy of member or business information and the security of payment
card information;
• risks relating to our ability to attract and retain a qualified management team and other team members;
• risks relating to our ability to implement our growth strategy by opening new clubs, and gasoline stations; and
• the other risk factors identified in our filings with the Securities and Exchange Commission, including in particular those set forth under "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended January 28, 2023 (the "Annual Report on Form 10-K for the fiscal year 2022") and this Quarterly Report on Form 10-Q.
Given these uncertainties, you should not place undue reliance on any forward-looking statements. Except as required by applicable law, we assume no obligation
to update these forward-looking statements, even if new information becomes available in the future, and you should not rely upon these forward-looking statements after the date of this Quarterly Report on Form 10-Q.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis is intended to promote an understanding of the results of operations and financial condition of the Company and is provided as a supplement to, and should be read in conjunction with,
our condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and the related notes thereto in our Annual Report on Form 10-K for the fiscal year 2022. The following discussion may contain forward-looking statements that reflect our plans, estimates and assumptions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause such differences are discussed in the sections of this Quarterly Report on Form 10-Q titled "Forward-Looking Statements" and in Part I. "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year 2022.
We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to the last day of January. Accordingly, references herein to "fiscal year 2023" relate
to the 53 weeks ending February 03, 2024, and references herein to "fiscal year 2022" relate to the 52 weeks ended January 28, 2023. The first quarter of fiscal year 2023 ended on April 29, 2023, and the first quarter of fiscal year 2022 ended on April 30, 2022, and both include thirteen weeks.
Overview
BJ’s Wholesale Club is a leading warehouse club operator concentrated primarily on the eastern half of the United States. We deliver significant value to our members, consistently offering 25% or more savings on a representative basket of
manufacturer-branded groceries compared to traditional supermarket competitors. We provide a curated assortment focused on perishable products, continuously refreshed general merchandise, gasoline and other ancillary services, coupon books, and promotions to deliver a differentiated shopping experience that is further enhanced by our digital capabilities.
Since pioneering the warehouse club model in New England in 1984, we have grown our footprint to 237 large-format, high volume warehouse clubs and 167 gas stations spanning 18 states as of the date of this filing. In our core New England markets, which have high population density and generate a disproportionate part of U.S. gross domestic product, we operate almost three times the number of clubs compared to the next largest warehouse club competitor. In addition to shopping in our clubs, members are able
to shop when and how they want through our website, bjs.com, and our highly rated mobile app, which allows them to use our buy-online-pickup-in-club ("BOPIC") service, curbside delivery, same-day home delivery or traditional ship-to-home service, as well as through the DoorDash and Instacart marketplaces where members receive preferential pricing by linking their membership. We also offer Same-Day Select, which offers BJ’s members the ability to pay a one-time fee for either unlimited or twelve same-day grocery deliveries over a one-year period.
Our leadership team continues to focus on transforming how we use data to improve member experience, instilling a culture of cost discipline, adopting a more proactive approach to growing our membership base and building an omnichannel offering oriented towards
making shopping at BJ’s more convenient. These changes continue to deliver results, evidenced by year-over-year income from continuing operations growth, consecutive quarter comparable club sales growth and adjusted EBITDA growth over the last four years.
Our goal is to offer our members significant value and a meaningful return in savings on their annual membership fee. As of the end of the first quarter of fiscal year 2023, we had more than6.5 million members paying annual fees to gain access to savings on groceries and general merchandise and services. The annual membership fee for our Club Card (formerly Inner Circle®) membership is generally $55, and the annual membership fee for our BJ’s Club+ (formerly Perks Rewards®) membership, which offers additional value-enhancing features, is generally $110. We
believe that members can save over ten times their $55 Club Card membership fee versus what they would otherwise pay at traditional supermarket competitors when they spend $2,500 or more per year at BJ’s on manufacturer-branded groceries. In addition to providing significant savings on a representative basket of manufacturer-branded groceries, we accept all manufacturer coupons and also carry our own exclusive brands that enable members to save on price without compromising on quality. Our two private label brands, Wellsley Farms® and Berkley Jensen®, represented over $3.7 billion in annual sales for fiscal year 2022 and are the largest brands we sell in terms of volume. Our customers recognize the relevance of our value proposition across economic environments, as demonstrated by over 20 consecutive years of membership fee income growth. Our membership fee income was $402.6 million for the trailing twelve-months ended April 29,
2023.
Our business is moderately seasonal in nature. Historically, our business has realized a slightly higher portion of net sales, operating income, and cash flows from operations in the second and fourth fiscal quarters, attributable primarily to the impact of the summer and year-end holiday season, respectively. Our quarterly results have been, and will continue to be, affected by the timing of new club openings and their associated pre-opening expenses. As a result of these factors, our
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financial results for any single quarter or for periods of less than a year are not necessarily indicative of the results that may be achieved for a full fiscal year.
Factors
Affecting Our Business
Overall economic trends
The overall economic environment and related changes in consumer behavior have a significant impact on our business. In general, positive conditions in the broader economy promote customer spending in our clubs, while economic weakness, which generally results in a reduction of customer spending, may have a different or more extreme effect on spending at our clubs. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, changes to the Supplemental Nutrition Assistance Program (SNAP), government stimulus programs, tax legislation, business conditions, changes in the housing market, the availability of credit, interest rates, tax rates and fuel and energy costs. In addition, unemployment rates and benefits may cause us to
experience higher labor costs.
Size and loyalty of membership base
The membership model is a critical element of our business. Members drive our results of operations through their membership fee income and their purchases. The majority of members renew within six months following their renewal date. Therefore, our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. We have grown our membership fee income each year for the past two decades and the quality of our membership mix is strong as evidenced by our higher tier penetration growth in the first thirteen weeks of fiscal year 2023. Our membership renewal rate, a key indicator of membership engagement, satisfaction and loyalty, was 90% at the end of fiscal year 2022.
Effective sourcing and distribution
of products and consumer demands
Our net sales and gross profit are affected by our ability to purchase our products in sufficient quantities at competitive prices. Further, our ability to maintain our appeal to existing customers and attract new customers primarily depends on our ability to originate, develop and offer a compelling product assortment responsive to customer preferences. As a result, our level of net sales could be adversely affected due to constraints in our supply chain, including our inability to procure and stock sufficient quantities of some merchandise in a manner that is able to match market demand from our customers.
Infrastructure investment
Our historical operating results reflect the impact of our ongoing investments to support our growth. We have made significant investments in our business that we believe have
laid the foundation for continued profitable growth. We believe that expanding our club footprint, bringing substantially all of our end-to-end perishable supply chain in-house with the Acquisition, and enhancing our information systems, including our distribution center and transportation management systems, and investing in hardware and digitally enabled shopping capabilities for convenience, such as BOPIC, curbside pickup, and same day home delivery will enable us to replicate our profitable club format and provide a differentiated shopping experience. We expect these infrastructure investments to support our successful operating model across our club operations.
Gasoline prices
The market price of gasoline impacts our net sales and comparable club sales, and large fluctuations in the price of gasoline may produce a short-term impact on our margins. Retail gasoline prices are
driven by daily crude oil and wholesale commodity market changes and are volatile, as they are influenced by factors that include changes in demand and supply of oil and refined products, global geopolitical events, regional market conditions, and supply interruptions caused by severe weather conditions. Typically, the change in crude oil prices impacts the purchase price of wholesale petroleum fuel products, which in turn impacts retail gasoline prices at the pump. During times when prices are particularly volatile, differences in pricing and procurement strategies between the Company and its competitors may lead to temporary margin contraction or expansion, depending on whether prices are rising or falling, and this impact could affect our overall results for a fiscal quarter.
In addition, the relative level of gasoline prices from period
to period may lead to differences in our net sales between those periods. Further, because we generally attempt to maintain a fairly stable gross profit per gallon, this variance in net sales, which may be substantial, may or may not have a significant impact on our operating income.
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Inflation and deflation trends
Our financial results can be directly impacted by substantial increases in product costs due to commodity cost increases or general inflation, which could lead to a reduction in our sales, as well as greater margin pressure, as costs may not be able to be passed on to consumers. Changes in commodity prices and general inflation have impacted several categories of our business. Recent inflationary
pressures can be attributed to several macro economic factors including supply chain disruptions, government stimulus, interest rates, and other factors. In response to increasing commodity prices or general inflation, we seek to minimize the impact of such events by sourcing our merchandise from different vendors, changing our product mix or increasing our pricing when necessary.
Results of Operations
The following table summarizes key components of our results of operations for the periods indicated:
Income from continuing operations before income taxes
172,080
142,476
Provision for income taxes
56,092
30,019
Income
from continuing operations
115,988
112,457
Income (loss) from discontinued operations, net of income taxes
89
(7)
Net income
$
116,077
$
112,450
Weighted-average
shares outstanding—basic
133,312
134,244
Basic EPS(a)
$
0.87
$
0.84
Weighted-average
shares outstanding—diluted
135,902
136,702
Diluted EPS(a)
$
0.85
$
0.82
Operational
Data:
Total clubs at end of period
237
227
Comparable club sales
2.0%
14.4%
Merchandise
comparable club sales
5.7%
4.1%
Adjusted EBITDA (b)
$
256,983
$
220,801
Free cash flow (b)
27,048
(46,225)
(a)
Basic and diluted EPS are calculated using net income.
(b) See "Non-GAAP Financial Measures" and "Liquidity and Capital Resources" within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for definitions of Adjusted EBITDA and Free cash flow, respectively.
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Thirteen Weeks Ended April 29, 2023 (First Quarter of Fiscal Year 2023) Compared to Thirteen Weeks Ended April 30, 2022(First Quarter of Fiscal Year 2022)
Net Sales
Net
sales are derived from direct retail sales to customers in our clubs and online, net of merchandise returns and discounts. Growth in net sales is impacted by opening new clubs and increases in comparable club sales.
Net sales for the first quarter of fiscal year 2023 were $4.6 billion, a 5.0% increase from net sales reported for the first quarter of fiscal year 2022 of $4.4 billion. The increase was due primarily to a 2.0% increase in comparable club sales.
Comparable Club Sales and Merchandise Comparable Club Sales
We believe net sales is an important driver of our profitability, particularly comparable club sales. Comparable sales growth is a function of increasing shopping frequency from new and existing members and the amount they spend on each visit. Sales comparisons can be influenced by certain factors that are beyond our control
such as changes in the cost of gasoline and macro-economic factors such as inflation. The higher comparable club sales, the more we can leverage certain of our selling, general and administrative (SG&A) expenses, reducing them as a percentage of sales and enhancing profitability.
Merchandise comparable club sales increased by 5.7% in the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022 primarily driven by an increase in sales of groceries of 8.1%.
In grocery, sales increased as demand for perishables, salty snacks, beverages, packaged goods, dairy, and bakery categories increased compared to the first quarter of fiscal year 2022, partially offset by a decrease in demand for fresh meat, vitamins, and household cleaning categories.
The
impact of gasoline sales is a result of lower retail prices, partially offset by slightly higher comparable gallons sold in the first quarter of fiscal 2023 as compared to the first quarter of fiscal year 2022.
Membership fee income
We continue to see growth in the size of our membership base and continued quality. Membership fee income was $102.5 million in the first quarter of fiscal year 2023 compared to $96.6 million in the first quarter of fiscal year 2022, a 6.1% increase. The increase was primarily driven by membership renewals and new members with greater penetration of higher-tier membership levels, evidencing the strength of our membership quality.
In connection with our co-brand credit card transition in the first quarter of fiscal year 2023, we offered a 5 cent-per-gallon discount on gasoline purchases
to our Club+ members. We believe the new program will help drive continued growth in our higher-tier membership penetration.
Cost of sales
Cost of sales consists primarily of the direct cost of merchandise and gasoline sold at our clubs, including costs associated with operating our distribution centers, including payroll, payroll benefits, occupancy costs, and depreciation; freight expenses associated with moving merchandise from vendors to our distribution centers and from distribution centers to our clubs, and vendor allowances, rebates, and cash discounts. Inflation levels remained elevated in the first quarter of fiscal year 2023, although moderated compared to the prior fiscal year.
Cost of sales was $3.8 billion, or 83.2% of net sales, in the first quarter of fiscal year 2023 compared to $3.7 billion, or 84.2% of
net sales, in the first quarter of fiscal year 2022. Merchandise gross margin rate, which excludes gasoline sales and
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membership fee income, increased 100 basis points over the prior year period. The improvement in merchandise margins was primarily due to relief in supply chain costs.
Selling, general and administrative expenses
SG&A consists of various expenses related to supporting and facilitating the sale of merchandise in our clubs, including the following: payroll and payroll benefits for team members; rent, depreciation, and other occupancy costs for retail and corporate locations; share-based compensation, advertising expenses; tender costs, including
credit and debit card fees; amortization of intangible assets; and consulting, legal, insurance, acquisition and integration costs, and other professional services expenses.
SG&A includes both fixed and variable components and, therefore, is not directly correlated with net sales. We expect that our SG&A will increase in future periods due to investments to spur comparable club sales growth and our expanding footprint as we open new clubs. In addition, any future increases in wages, stock options or other stock-based grants or modifications will increase our SG&A.
SG&A increased by 8.5% to $689.3 million in the first quarter of fiscal year 2023 from $635.4 million in the first quarter of fiscal year 2022. The year-over-year increase in SG&A was primarily driven by increased labor and occupancy costs as a result of new club and gas station openings, as well as other
continued investments to drive strategic priorities. Our growth profile this year is weighted toward owned clubs, elevating our depreciation expense.
Pre-opening expenses
Pre-opening expenses include startup costs for new clubs. Expenses will vary based on the number of new club openings, geography of the club, whether the club is owned or leased, and timing of the opening relative to our period end.
Pre-opening expenses were $3.9 million in the first quarter of fiscal year 2023 compared to $4.9 million in the first quarter of fiscal year 2022. Pre-opening expenses decreased due to timing of spend for club and gas station openings year-over-year.
Interest expense
Interest expense was $14.7 million in the first quarter of fiscal year 2023 compared to
$7.8 million in the first quarter of fiscal year 2022. The increase is primarily due to rising interest rates year-over-year.
Provision for income taxes
The Company’s effective income tax rate from continuing operations was 32.6% and 21.1% for the first quarters of fiscal years 2023 and 2022, respectively. The increase in the effective tax rate was largely due to an immaterial adjustment to certain deferred tax assets related to prior periods, as well as lower excess tax benefits, offset by higher income in the current period.
Non-GAAP Financial Measures
The accompanying
Condensed Consolidated Financial Statements, including the related notes, are presented in accordance with GAAP. In addition to relevant GAAP measures we also provide non-GAAP measures, including adjusted EBITDA, comparable club sales, free cash flow, adjusted net income and adjusted net income per diluted share because management believes these metrics are useful to investors and analysts by excluding items that we do not believe are indicative of our core operating performance. These measures are customary for our industry and commonly used by competitors. These non-GAAP financial measures should not be reviewed in isolation or considered as an alternative to any other performance measure derived in accordance with GAAP and should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In addition, adjusted EBITDA, comparable club sales, free cash flow, adjusted net income and adjusted net income per diluted share
may not be comparable to similarly titled measures used by other
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companies in our industry or across different industries. Free cash flow is discussed within the Liquidity and Capital Resources section below.
Adjusted EBITDA
Adjusted EBITDA is defined as income from continuing operations before interest expense, net, provision for income taxes and depreciation and amortization, adjusted for the impact of certain other items, including stock-based compensation expense; pre-opening expenses; non-cash rent; acquisition and integration costs; and other adjustments.
The following is a reconciliation of our income from continuing operations to
Adjusted EBITDA and Adjusted EBITDA as a percentage of net sales for the periods presented:
(a) Represents
direct incremental costs of opening or relocating a facility that are charged to operations as incurred.
(b) Consists of an adjustment to remove the non-cash portion of rent expense.
(c) Represents costs related to the Acquisition, including due diligence, legal, and other consulting expenses.
(d) Other non-cash items, including non-cash accretion on asset retirement obligations, obligations associated with our post-retirement medical plan and incremental rent expense as the Company transitioned home office locations in fiscal 2022.
Comparable Club Sales and Merchandise Comparable Club Sales
Comparable club sales, also known as same-store sales, includes all
clubs that were open for at least 13 months at the beginning of the period and were in operation during the entirety of both periods being compared, including relocated clubs and expansions.
Comparable club sales allow us to evaluate how our club base is performing by measuring the change in period-over-period net sales in clubs that have been open for the applicable period. Various factors affect comparable club sales, including consumer preferences and trends, product sourcing, promotional offerings and pricing, customer experience and purchase amounts, weather and holiday shopping period timing and length.
Merchandise comparable club sales represents comparable club sales from all merchandise other than our gasoline operations for the applicable period.
Adjusted Net Income
The adjusted net
income and adjusted net income per diluted share metrics are important measures used by management to compare the performance of core operating results between periods. We define adjusted net income as net income as reported adjusted for: acquisition and integration costs; home office transition costs; other adjustments; and the tax impact of the foregoing adjustments on net income. We define adjusted net income per diluted share as adjusted net income divided by the weighted-average diluted shares outstanding.
23
We believe adjusted net income and adjusted net income per diluted share are useful metrics to investors and analysts because they present more accurate year-over-year comparisons for our net income and net income per diluted share because adjusted items are not
the result of our normal operations.
(a)Represents
costs related to the Acquisition, including due diligence, legal, and other consulting expenses.
(b)Represents incremental rent expense as the Company transitioned home office locations in fiscal 2022.
(c)Other non-cash items related to the reclassification into earnings of accumulated other comprehensive income/ loss associated with the de-designation of hedge accounting and other adjustments.
(d)Represents the tax effect of the above adjustments at a statutory tax rate of approximately 28%.
(e)Adjusted EPS represents adjusted net income per diluted share.
Liquidity
and Capital Resources
Our primary sources of liquidity are cash flows generated from club operations and borrowings from our ABL Revolving Facility. As of April 29, 2023, cash and cash equivalents totaled $23.4 million and we had $645.0 million of unused capacity under our ABL Revolving Facility. Our principal liquidity needs for the next twelve months and beyond are to fund normal recurring operational expenses and anticipated capital expenditures; fund possible acquisitions; fund share repurchases; and meet debt service and principal repayment obligations. We believe that our current resources, together with anticipated cash flows from operations and borrowing capacity under our ABL Revolving Facility, will be sufficient to finance our operations for at least the next twelve months.
In the first quarter of
fiscal year 2023, we used $15.3 million of available cash to repurchase 204,040 shares under the 2021 Repurchase Program.
We do not have any off-balance sheet arrangements that have, or are, in the opinion of management, reasonably likely to have, a current or future material effect on our results of operations or financial position. We do, however, enter into letters of credit and purchase obligations in the normal course of our operations.
Summary of Cash Flows
A summary of our cash flows from operating, investing and financing activities is presented in the following table:
Net
cash (used in) provided byfinancing activities
(37,576)
38,741
Net decrease in cash and cash equivalents
$
(10,528)
$
(7,484)
Net Operating Cash Flows
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Net
cash provided by operating activities was $119.1 million for the first quarter of fiscal year 2023 compared to $44.3 million for the first quarter of fiscal year 2022. The increase in operating cash flow was primarily due to the increase in pre-tax net income, excluding non-cash items, coupled with favorable fluctuations in working capital.
Net Investing Cash Flows
Cash used in investing activities was $92.1 million for the first quarter of fiscal year 2023, compared to $90.5 million for the first quarter of fiscal year 2022. The slight increase is primarily due to the volume and cost of property, plant and equipment additions as we continue to expand our footprint with more purchased locations.
Net Financing Cash Flows
Net
cash used in financing activities for the first quarter of fiscal year 2023 was $37.6 million compared to net cash provided by financing activities of $38.7 million for the first quarter of fiscal year 2022. The change is primarily driven by the timing of borrowings and repayments on our ABL Revolving Facility in the first quarter of fiscal year 2023 as compared to the first quarter of fiscal year 2022.
Free Cash Flow
We present free cash flow because we use it to report to our board of directors and we believe it assists investors and analysts in evaluating our liquidity. Free cash flow should not be considered as an alternative to cash flows from operations as a liquidity measure. We define free cash flow as net cash provided by operating activities less additions to property and equipment, net of disposals, plus proceeds from sale
leaseback transactions.
The following is a reconciliation of our net cash provided by operating activities to free cash flow for the periods presented:
Less: Additions to property and equipment, net of disposals
92,084
90,533
Plus:
Proceeds from sale leaseback transactions
—
—
Free cash flow
$
27,048
$
(46,225)
Free cash flow increased to $27.0 million for the first quarter of fiscal year 2023 compared to a decline of $46.2 million for the
first quarter of fiscal year 2022. The increase is the result of higher cash flows from operating activities primarily due to the increase in pre-tax net income, excluding non-cash items, coupled with favorable fluctuations in working capital, offset by higher cash outflows for property and equipment.
Debt and Borrowing Capacity
Our primary sources of borrowing capacity are the ABL Revolving Facility and the First Lien Term Loan, which are further discussed in Note 4, "Debt and Credit Arrangements," included in this Quarterly Report on Form 10-Q.
On
July 28, 2022, the Company entered into the ABL Revolving Facility with an aggregate ABL Revolving Commitment of $1.2 billion pursuant to that certain credit agreement with Bank of America, N.A., as administrative agent and collateral agent, and other lenders party thereto. The maturity date of the ABL Revolving Facility is July 28, 2027. As part of this transaction, the Company extinguished the ABL Facility.
On January 5, 2023, the Company amended the First Lien Term Loan to extend the maturity date from February 3,
2024 to February 3, 2027 and transition the interest rate from London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”) and changes the applicable margin from LIBOR plus 200 – 225 basis points per annum to SOFR plus 275 basis points per annum. In connection with the amendment the Company made a paid approximately $151.9 million of the principal amount.
At April 29, 2023, there was $400.0 million outstanding in loans under the ABL Revolving Facility and $11.8 million in outstanding letters of credit. The interest rate on the revolving credit facility was 6.08% and unused capacity was $645.0 million.
25
At
April 29, 2023, the interest rate for the First Lien Term Loan was 7.58% and there was $450.0 million outstanding.
Material Cash Commitments
Our material cash commitments consist primarily of debt obligations, interest payments, leases and purchase orders for merchandise inventory. These material cash commitments impact our short-term and long-term liquidity and capital needs. As of April 29, 2023, other than those items related to the ordinary course of operations of our business such as inventory purchases, new leases and lease amendments, there were no material changes to our material cash commitments from those described in our Annual Report on Form 10-K for the fiscal year 2022.
Critical
Accounting Policies and Use of Estimates
This discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which we have prepared in accordance with GAAP. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. There were no material changes in critical accounting policies and estimates during the period covered by this Quarterly Report on Form 10-Q. Refer to Item 7., "Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies and Estimates," in our Annual Report on Form 10-K for the fiscal year 2022 for a complete list of our Critical Accounting Policies and Estimates.
Recent
Accounting Pronouncements
There have been no recent accounting pronouncements since those disclosed in our Annual Report on Form 10-K for the fiscal year 2022 that have had a material impact on our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to changes in market interest rates and these changes in rates will impact our net interest expense and our cash flow from operations. Substantially all of our borrowings carry variable interest rates. There have been no material changes in our market risk from the disclosure included in Part II. "Item 7A. Quantitative and Qualitative Disclosures of Market Risk" in the Annual Report on Form 10-K
for the fiscal year 2022.
Item 4. Controls and Procedures.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of April 29, 2023.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15 or 15d-15 of the Exchange Act during the most recently
completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject to various litigation, claims and other proceedings that arise from time to time in the ordinary course of business. We believe these actions are routine and incidental to the business. While the outcome
of these actions cannot be predicted with certainty, we do not believe that any will have a material adverse impact on our business, financial condition or results of operations.
Item 1A. Risk Factors.
There have been no material changes to the risk factors relating to the Company set forth under the caption "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following
table sets forth information regarding our purchases of shares of our common stock during the first quarter of fiscal year 2023.
Period
Total Number of Shares
Purchased (a)
Average
Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(a)Includes
585 shares of common stock for the period January 29, 2023 to February 25, 2023, 353,043 shares of common stock for the period February 26, 2023 to April 1, 2023, and 2,574 shares of common stock for the period April 2, 2023 to April 29, 2023 surrendered to the Company by employees to satisfy their tax withholding obligations in connection with the vesting of restricted stock and performance stock awards. See Note 7"Treasury Shares and Share Repurchase
Programs" of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.
(b)On November 16, 2021, the Company's board of directors approved the 2021 Repurchase Program that allows the Company to repurchase up to $500.0 million of its outstanding common stock. The 2021 Repurchase Program expires in January 2025.
Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.*) (filed herewith)
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SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
