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5: EX-32.2 Certification -- §906 - SOA'02 HTML 19K
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12: R2 Condensed Consolidated Balance Sheets HTML 119K
13: R3 Condensed Consolidated Balance Sheets HTML 35K
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and Comprehensive Income
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18: R8 Description of Business HTML 22K
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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)
i25
Research Drive
iWestborough, iMassachusettsi01581
(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 August 17, 2022, the registrant had i135,068,956 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 Perks Elite®, BJ’s Perks Plus®, Inner Circle®, 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 $i1.2 billion under the ABL Revolving Facility
• "First Lien Term Loan" means the Company’s senior secured first lien term loan facility;
• "fiscal
year 2022" means the 52 weeks ending January 28, 2023;
• "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 ifour
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, i146,157 shares issued and i135,052 outstanding at July 30, 2022; i145,451 shares
issued and i135,506 outstanding at January 29, 2022; and i144,300 shares issued and i136,347 outstanding
at July 31, 2021
Adjustments
to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
i97,093
i89,834
Amortization
of debt issuance costs and accretion of original issue discount
i1,663
i1,724
Debt
extinguishment charges
i389
i657
Stock-based
compensation expense
i18,502
i34,634
Deferred
income tax provision (benefit)
i12,212
(i6,260)
Changes
in operating leases and other non-cash items
i32,067
i3,187
Increase
(decrease) in cash due to changes in:
Accounts receivable
(i29,605)
i3,584
Merchandise
inventories
(i45,519)
i172,140
Prepaid
expenses and other current assets
i1,097
(i1,665)
Other
assets
(i1,858)
i790
Accounts
payable
i130,503
i41,652
Accrued
expenses and other current liabilities
(i31,019)
i26,049
Other
non-current liabilities
i4,070
i420
Net
cash provided by operating activities
i443,052
i559,313
CASH
FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment, net of disposals
(i191,534)
(i147,808)
Proceeds
from sale leaseback transactions
i2,674
i19,080
Acquisitions
(i376,521)
i—
Net
cash used in investing activities
(i565,381)
(i128,728)
CASH
FLOWS FROM FINANCING ACTIVITIES
Payments on long term debt
(i50,000)
i—
Payments
on First Lien Term Loan
i—
(i100,000)
Proceeds
from revolving lines of credit
i905,000
i—
Payments
on revolving lines of credit
(i555,000)
(i260,000)
Debt
issuance costs paid
(i2,701)
i—
Net
cash received from stock option exercises
i5,018
i4,913
Net
cash received from Employee Stock Purchase Plan (ESPP)
i2,331
i1,877
Treasury
stock purchases
(i74,530)
(i79,269)
Proceeds
from financing obligations
i13,083
i1,333
Other
financing activities
(i2,627)
(i543)
Net
cash provided by (used in) financing activities
i240,574
(i431,689)
Net
increase (decrease) in cash and cash equivalents
i118,245
(i1,104)
Cash
and cash equivalents at beginning of period
i45,436
i43,518
Cash
and cash equivalents at end of period
$
i163,681
$
i42,414
Supplemental
cash flow information:
Interest paid
$
i15,689
$
i23,348
Income
taxes paid
i81,512
i62,844
Non-cash
financing and investing activities:
Lease liabilities arising from obtaining right-of-use assets
i181,411
i160,452
Property
additions included in accrued expenses
i19,489
i18,044
The
accompanying notes are an integral part of the condensed consolidated financial statements.
9
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 on the east coast of the United States. As of July 30, 2022, the Company operated i229 warehouse clubs and i160 gas
stations in i17 states.
The Company follows and reports based on the National Retail Federation’s fiscal calendar. The thirteen week periods ended July 30, 2022 and July 31, 2021 are referred to herein as the "second quarter of fiscal year 2022" and the "second quarter of fiscal year 2021," respectively.
Events
and global business conditions such as inflation, the ongoing coronavirus (“COVID-19”) pandemic and the war in Ukraine have resulted in certain impacts to the global economy, including market disruptions and supply chain challenges. During the second quarter of fiscal year 2022 we continued to experience elevated supply chain costs, including increased commodity prices, logistics, and procurement costs. We expect these market disruptions and inflationary pressures to continue throughout 2022.
On May 2, 2022, the Company closed the previously announced acquisition of the assets and operations of ifour
distribution centers and the related private transportation fleet from Burris Logistics, LLC. The Company financed the purchase price with a combination of available cash and borrowings under the ABL Facility. See Note 12, "Acquisitions" of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.
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 29,
2022 is derived from the audited consolidated balance sheet as of that date. The unaudited results of operations for the second quarter of fiscal year 2022 are not necessarily indicative of future results or results to be expected for fiscal year 2022. 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 2021, as
filed with the Securities and Exchange Commission on March 17, 2022.
i
Recently Adopted Accounting Pronouncements
The accounting policies the Company follows are set forth in its audited financial statements for fiscal year 2021 included in its Annual Report on Form 10-K for the fiscal year 2021. There have been no material changes to these accounting policies and no material pronouncements
adopted.
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
10
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 shipping point. iThe following tables summarize 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
i92
%
i93
%
Point
of sale transactions, excluding sales tax, as a percent of total revenues
i90
%
i91
%
BJ’s
Perks Rewards and My BJ’s Perks programs—The Company’s BJ’s Perks Rewards® membership program allows 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 offers a co-branded credit card program, the My BJ’s Perks® program, which allows 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 is in the form of electronic awards issued in $i10 increments that may be used online or in-club at the register and expire isix months
from the date issued.
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 on the Company’s website or app. 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 $i40.0 million at July 30, 2022, $i30.3
million at January 29, 2022 and $i25.8 million at July 31, 2021.
Royalty revenue received in connection with the My BJ’s Perks 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 Rewards was $i28.5
million, $i17.8 million and $i18.8 million at July 30, 2022, January 29,
2022 and July 31, 2021, respectively. The timing of revenue recognition is driven by actual customer activities, such as redemptions and expirations. As of July 30, 2022, the Company expects to recognize $i26.6 million by the end of fiscal year 2022 and expects the remainder to be recognized in the periods thereafter.
Membership—The
Company charges a membership fee to its customers. That fee allows customers to shop in the Company’s clubs, shop on the Company’s website and app 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, app 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 $i185.4
million, $i174.9 million and $i169.3 million at July 30, 2022, January 29,
2022 and July 31, 2021, respectively.
Gift Card Program—The Company sells BJ’s gift cards in both physical and digital format, which allows 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 in proportion to its rate of gift card redemptions as the Company’s performance obligation to redeem the gift card for merchandise is satisfied when the gift card is redeemed. The Company also recognizes breakage in proportion to its rate of gift card redemptions. Deferred revenue related to gift cards was $i11.9
million, $i11.8 million and $i9.7 million at July 30, 2022, January 29, 2022 and July 31,
2021, respectively. The Company recognized $i12.7 million and $i9.6
million of revenue from gift card redemptions in the second quarter of fiscal year 2022 and second quarter of fiscal year 2021, respectively. The Company recognized $i23.2 million and $i18.4
million of revenue from gift card redemptions in the twenty-six weeks ended July 30, 2022 and July 31, 2021 respectively.
11
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
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:
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. As part of 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 and 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 i0.20% 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 upon the Borrower’s, and its restricted 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
12
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 July 30, 2022, there were $i350.0
million outstanding in loans under the ABL Revolving Facility and $i12.9 million in outstanding letters of credit. The interest rate on the revolving credit facility was i3.42%
and unused capacity was $i576.7 million.
ABL Facility - Former Credit Agreement
The ABL Revolving Facility replaced the ABL Facility, which comprised of $i950.0
million revolving credit facility and a $i50.0 million term loan.
Interest on the ABL Facility was calculated either at 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.
At January 29,
2022, there were $i50.0 million outstanding in loans under the ABL Facility and $i12.7 million in outstanding letters of credit. The interest rate on the revolving credit
facility was i1.23%, the interest rate on the term loan was i2.10% and unused capacity was $i886.9
million.
At July 31, 2021, there were $i50.0 million outstanding in loans under the ABL Facility and $i24.1
million in outstanding letters of credit. The interest rate on the revolving credit facility was i1.23%, the interest rate of the term loan was i2.10% and unused capacity was
$i768.2 million.
First Lien Term Loan
The Company’s First Lien Term Loan matures on February 3, 2024. 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.
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.
On April 30, 2021, the Company used $i100.0
million of cash and cash equivalents to pay $i100.0 million of the principal amount outstanding on the First Lien Term Loan. In connection with the payment, the Company expensed $i0.7
million of previously capitalized debt issuance costs and original issue discount.
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 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.
13
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 July 30, 2022, there were i5,295,613 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 twenty-six weeks ended July 30, 2022 (shares in thousands):
Stock-based
compensation expense was $i9.4 million and $i7.3 million for the thirteen weeks ended July 30,
2022 and July 31, 2021, respectively. Stock-based compensation was $i18.5 million and $i34.6
million for the twenty-six weeks ended July 30, 2022 and July 31, 2021, respectively. Stock-based compensation expense in the twenty-six weeks ended July 31, 2021 included $i17.5 million of stock-based compensation related to the modification of stock awards
associated with the passing of a former executive.
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 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 July 30, 2022 and July 31, 2021 was $i0.3
million and $i0.4 million, respectively. The amount of expense recognized for both the twenty-six weeks ended July 30, 2022 and July 31, 2021 was $ii0.5/
million. As of July 30, 2022, there were i2,084,348 shares available for issuance under the ESPP.
7. iTreasury
Shares and Share Repurchase Program
Treasury Shares Acquired on Restricted Stock Awards
The Company acquired i5,945 shares to satisfy employees’ tax withholding obligations upon the vesting of restricted stock awards in the thirteen weeks ended July 30, 2022, which were recorded
as $i0.3 million of treasury stock. The Company
14
acquired i120,421 shares
to satisfy employees' tax withholding obligations upon the vesting of restricted stock awards in the thirteen weeks ended July 31, 2021, which were recorded as $i5.6 million of treasury stock.
The Company acquired i235,845
shares to satisfy employees' tax withholding obligations upon the vesting of restricted stock awards in the twenty-six weeks ended July 30, 2022, which were recorded as $i15.9 million of treasury stock. The Company acquired i346,825
shares to satisfy employees' tax withholding obligations upon the vesting of restricted stock awards in the twenty-six weeks ended July 31, 2021, which were recorded as $i15.7 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 i353,000 shares for $i22.8
million during the thirteen weeks ended July 30, 2022, and i923,506 shares for $i58.6
million during the twenty-six weeks ended July 30, 2022. As of July 30, 2022, $i412.6 million remained available to purchase under the 2021 Repurchase Program.
8. iIncome
Taxes
The effective income tax rate is based on estimated income from continuing operations for the fiscal year, as well as discrete adjustments, if any, in the applicable quarterly periods. The Company projects the estimated annual effective tax rate for fiscal year 2022 to be i27.4%, 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 i26.6% and i24.7% for
the thirteen weeks ended July 30, 2022 and July 31, 2021, respectively, and i24.2% and i24.3%
for the twenty-six weeks ended July 30, 2022 and July 31, 2021, respectively. The increase in the effective tax rate for the thirteen weeks ended July 30, 2022 compared to the thirteen weeks ended July 31, 2021 is due primarily to lower excess tax benefits from stock-based compensation in the current year period. The slight decrease in the effective tax rate for the twenty-six weeks ended July 30, 2022 compared to the twenty-six weeks ended July 31, 2021 is due to higher excess tax benefits from stock-based compensation in the current year period.
The
Company is subject to taxation in the U.S. federal and various state taxing jurisdictions. The Company’s tax years from 2017 forward remain open and subject to examination by the Internal Revenue Service and various state taxing authorities.
9. iFair Value Measurements
Fair value is defined as
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date or "exit price." The inputs used to measure fair value are generally classified into the following hierarchy:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not observable for the asset or liability.
Level 3: Unobservable inputs for the asset or liability.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair values of the
Company’s derivative instruments were based on quotes received from third-party banks and represent the estimated amount the Company would pay to terminate the agreements taking into consideration current interest rates as well as the creditworthiness of the counterparties. These inputs were considered to be Level 2. All derivative instruments expired in the first quarter of fiscal year 2022.
15
Financial Assets and Liabilities
i
The
gross carrying amount and fair value of the Company’s debt at July 30, 2022 are as follows (in thousands):
Carrying Amount
Fair Value
First Lien Term Loan
$
i701,920
$
i700,797
ABL
Revolving Facility
i350,000
i350,000
Total
Debt
$
i1,051,920
$
i1,050,797
The
gross carrying amount and fair value of the Company’s debt at January 29, 2022 are as follows (in thousands):
Carrying Amount
Fair Value
First Lien Term Loan
$
i701,920
$
i702,053
ABL
Facility
i50,000
i50,000
Total
Debt
$
i751,920
$
i752,053
The
gross carrying amount and fair value of the Company’s debt at July 31, 2021 are as follows (in thousands):
Carrying Amount
Fair Value
First Lien Term Loan
$
i701,920
$
i700,032
ABL
Facility
i50,000
i50,000
Total
Debt
$
i751,920
$
i750,032
/
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 and twenty-six weeks ended July 30, 2022 and July 31, 2021:
Weighted-average shares of common stock outstanding, used for basic computation
i134,341,280
i135,521,353
i134,292,751
i135,615,068
Plus:
Incremental shares of potentially dilutive securities
i2,226,186
i2,675,814
i2,341,962
i2,814,498
Weighted-average
shares of common stock and dilutive potential shares of common stock outstanding
i136,567,466
i138,197,167
i136,634,713
i138,429,566
/
iThe
table below summarizes restricted shares, restricted stock units, and ESPP shares that were excluded from the computation of diluted earnings for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021, as their inclusion would have been anti-dilutive:
On November 13, 2018, the Company entered into ithree forward starting interest rate swaps (the "interest rate swaps"), which became effective on February 13, 2019. The
Company fixed the LIBOR component of $i1.2 billion of its floating rate debt at a rate of approximately i3.0% from February 13, 2019 to 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.
On April 30, 2021, the Company used $i150.0
million of its cash and cash equivalents to pay $i100.0 million of the principal amount outstanding on the First Lien Term Loan and $i50.0 million of the outstanding amounts on
the ABL Facility. The Company accelerated the release of unrealized losses into earnings on the ineffective interest rate swap agreements and released $i4.7 million recorded in other comprehensive income to interest expense, net of tax.
On July 30, 2021, the
Company used $i210.0 million of its cash and cash equivalents to pay $i210.0 million of the principal amount outstanding on the ABL Facility. The
Company accelerated the release of unrealized losses into earnings on the ineffective interest rate swap agreements and released $i3.5 million recorded in other comprehensive income to interest expense, net of tax.
The interest rate swaps expired in February 2022. There was ino
liability recorded as of July 30, 2022 and $i2.2 million and $i14.5 million recorded at January 29, 2022 and
July 31, 2021, respectively. The net of tax amount for the effective and ineffective interest rate swaps were recorded in other comprehensive income and interest expense, respectively.
There were ino gains or losses recorded for the thirteen weeks ended July 30, 2022 and $i4.1
million gain recorded in other comprehensive income for the thirteen weeks ended July 31, 2021. There were gains of $i0.8 million and $i8.5
million recorded in other comprehensive income for the twenty-six weeks ended July 30, 2022 and July 31, 2021, respectively. There were ino ineffective portion of gains in the thirteen weeks ended July 30, 2022 and $i0.3
million recorded in interest expense for the twenty-six weeks ended July 30, 2022. The ineffective portion of gains in the thirteen and twenty-six weeks ended July 31, 2021 of $i1.6 million and $i3.4
million, respectively, were recorded in interest expense.
i
The fair values of derivative instruments included on the condensed consolidated balance sheets are as follows (in thousands):
On May 2, 2022, the Company completed the Acquisition to bring its perishable 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 recorded transaction costs related to the Acquisition of $i3.6 million
and
17
$i11.5 million during the thirteen and twenty-six weeks ended July 30, 2022, respectively. 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 preliminary fair values of the assets acquired and liabilities assumed (in thousands) in connection with the Acquisition:
Total consideration paid, including working capital adjustments
$
i375,582
/
Goodwill
represents the excess of the purchase price over the net identifiable assets acquired and liabilities assumed. Goodwill is primarily attributable to the assembled workforce and bringing the Company's perishable supply chain in-house. Goodwill deductible for tax purposes is $i84.7 million.
The Acquisition was accounted for as a business combination using the acquisition method with the
Company as the accounting acquirer in accordance with ASC 805. Under this method of accounting, the purchase price is allocated to the assets acquired and liabilities assumed of the acquiree based upon their estimated fair values at the acquisition date. The purchase price allocation for the Acquisition is preliminary and the Company's estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuation of certain tangible and intangible assets acquired and liabilities assumed. There can be no assurance that such finalization will not result in material changes from the preliminary purchase price allocation.
For each of
the thirteen and twenty-six week periods ended July 30, 2022, the Acquisition generated an incremental $ii21.8/ million
in revenue. 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.
18
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;
• 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 the COVID-19 pandemic, including the duration, scope and severity of the pandemic, federal, state and local government actions or restrictive measures implemented in response to COVID-19, the effectiveness of such measures, as well as the effect of any relaxation or revocation of current restrictions, and the direct and indirect impact of such measures;
• risks related to increases in product costs due to commodity cost increases or general inflation;
• risks related to our ability to purchase our products in sufficient quantities at competitive prices;
• 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;
• our ability to attract and retain a qualified management team and other team members;
• 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 29, 2022 (the "Annual Report on Form 10-K for the fiscal year 2021") 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 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 2021. 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 2021.
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 2022" relate to the 52 weeks ending January 28, 2023, and references herein to "fiscal year 2021" relate to the 52 weeks ended January 29, 2022. The second quarter of fiscal year 2022 ended on July 30, 2022, and the second quarter of fiscal year 2021 ended on July 31, 2021, and both include thirteen weeks.
Overview
BJ’s Wholesale Club is a leading warehouse club operator concentrated primarily
on the east coast 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 to deliver a differentiated shopping experience that is further enhanced by our omnichannel capabilities.
Since pioneering the warehouse club model in New England in 1984, we have grown our footprint to 229 warehouse clubs spanning 17 states. 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, www.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 marketplace where members receive preferential pricing by linking their membership. We also launched Same-Day Select in the first quarter of fiscal year 2022, 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
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 second quarter of fiscal year 2022, we had more than6.5 million members paying annual fees to gain access to savings on groceries, consumables, general merchandise, services and gasoline. The annual membership fee for our Inner Circle® membership is $55 and the annual membership fee for our BJ’s Perks Rewards® membership, which offers additional value-enhancing features, is $110. We believe that members can save over ten times the price of their $55 Inner Circle 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 $3.0 billion in annual sales for fiscal year 2021 and are the largest brands we sell. 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 $381.2 million for the trailing twelve-months ended July 30, 2022.
On May 2, 2022, we completed our acquisition of the assets and operations of four distribution centers and the related private transportation fleet from Burris Logistics, which brings our end-to-end perishable supply
chain in-house. See Note 12, "Acquisitions" of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the Acquisition.
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
20
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.
Impact of the COVID-19 Pandemic
As the impact of the COVID-19 pandemic has evolved, we have continued to face several operational challenges directly or indirectly related to the pandemic, including supply chain constraints, inflation, and wage inflation. The COVID-19 pandemic is unprecedented and demand may continue to change in the future if consumer purchasing behavior changes as the COVID-19 pandemic continues to evolve, and the long-term impacts to our financial condition and results of operations are still uncertain.
The COVID-19 pandemic may impact many of the factors discussed in this section,
including, among others, overall
economic trends, consumer preferences and demand, product mix, quarterly fluctuations, sourcing and labor shortages, which in
turn could adversely affect our business, financial condition and results of operations. During the thirteen weeks ended July 30, 2022 we continued to experience elevated supply chain costs, including commodity prices, logistics, and procurement costs. We expect these market disruptions and inflationary pressures to continue throughout 2022.
Factors Affecting Our Business
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.
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 or units sold, as well as greater margin pressure, as increased costs for goods may not always be able to be passed on to consumers. We continue to see increased commodity prices and general inflation, which have impacted several
categories of our business, and expect to continue to see the same throughout 2022. Events such as the COVID-19 pandemic have resulted in market disruptions, supply chain disruptions and inflationary pressures. 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.
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
21
the reporting date. We have grown our membership fee income each year for the past two decades and the quality of our membership mix continues to improve as evidenced by higher tier penetration growth in the first half of fiscal year 2022. Our membership renewal rate, a key indicator of membership engagement, satisfaction and loyalty, was 89% at the end of fiscal year 2021.
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. Recently,
we have experienced challenges related to the global supply chain, which we expect to continue for the foreseeable future. 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 continuing 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 our end-to-end perishable supply chain in-house with the Acquisition, and enhancing our information systems, including our distribution center management system, 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.
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
192,036
147,356
334,512
254,325
Provision
for income taxes
51,022
36,359
81,041
61,742
Income from continuing operations
141,014
110,997
253,471
192,583
Loss
from discontinued operations, net of income taxes
(7)
(9)
(14)
(16)
Net income
$
141,007
$
110,988
$
253,457
$
192,567
Operational
Data:
Total clubs at end of period
229
222
229
222
Comparable club sales
19.8%
4.0%
17.2%
2.2%
Merchandise
comparable club sales increase (decrease)
7.6%
(3.4)%
5.9%
(4.2)%
Adjusted EBITDA (a)
$
273,700
$
220,140
$
494,501
$
422,549
Free
cash flow (a)
300,417
239,680
254,192
430,585
(a) See "Non-GAAP Financial Measures" within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a definition of Adjusted EBITDA and Free cash flow
22
Thirteen Weeks Ended July 30,
2022 (Second Quarter of Fiscal Year 2022) Compared to Thirteen Weeks Ended July 31, 2021(Second Quarter of Fiscal Year 2021)
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 second quarter of fiscal year 2022 were $5.0 billion, a 22.4% increase from net sales reported for the second quarter of fiscal year 2021 of $4.1 billion. The increase was due primarily to a 19.8% increase in comparable club sales.
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, macro-economic factors such as inflation and supply chain disruptions. 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 7.6% in the second quarter of fiscal year 2022 compared to the second quarter of fiscal year 2021 driven by an increase in sales of groceries of 8% and an increase in sales of general merchandise and services of approximately 4%.
In grocery, sales increased as demand for beverages, fresh fruit and vegetables, fresh meat, candy, dairy and active nutrition categories increased compared to the second quarter of fiscal year 2021. General merchandise and services sales increased primarily due to our services business and seasonal categories within general merchandise.
Membership fee income
We continue to see growth in the size and quality of our membership base. Membership fee income was $98.8 million in the second quarter of fiscal year 2022 compared to $88.8 million in the second quarter of fiscal year 2021, an 11.3% increase. The increase was primarily driven by membership renewals, new members and increased penetration of higher-tier membership levels, evidencing the strength of our membership quality.
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. We continue to experience inflation across most categories and have invested in certain categories to preserve our member value proposition.
Cost of sales was $4.2 billion, or 84.8% of net sales, in the second quarter of fiscal year 2022 compared to $3.4 billion, or 83.5% of net sales, in the second quarter of fiscal year 2021. Merchandise gross margin
rate, which excludes gasoline sales and membership fee income, decreased 50 basis points over the second quarter of fiscal year 2021. Merchandise margins were impacted by increased freight costs as well as investments in inflationary categories and markdowns in general merchandise inventory.
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; 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.
23
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 made to spur comparable club sales growth and our expanding footprint as we open new clubs. In addition, any future increases in wages, stock-based grants or modifications will increase our SG&A.
SG&A increased by 8.9% to $651.2 million in the second quarter of fiscal year 2022 from $598.1 million in the second quarter of fiscal year 2021. The year-over-year increase in SG&A was primarily driven by increased labor costs as a result of last year’s wage investments as well as the acquisition, integration and operating expenses related to the Acquisition.
Pre-opening expenses
Pre-opening
expenses include startup costs for new clubs and 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 $5.9 million in the second quarter of fiscal year 2022 compared to $1.6 million in the second quarter of fiscal year 2021. Pre-opening expenses increased due to timing of spend for club and gas station openings year-over-year. Expansion plans remain on track with 11 new club openings expected in fiscal year 2022.
Interest expense
Interest expense was $10.9 million in the second quarter of fiscal year 2022 compared to $16.4 million in the second quarter of fiscal year 2021. The decrease is due to lower debt balances outstanding throughout the second quarter of fiscal year 2022 as compared to
the second quarter of fiscal year 2021 before refinancing the ABL Facility on July 28, 2022. In addition, the second quarter of fiscal year 2021 included net losses on our ineffective cash flow hedges in connection with the payment of outstanding amounts under the ABL Facility.
Provision for income taxes
The Company’s effective income tax rate from continuing operations was 26.6% and 24.7% for the second quarters of fiscal years 2022 and 2021, respectively. The increase in the effective tax rate is due primarily to lower excess tax benefits from stock-based compensation in the current year period.
Twenty-Six Weeks Ended July 30,
2022 (First Six Months of Fiscal Year 2022) Compared to Twenty-Six Weeks Ended July 31, 2021(First Six Months of Fiscal Year 2021)
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 six months of fiscal year 2022 were $9.4 billion, a 19.5% increase from net sales reported for the first six months of fiscal year 2021 of $7.9 billion. The increase was due primarily to a 17.2% increase in comparable club sales.
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 and supply chain disruptions. The higher comparable club sales, the more we can leverage certain of our SG&A, reducing them as a percentage of sales and enhancing profitability.
Merchandise comparable club sales increased by 5.9% in the first six months of fiscal year 2022 compared to the first
six months of fiscal year 2021 driven by an increase in sales of groceries of approximately 8% offset by a decrease in sales of general merchandise and services of approximately 4%. In grocery, sales increased as demand for beverages, candy, active nutrition, fresh meat, dairy and bakery categories increased compared to the first six months of fiscal year 2021. General merchandise realized headwinds in consumer electronics, apparel and seasonal categories as consumers face pressure around discretionary spend due to inflation.
Membership fee income
We continue to see growth in the size and quality of our membership base. Membership fee income was $195.4 million in the first
six months of fiscal year 2022 compared to $175.1 million in the first six months of fiscal year 2021, an 11.6% increase. The increase was primarily driven by membership renewals, new members and increased penetration of higher-tier membership levels, evidencing the strength of our membership quality.
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. We continue to experience inflation across most categories and have invested in certain
categories, such as our full service deli, to preserve our member value proposition.
Cost of sales was $7.9 billion, or 84.5% of net sales, in the first six months of fiscal year 2022 compared to $6.6 billion, or 83.3% of net sales, in the first six months of fiscal year 2021. Merchandise gross margin rate, which excludes gasoline sales and membership fee income, decreased 40 basis points over the first six months of fiscal year 2021. Merchandise margins were impacted by increased freight costs, investments in inflationary categories and market driven markdowns in general merchandise categories.
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; 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 made to spur comparable club sales growth and our expanding footprint as we open new clubs. In addition, any future increases in wages, stock-based grants or modifications will increase our SG&A.
SG&A increased by 7.4% to $1.3 billion in
the first six months of fiscal year 2022 from $1.2 billion in the first six months of fiscal year 2021. The year-over-year increase in SG&A was primarily driven by increased labor costs as a result of last year’s wage investments as well as the acquisition, integration and operating expenses related to the Acquisition.
Pre-opening expenses
Pre-opening expenses include startup costs for new clubs and 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 $10.8 million in the first six months of fiscal year 2022 compared to $2.2 million in the first six months of fiscal year 2021. Pre-opening expenses increased due to timing of spend for club and gas
station openings year-over-year. Expansion plans remain on track with 11 new club openings expected in fiscal year 2022.
Interest expense
Interest expense was $18.7 million in the first six months of fiscal year 2022 compared to $35.7 million in the first six months of fiscal year 2021. The decrease is due to lower debt balances outstanding throughout the first half of fiscal year 2022 as compared to the first half of fiscal year 2021 before refinancing the ABL Facility on July 28, 2022. In addition, the first half
25
of fiscal year 2021 included net losses on our ineffective cash flow hedges in connection with the payment of outstanding
amounts under the ABL Facility.
Provision for income taxes
The Company’s effective income tax rate from continuing operations was 24.2% and 24.3% for the first six months of fiscal years 2022 and 2021, respectively. The slight decrease in the effective tax rate is due primarily to higher excess tax benefits from stock-based compensation in the current year 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 companies in our industry or across different industries.
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; strategic consulting; offering costs; club closing and impairment charges; reduction in force severance; 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.Represents an adjustment to remove the non-cash portion of rent expense.
c.Represents costs related to the acquisition
and integration of assets from Burris Logistics, including due diligence, legal, and other consulting expenses.
d.Represents severance charges associated with labor reductions that resulted from the realignment of our field operations.
e.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 transitions from the current home office to a new home office building in fiscal year 2022.
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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.
Free Cash Flow
We present free cash flow, which is not a recognized financial measure under GAAP, as 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
101,001
73,118
191,534
147,808
Plus: Proceeds from sale leaseback transactions
2,674
2,450
2,674
19,080
Free
cash flow
$
300,417
$
239,680
$
254,192
$
430,585
Free cash flow increased to $300.4 million for the second quarter of fiscal year 2022 compared to $239.7 million for the second quarter of fiscal year 2021 as a result of increased income from operations as well as positive changes in working capital. Free cash flow declined to $254.2 million in the first six months
of fiscal year 2022 compared to $430.6 million in the first six months of 2021 as a result of cash outflows for higher working capital, specifically inventory related to new club growth and other strategic actions we’ve taken to better position our business, such as improving in-stock levels over last year.
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: stock-based compensation related to acceleration of stock awards; acquisition and integration costs; incremental home office expenses; loss on cash flow hedge; expenses related to debt payments; severance charges; offering costs; gains on sale leaseback transactions;
club closing and impairment charges; 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.
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.
Stock-based
compensation related to acceleration of stock awards (a)
—
—
—
17,494
Acquisition and integration costs (b)
3,587
—
11,467
—
Incremental
home office expense (c)
600
—
1,199
—
(Gain) loss on cash flow hedge (d)
—
3,245
(165)
7,954
Charges
related to debt payments (e)
389
—
389
657
Severance (f)
—
—
—
2,300
Tax
impact of adjustments to net income (g)
(1,287)
(909)
(3,624)
(7,953)
Adjusted net income
$
144,296
$
113,324
$
262,722
$
213,019
(a)Represents
accelerated vesting of equity awards, which were related to the passing of a former executive.
(b)Represents costs related to the acquisition and integration of assets from Burris Logistics, including due diligence, legal, and other consulting expenses.
(c)Represents incremental rent expense as the Company transitions from the current home office to a new home office building in fiscal year 2022.
(d)Represents the reclassification into earnings of accumulated other comprehensive income associated with the de-designation of hedge accounting.
(e)Represents the expensing of fees and deferred fees and original issue discount
associated with the partial prepayment of debt in fiscal year 2021 and extinguishment cost related to the ABL Facility in fiscal year 2022.
(f)Represents severance charges associated with labor reductions that resulted from the realignment of our field operations.
(g)Represents the tax effect of the above adjustments at a statutory tax rate of approximately 28%.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows generated from club operations and borrowings from the ABL Facility and the ABL Revolving Facility. As of July 30, 2022,
cash and cash equivalents totaled $163.7 million and we had $576.7 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 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 six months of fiscal year 2022, we used $58.6 million of available cash to repurchase 923,506 shares under the 2021 Repurchase Program. In addition, we used $50.0 million of available cash to extinguish the term loan associated with the ABL Facility.
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 provided by (used in) financing activities
240,574
(431,689)
Net increase (decrease) in cash and cash equivalents
$
118,245
$
(1,104)
Net Cash from Operating Activities
Net cash provided by operating activities was $443.1 million for the first six months of fiscal year 2022 compared to $559.3 million
for the first six months of fiscal year 2021. The decrease in operating cash flow was primarily due to cash
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outflows due to inflation in inventory, improvement in inventory position for key categories, partially offset by income from operations compared to the prior year.
Net Cash from Investing Activities
Cash used for capital expenditures was $565.4 million for the first six months of fiscal year 2022, compared to $128.7 million for the first six months of fiscal year 2021. The increase is primarily due to the Acquisition, as well as the timing, volume and cost of property, plant and
equipment additions as we continue to expand our footprint.
Net Cash from Financing Activities
Net cash provided by financing activities for the first six months of fiscal year 2022 was $240.6 million compared to net cash used in financing activities of $431.7 million for the first six months of fiscal year 2021. The change is due primarily to the draw down of debt on the ABL Facility and the ABL Revolving Facility in the first six months of fiscal year 2022 as compared to debt payments in the six months quarter of fiscal year 2021.
Debt and Borrowing Capacity
On April 30, 2021, the
Company used $150.0 million of cash and cash equivalents to pay $100.0 million of the principal amount outstanding on the First Lien Term Loan and $50.0 million of the principal amount outstanding on the ABL Facility. In connection with the payment, the Company expensed $0.7 million of previously capitalized debt issuance costs and original issue discount.
On July 28, 2022, the Company entered into the ABL Revolving Facility in 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.
At July 30, 2022, there was $350.0 million outstanding in loans under the ABL Revolving Facility and $12.9 million in outstanding letters of credit. The interest rate on the revolving credit facility was 3.42% and unused capacity was $576.7 million.
At July 30, 2022, the interest rate for the First Lien Term Loan was 3.96% and there was $701.9 million outstanding. See Note 4, "Debt and Credit Arrangements" of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.
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 July 30, 2022, 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 2021.
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. Except as described below, 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 2021 for a complete list of our Critical Accounting Policies and Estimates.
Business Combinations
We account for business combinations under the acquisition method of accounting in accordance
with ASC Topic 805, Business Combinations, which requires an allocation of the consideration we paid to the identifiable assets, intangible assets
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and liabilities based on the estimated fair values as of the closing date of the acquisition. The excess of the fair value of the purchase price over the fair values of these identifiable assets, intangible assets and liabilities is recorded as goodwill. The valuation of acquired assets will impact future operating results. We utilize third-party valuation specialists to assist us in the determination of the fair value of the assets acquired. Specifically, the fair value of the buildings and site improvement were determined using a combination of the cost, income and sales comparison approaches with the ultimate valuation primarily
based on the income approach and the market approach was utilized to determine the fair value of trailers acquired.
The remaining useful lives of depreciable assets have a significant impact on earnings. The selected lives are based on the expected periods that the assets will provide value to the Company subsequent to the business combination. The Company may adjust the amounts recognized for a business combination during a measurement period after the acquisition date. Any such adjustments are based on the Company obtaining additional information that existed at the acquisition date regarding the assets acquired or the liabilities assumed. Measurement-period adjustments
are generally recorded as increases or decreases to the goodwill recognized in the transaction. The measurement period ends once the Company has obtained all necessary information that existed as of the acquisition date, but does not extend beyond one year from the date of acquisition. Any adjustments to assets acquired or liabilities assumed beyond the measurement period are recorded through earnings.
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 2021.
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 2021.
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 July 30, 2022.
Changes in Internal Control
On May 2, 2022 we completed the Acquisition to bring our end-to-end perishable supply chain in-house. As part of the Acquisition, the Company has designed and implemented controls over the evaluation, execution and recording of the transaction. We are in the process of integrating the Acquisition with our processes and internal controls over financial reporting.
Other than activity related to the
Acquisition discussed above, 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 2021, except as set forth below.
We
may be unable to generate sufficient cash flow to satisfy our debt service obligations, which could have a material adverse effect on our business, financial condition and results of operations.
Our ability to make principal and interest payments on and to refinance our indebtedness will depend on our ability to generate cash in the future and is subject to general economic, financial, competitive, legislative, regulatory, tax and other factors that are beyond our control. If our business does not generate sufficient cash flow from operations, in the amounts projected or at all, or if future borrowings are not available to us in amounts sufficient to fund our other liquidity needs, our business financial condition and results of operations could be materially adversely affected. If we cannot generate sufficient cash flow from operations to make scheduled principal and interest payments in the future,
we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures or seek additional equity. The terms of our existing or future debt agreements, including the First Lien Term Loan and the ABL Facility, may also restrict us from affecting any of these alternatives. Further, changes in the credit and capital markets, including market disruptions and interest rate fluctuations, may increase the cost of financing, make it more difficult to obtain favorable terms, or restrict our access to these sources of future liquidity. Our ABL Revolving Facility is scheduled to mature on July 28, 2027 and our First Lien Term Loan is scheduled to mature on February 3, 2024. See "Liquidity and Capital Resources." If we are unable to refinance any of our indebtedness on commercially reasonable terms or at all or to effect
any other action relating to our indebtedness on satisfactory terms or at all, it could have a material adverse effect on our business, financial condition and results of operations.
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 second quarter of fiscal year 2022.
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
446 shares of common stock for the period May 1, 2022 to May 28, 2022 and 5,499 shares of common stock for the period May 29, 2022 to July 2, 2022 surrendered to the Company by employees to satisfy their tax withholding obligations in connection with the vesting of restricted 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, effective immediately, 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.
