BJ’s Wholesale Club Holdings, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 39 weeks ended October 29, 2022: BJ’s fiscal third quarter and first nine months of fiscal 2022, compared with corresponding 2021 periods. It is not a fiscal 2021 Q3 filing.
Business context and reporting period
BJ’s operates warehouse clubs primarily in the eastern United States. At quarter-end it operated 232 clubs and 163 gas stations in 18 states and reported more than 6.5 million paying members. The company completed its acquisition of four distribution centers and a private transportation fleet from Burris Logistics on May 2, 2022, to bring more of its perishable supply chain in-house.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | First 39 weeks FY2022 | First 39 weeks FY2021 |
|---|---|---|---|---|
| Total revenue | $4.785bn | $4.264bn | $14.386bn | $12.309bn |
| Operating income | $192.0m | $170.2m | $545.2m | $460.2m |
| Net income | $129.9m | $126.5m | $383.4m | $319.1m |
| Diluted EPS | $0.95 | $0.92 | $2.81 | $2.31 |
| Adjusted EBITDA | $272.3m | $228.4m | $766.8m | $650.9m |
| Free cash flow | $75.4m | $99.2m | $329.6m | $529.8m |
Q3 total revenue rose 12.2%, including net sales growth of 12.3% and membership fee income growth of 8.7%. Comparable club sales increased 9.7%, including a 4.4% contribution from gasoline; merchandise comparable sales rose 5.3%. Net income increased 2.7%, slower than revenue growth. Operating margin was approximately 4.0% of total revenue, versus 4.0% in the prior-year quarter; net margin was approximately 2.7%, versus 3.0%.
For the first nine months, revenue increased 16.9%, net income 20.2%, and diluted EPS from $2.31 to $2.81. Comparable club sales rose 14.6%, including an 8.9% gasoline contribution. Adjusted EBITDA margin as a percentage of net sales was 5.4% for both nine-month periods.
Q3 cost of sales was 83.4% of net sales, compared with 83.2%; merchandise gross margin declined 30 basis points. For the first nine months, cost of sales was 84.1% of net sales versus 83.3%, and merchandise gross margin declined 40 basis points. Management attributed pressure to supply-chain costs, inflation-related value investments, and general-merchandise markdowns.
Cash flow, debt, and liquidity
For the first 39 weeks, operating cash flow was $612.9m, down from $733.2m. Capital expenditures, net of disposals, were $294.3m; investing cash outflow totaled $659.7m, including $376.5m for acquisitions. Free cash flow fell to $329.6m from $529.8m, primarily due to working-capital outflows, including inventory for the acquired distribution centers, new clubs, and inflation.
At October 29, 2022, cash was $34.6m and total debt was approximately $896.9m, comprising $295.0m drawn on the ABL Revolving Facility and $601.9m on the First Lien Term Loan. The company reported $774.8m of unused revolving capacity. The ABL facility matures in July 2027; the term loan matures in February 2024. Interest rates were 4.73% on the revolver and 5.35% on the term loan. The company repaid $100m of term-loan principal during Q3 using revolver borrowings.
During the first nine months, BJ’s repurchased $108.7m of shares under its $500m repurchase program; $362.5m remained available at quarter-end. Management said current resources, operating cash flows, and revolver capacity should fund operations for at least the next 12 months.
Material changes, outlook, and risks
- Revenue growth reflected comparable-sales gains, gasoline, membership growth, and new clubs. Higher-tier membership penetration also increased; membership fee income grew 8.7% in Q3.
- Management expected inflationary pressures and supply-chain disruptions to continue through the rest of 2022, and said inflation would remain a factor into fiscal 2023. It cited elevated commodity, logistics, and procurement costs.
- SG&A rose 9.1% in Q3, driven mainly by labor and occupancy costs associated with new clubs and gas stations and costs related to the home-office transition. Pre-opening expense increased to $10.7m from $3.1m.
- The Burris acquisition generated $40.0m of incremental revenue during the first 39 weeks and incurred $12.3m of transaction and integration costs. Purchase-price allocation remained preliminary and could change during the measurement period.
- Substantially all borrowings carry variable rates, exposing the company to higher interest expense. The filing identifies consumer-spending, membership loyalty, competition, vendor and supply availability, inflation, fuel-price volatility, cybersecurity, and execution of growth plans as risks.
- No specific earnings or sales guidance was provided in the supplied filing. Management stated that future SG&A may rise with growth investments and new openings. Legal proceedings were described as routine, with no material loss expected; management reported disclosure controls effective at the reasonable-assurance level.
Important facts for investors to verify
- Confirm the filing period: this is fiscal Q3 2022, despite the request metadata identifying 2021 Q3.
- Track merchandise margin, inflation and supply-chain costs, and the extent to which sales gains reflect gasoline prices versus merchandise demand.
- Monitor operating cash conversion, inventory growth, capital spending, and free cash flow after the acquisition and club expansion.
- Review variable-rate debt exposure, the February 2024 term-loan maturity, and revolver usage and availability.
- Assess integration benefits and costs from the Burris acquisition, including any final purchase-accounting adjustments.
- Consider the effect of ongoing buybacks on cash, leverage, and diluted share count.