BJ’s Wholesale Club Holdings, Inc. — Form 10-Q
Reporting period: Third quarter of fiscal 2018, the 13 weeks ended November 3, 2018, and year-to-date, the 39 weeks ended November 3, 2018. The request metadata says “2017 Q3,” but the filing itself covers 2018 Q3. Financial statement amounts below are in millions unless noted.
Business context
BJ’s operated 216 warehouse clubs in 16 states, including 136 with gasoline stations. Its business combines merchandise sales, membership fees, gasoline and ancillary services. Results are seasonal, with sales and operating income typically higher in the second and fourth quarters.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Net sales | $3,150.2 | $3,019.4 | $9,380.6 | $9,006.0 |
| Membership fee income | $71.4 | $64.9 | $209.8 | $192.6 |
| Total revenues | $3,221.7 | $3,084.2 | $9,590.5 | $9,198.6 |
| Operating income | $90.3 | $80.5 | $193.6 | $127.5 |
| Net income (loss) | $54.4 | $22.8 | $63.0 | $(16.4) |
| Diluted EPS | $0.39 | $0.25 | $0.55 | $(0.18) |
| Adjusted EBITDA | $148.6 | $141.1 | $413.1 | $375.5 |
| Adjusted EBITDA as % of net sales | 4.7% | 4.7% | 4.4% | 4.2% |
Q3 net sales increased 4.3%; comparable club sales rose 3.6%, including a 1.7 percentage-point contribution from gasoline. Comparable sales excluding gasoline grew 1.9%. Year-to-date, net sales rose 4.2%, comparable sales increased 4.1%, and comparable sales excluding gasoline increased 2.0%.
Cost of sales was 83.5% of net sales in Q3 versus 83.6% a year earlier, and 83.8% year-to-date versus 84.2%. Management attributed margin improvement primarily to merchandise profitability initiatives and procurement savings, partly offset by gasoline’s lower margins. Membership fee income rose 10.1% in Q3 and 9.0% year-to-date, reflecting the January 2018 fee increase and member acquisition efforts. Q3 SG&A increased 4.0%; management cited membership marketing and payroll investments. Year-to-date SG&A included substantial IPO-related stock compensation.
Cash flow, debt and liquidity
- For the first 39 weeks, operating cash flow was $250.9 million, capital expenditures were $103.3 million and free cash flow, as defined by the company, was $147.6 million, versus $100.4 million, $86.1 million and $14.2 million, respectively, in the prior-year period.
- Cash was $31.5 million at November 3, 2018. Total debt carrying value was $1,957.9 million; debt fair value was $1,959.3 million. The company reported $389.4 million as current debt and $1,549.4 million as long-term debt.
- The ABL Facility had $424.0 million of borrowings, $45.1 million of letters of credit outstanding and $521.6 million of borrowing availability. Its maturity was extended to August 17, 2023. The First Lien Term Loan had $1,533.9 million outstanding and matures February 3, 2024.
- Management said cash, anticipated operating cash flow and ABL availability should be sufficient for operations, debt obligations and anticipated capital expenditures. The filing notes that substantially all borrowings carry variable rates; a 100-basis-point increase would have an estimated annual interest expense impact of $19.6 million before hedges.
Material changes, outlook and notable items
- The July 2018 IPO generated $685.9 million net proceeds, used principally to repay the $623.2 million Second Lien Term Loan. In August, the company repriced and reduced its First Lien Term Loan, and amended the ABL Facility to extend maturity and lower applicable rates and fees.
- A secondary offering of 32.2 million shares by selling stockholders closed in October; BJ’s received no proceeds. The company completed its IPO in July and reported $55.0 million of stock-based compensation for the 39-week period, including $48.9 million related to the IPO. It also reported $25.4 million of year-to-date debt extinguishment and refinancing charges.
- The reported tax benefit reduced the year-to-date effective tax rate to negative 13.6%. Management estimated the fiscal 2018 annual effective tax rate at approximately 27%, excluding discrete items. Q3’s 4.8% effective rate reflected stock-option windfall benefits, tax-law changes and other discrete tax adjustments.
- On November 13, 2018, the company entered into forward-starting swaps to fix the LIBOR component on $1.2 billion of floating-rate debt at approximately 3.0%, effective February 13, 2019. The company expected to elect hedge accounting.
- The filing provides no specific sales or earnings guidance. Management highlighted planned investments in membership marketing, payroll, technology and club growth. Adoption of the new lease standard was expected to materially increase reported balance-sheet assets and liabilities, but not directly affect overall financial condition.
- Risks include variable-rate debt and leverage, member retention and competition, gasoline-price and product-mix changes, supply and perishables distribution disruptions, cybersecurity and privacy, labor costs, seasonal volatility, and execution of new-club and technology investments. The company reported no legal proceedings it believed would materially adversely affect its financial position, results or cash flows; it continued to carry obligations for two clubs closed in 2011.
Important facts for investors to verify
- Whether comparable-sales growth excluding gasoline and membership-fee growth continue, and how gasoline prices and sales mix affect reported growth and margins.
- Debt repayment, ABL borrowing-base availability and interest-rate exposure; confirm the impact and effectiveness of the announced swaps after they take effect.
- The quality and sustainability of operating cash flow and free cash flow, including working-capital movements and planned capital spending.
- The extent to which IPO-related stock compensation, refinancing costs and discrete tax benefits affect comparisons with future periods.
- Lease obligations and the balance-sheet effects of lease accounting adoption, alongside execution risks from club expansion, technology investment and cybersecurity exposure.