BJ’s Wholesale Club Holdings, Inc. — Form 10-K Summary
Period clarification: The supplied filing is for fiscal 2018, the 52 weeks ended February 2, 2019—not fiscal 2017 Q4. Fiscal 2017, the prior comparable year, had 53 weeks ended February 3, 2018; its extra week contributed approximately $240 million of net sales and $7 million of net income.
Business context
BJ’s operates membership warehouse clubs primarily in the eastern United States. At year-end it had 216 clubs in 16 states, approximately 5.5 million paid members, and 138 gasoline stations. Its only reportable segment is club retail operations. The company completed its IPO in July 2018.
Financial performance
| Metric | FY2018 | FY2017 | Change or context |
|---|---|---|---|
| Net sales | $12.724 billion | $12.496 billion | +1.8%; comparable club sales +3.7% |
| Membership fee income | $282.9 million | $258.6 million | +9.4% |
| Total revenues | $13.007 billion | $12.755 billion | +2.0% |
| Operating income | $303.5 million | $220.3 million | +37.8%; operating margin on net sales approximately 2.4% vs. 1.8% |
| Net income | $127.3 million | $50.3 million | +153%; net margin on net sales approximately 1.0% vs. 0.4% |
| Adjusted EBITDA (non-GAAP) | $578.4 million | $533.5 million | +8.4%; 4.5% vs. 4.3% of net sales |
| Operating cash flow | $427.1 million | $210.1 million | Up $217.0 million |
| Capital expenditures | $145.9 million | $137.5 million | Technology, new and relocated clubs |
| Free cash flow (non-GAAP) | $281.2 million | $72.6 million | Operating cash flow less capital expenditures |
Comparable sales excluding gasoline rose 2.2%; gasoline contributed 1.5 percentage points to comparable sales growth. Cost of sales declined to 83.7% of net sales from 84.1%, reflecting procurement and merchandise-margin improvements, partly offset by a higher gasoline sales mix. Membership renewal reached a record 87%, versus 86%.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $27.1 million at February 2, 2019, down from $35.0 million.
- Debt carrying value was approximately $1.801 billion, including $254.4 million current and $1.546 billion long-term; gross principal was approximately $1.819 billion. The filing cites $1.546 billion as long-term debt outstanding.
- Borrowing availability under the asset-based revolving credit facility was $545.6 million. Management said cash, expected operating cash flow and available borrowing capacity should fund operations, debt obligations and anticipated capital spending.
- Current assets of $1.337 billion were below current liabilities of $1.578 billion. Stockholders’ deficit was $202.1 million.
- Total contractual obligations were $5.944 billion, including $3.246 billion of operating lease payments and $2.250 billion of scheduled debt and interest payments.
- Substantially all borrowings were variable rate. A 100-basis-point rate increase was estimated to raise annual interest expense by approximately $22 million. Swaps effective February 13, 2019 fixed the LIBOR component on $1.2 billion of floating-rate debt at approximately 3.0%.
Material changes and unusual items
- The company used approximately $686 million of net IPO proceeds to repay the $623.3 million Second Lien Term Loan. It also repriced and reduced the First Lien Term Loan and amended the ABL Facility, extending its maturity to August 2023 and lowering applicable spreads. The First Lien Term Loan matures in February 2024.
- FY2018 interest expense fell to $164.5 million from $196.7 million, but included $25.4 million of refinancing-related charges. FY2018 also included $48.9 million of IPO-related stock compensation, $3.8 million of offering costs, and a $4.0 million fixed-asset impairment for a relocated club.
- FY2017 included $78.0 million of option-holder compensation and a $32.1 million tax benefit from remeasuring deferred taxes after the Tax Cuts and Jobs Act. The unusual tax benefit contributed to a negative 120.7% effective tax rate in FY2017; FY2018’s effective rate was 8.5%.
- Private-label products reached 20% of merchandise sales, up from 19%. Management said the shift generally supports margins but may reduce reported sales relative to branded-product mix. Gasoline’s lower margins can also dilute the overall gross margin rate.
- The company adopted ASC 606 in FY2018 using the modified retrospective method; prior-year figures were not restated. It expected to adopt the new lease standard in FY2019 and estimated recognition of $1.9–$2.1 billion of operating lease liabilities.
Outlook, commentary and risks
The filing provides no specific forward financial guidance. Management described continued investment in technology, marketing, payroll, club growth and omnichannel capabilities, including website and mobile-app improvements and same-day delivery. It highlighted cost discipline, membership growth, procurement improvements and positive comparable sales as drivers of performance. Management cautioned that future results depend on consumer spending, member retention, pricing and sourcing, and successful execution of these investments.
- Membership fees contributed approximately half of Adjusted EBITDA, making renewal, member acquisition and loyalty important profit drivers.
- The New York metropolitan area generated approximately 25% of net sales. One third-party distributor consolidates a substantial majority of perishables, creating concentration and disruption risk.
- EBT payments represented approximately 5% of net sales in fiscal years 2015–2018; changes to SNAP could affect sales.
- Other material risks include intense price competition, commodity and gasoline-price volatility, labor and freight costs, supply disruptions, cybersecurity and payment-card security, product safety, weather events, and execution of omnichannel and new-club initiatives.
- The company reported a March 2018 data breach at its travel vendor affecting personal information of several hundred members. Management did not expect current legal proceedings to have a material adverse impact.
- Management concluded disclosure controls were effective at February 2, 2019. The 10-K did not include management’s assessment or auditor attestation of internal control over financial reporting because of the newly public company transition period. The independent auditor issued an unqualified opinion on the financial statements.
Key facts for investors to verify
- Confirm the fiscal-period comparison: FY2018 had 52 weeks, while FY2017 had 53, and assess comparable-sales trends excluding gasoline.
- Review the composition and sustainability of earnings growth, including IPO-related compensation, refinancing charges, non-GAAP adjustments and the unusually low FY2018 tax rate.
- Track debt reduction, variable-rate exposure, swap coverage, ABL borrowing availability and the company’s ability to meet substantial lease and debt commitments.
- Monitor membership renewal and fee income, private-label mix, gasoline contribution, and performance in the New York metropolitan area.
- Assess the impact of the new lease accounting standard and confirm the actual recognized lease assets and liabilities after adoption.
- Consider share supply and governance: the Sponsors retained significant influence, and a March 2019 secondary offering involved selling stockholders; the company received no proceeds from secondary sales.