BJ’s Wholesale Club Holdings, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended May 2, 2020 (first quarter of fiscal 2020), compared with the 13 weeks ended May 4, 2019. Although the request metadata says 2019 Q1, the filing itself reports fiscal 2020 Q1. BJ’s operated 218 clubs and 145 gas stations in 17 states.
Financial results
| Metric | Q1 FY2020 | Q1 FY2019 | Change / context |
|---|---|---|---|
| Net sales | $3.718 billion | $3.070 billion | Up 21.1% |
| Membership fee income | $79.6 million | $73.4 million | Up 8.4% |
| Total revenues | $3.798 billion | $3.143 billion | Up 20.8% |
| Operating income | $143.8 million | $70.7 million | Operating margin on total revenues: 3.8%, versus 2.2% |
| Net income | $95.7 million | $35.8 million | Diluted EPS $0.69, versus $0.25 |
| Adjusted EBITDA | $193.9 million | $124.1 million | 5.2% of net sales, versus 4.0% |
| Operating cash flow | $469.9 million | $44.9 million | Increase primarily reflected sales-related working capital benefits and lower interest payments |
| Capital expenditures | $35.2 million | $36.5 million | Free cash flow was $434.7 million, versus $8.4 million |
Cost of sales was 82.3% of net sales, compared with 83.7%. The resulting improvement reflected stronger gasoline margins as fuel costs fell rapidly; merchandise margin declined about 0.3 percentage points. SG&A rose 17.8% to $590.4 million, including substantial COVID-related costs.
Liquidity and debt
- Cash and cash equivalents were $132.9 million at May 2, 2020, up from $30.2 million at February 1, 2020.
- Gross principal debt was approximately $1.362 billion: $1.312 billion under the First Lien Term Loan and $50 million under the ABL Facility. Total debt was below the $1.807 billion reported at May 4, 2019. The company reported a net leverage ratio below 2.00.
- Unused ABL revolving capacity was $770.6 million, with $22.1 million of letters of credit outstanding. The First Lien Term Loan rate was 3.08%; the ABL revolver rate was 1.45%.
- Management said cash, expected operating cash flow and ABL availability should be sufficient for operations, debt obligations and anticipated capital spending. Substantially all borrowings carry variable rates; $1.2 billion of floating-rate debt was hedged at an approximately 3.0% LIBOR component through February 2022.
Material changes, outlook and risks
- COVID-19 drove unusually strong demand: Comparable club sales increased 19.9%; merchandise comparable sales rose 27.0%. Grocery sales grew approximately 33%, while general merchandise and services fell approximately 3%. Gasoline sales declined 25.3%, reflecting lower demand and pump prices. Grocery became 81% of net sales, versus 74% a year earlier.
- Higher pandemic-related expenses: Q1 SG&A included $51.3 million of wage increases and bonus expense, $8.8 million for safety and protective equipment, and $1.7 million of other operating costs. Management expected elevated COVID-related costs in Q2 and potentially later, but at lower rates than in Q1.
- Uncertain demand and operations: Management cautioned that pandemic-driven grocery demand could reverse. Risks include changing consumer behavior, store restrictions or closures, supply and staffing disruptions, lower discretionary spending, and increased markdowns or costs. The duration and financial impact of the pandemic remained uncertain.
- Debt and capital allocation: Interest expense fell to $21.8 million from $27.8 million, reflecting deleveraging and the January 2020 term-loan repricing. BJ’s repurchased 175,000 shares for $4.0 million under its buyback program during the quarter; $246.0 million remained authorized.
- No full-year financial guidance was provided in the supplied filing text. The company noted customary seasonality, with sales and operating income historically stronger in Q2 and Q4. It reported no material expected loss from current legal proceedings and no material change in contractual obligations outside ordinary operations.
Important facts for investors to verify
- Whether exceptional COVID-era sales growth, particularly in grocery, persists or reverses, and how comparable sales trend after the reported quarter.
- Whether pandemic-related labor, safety, supply-chain and distribution costs decline as management expected, and their effect on margins.
- The sustainability of the quarter’s unusually high operating cash flow, much of which benefited from working capital movements, including accounts payable and inventory.
- Debt reduction, available ABL capacity, variable-rate exposure and the effect of interest-rate changes despite the company’s swaps.
- That reported cash and liquidity, debt figures and share-repurchase activity are being compared on consistent dates and definitions.