BJ’s Wholesale Club Holdings, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 30, 2021, the third quarter and first nine months of fiscal 2021. Although the request metadata says “2020 Q3,” the filing itself is for fiscal 2021 Q3; the comparable quarter ended October 31, 2020. Dollar amounts below are U.S. dollars.
Business context
BJ’s operates warehouse clubs and gas stations, primarily on the U.S. East Coast. At quarter-end it operated 222 clubs and 151 gas stations across 17 states, with more than six million members. Club retail operations are its only reportable segment.
Key financial results
| Metric | Q3 FY2021 | Q3 FY2020 | First 39 weeks FY2021 | First 39 weeks FY2020 |
|---|---|---|---|---|
| Total revenue | $4.264 billion | $3.732 billion | $12.309 billion | $11.483 billion |
| Net sales | $4.173 billion | $3.647 billion | $12.043 billion | $11.236 billion |
| Operating income | $170.2 million | $190.4 million | $460.2 million | $497.7 million |
| Net income | $126.5 million | $122.8 million | $319.1 million | $325.1 million |
| Diluted EPS | $0.92 | $0.88 | $2.31 | $2.34 |
| Adjusted EBITDA | $228.4 million | $242.2 million | $650.9 million | $653.0 million |
| Free cash flow | $99.2 million | $20.3 million | $529.8 million | $675.1 million |
Q3 net sales rose 14.4%, while comparable club sales increased 13.1%; gasoline contributed 7.4 percentage points and merchandise comps rose 5.7%. Membership fee income rose 7.7% to $91.5 million. For the first nine months, net sales increased 7.2%, comparable club sales rose 5.7%, and merchandise comps declined 1.0%, reflecting normalized demand in several grocery categories.
Q3 cost of sales was 83.2% of net sales versus 81.9% a year earlier, implying gross margin of 16.8% versus 18.1%. Operating margin was approximately 4.1% versus 5.2%; net margin was approximately 3.0% versus 3.4%. For the first nine months, cost of sales was 83.3% of net sales versus 82.3%. Q3 net income increased despite lower operating income, helped by lower interest expense and a lower effective tax rate. Nine-month net income and diluted EPS declined year over year.
Cash, debt and liquidity
For the first 39 weeks, operating cash flow was $733.2 million, down from $802.0 million. Capital expenditures, net of disposals, were $222.5 million; sale-leaseback proceeds were $19.1 million. Cash and cash equivalents were $84.7 million at October 30, 2021. The company reported $930.6 million of unused ABL revolving capacity, with $50.0 million outstanding under the ABL Facility and $701.9 million outstanding under the First Lien Term Loan. Total gross debt was $751.9 million, down from $1.112 billion at October 31, 2020. Management said available liquidity should be adequate for operations, debt obligations, investment and expansion for the foreseeable future.
During the first nine months, the company repurchased $135.1 million of shares and made $100 million of First Lien Term Loan repayments. A new $500 million share repurchase authorization was approved on November 16, 2021, after the quarter-end; the prior program was fully exhausted on November 17.
Changes, outlook and risks
- Q3 Adjusted EBITDA fell 5.7% year over year, and its margin on net sales declined to 5.5% from 6.6%. Management cited freight-cost increases, price investments in inflation-affected categories, higher team-member wages, incentive-compensation timing and other operating investments.
- For the first nine months, merchandise margin benefited from general merchandise mix and private-label penetration, but higher gasoline sales, freight costs and inflation-related price investments pressured cost of sales.
- Management reported continuing supply-chain challenges and inflationary pressure, with potential effects on product availability, sales, costs and margins. COVID-19-related demand and longer-term effects remain uncertain; labor shortages, gasoline-price volatility, consumer spending, competition, vendor supply and cybersecurity are also identified risks.
- The filing provides no quantified full-year sales, earnings or margin guidance. Management expects SG&A to increase in future periods as it invests in comparable-sales growth and club expansion. It expects to take possession of a new home-office lease in Q4 FY2021.
- Q3 pre-opening expense rose to $3.1 million from $0.6 million, attributed to the timing of club and gas-station openings. Nine-month stock-based compensation included $17.5 million related to a former executive; this also contributed to a lower effective tax rate through excess stock-compensation tax benefits.
- Management reported no material changes to previously disclosed risk factors, no material expected loss from current legal proceedings, and effective disclosure controls as of October 30, 2021.
Important facts for investors to verify
- Confirm that year-over-year sales and comparable-sales growth can be sustained as pandemic-related demand normalizes, particularly in grocery.
- Track whether freight, wage and other inflationary costs continue to pressure merchandise and operating margins, and whether pricing offsets those pressures.
- Assess operating cash flow and free cash flow trends alongside higher capital spending and continued share repurchases.
- Review debt balances, variable-rate exposure, interest-rate swap accounting and the availability of ABL capacity.
- Evaluate the impact of the new $500 million repurchase authorization on liquidity, leverage and share count; repurchases are discretionary, not required.