BJ’s Wholesale Club Holdings, Inc. — Form 10-K Summary
Period clarification: The supplied filing is the annual report for the 52 weeks ended January 29, 2022 (fiscal 2021), not a 2020 Q4 filing. Fiscal 2020 comparatives are for the 52 weeks ended January 30, 2021. Amounts below are in U.S. dollars.
Business context and reporting period
BJ’s operates membership warehouse clubs concentrated on the U.S. East Coast. At fiscal year-end, it had 226 clubs in 17 states and 157 gasoline stations. Retail operations are its sole reportable segment. The business combines merchandise sales, gasoline, membership fees, private-label products and online shopping and fulfillment services.
Financial performance, cash flow and liquidity
| Metric | Fiscal 2021 | Fiscal 2020 | Change or context |
|---|---|---|---|
| Total revenue | $16.67 billion | $15.43 billion | Up 8.0% |
| Net sales | $16.31 billion | $15.10 billion | Up 8.0% |
| Membership fee income | $360.9 million | $333.1 million | Up 8.4%; renewal rate 89%, versus 88% |
| Operating income | $617.3 million | $642.4 million | Down 3.9% |
| Net income | $426.7 million | $421.0 million | Up 1.3%; diluted EPS was $3.09 versus $3.03 |
| Adjusted EBITDA | $879.6 million | $857.5 million | Up 2.6%; 5.4% of net sales versus 5.7% |
| Cost of sales | 83.3% of net sales | 82.5% | Higher proportion, primarily reflecting greater gasoline sales penetration; merchandise gross margin rate rose approximately 20 basis points |
| Operating cash flow | $831.7 million | $868.5 million | Down, mainly due to working-capital timing |
| Capital expenditures, net of disposals | $323.6 million | $218.3 million | Higher investment in clubs, gas stations and digital capabilities |
| Free cash flow | $527.1 million | $676.1 million | Down; company cited working-capital and capital-spending timing |
Comparable club sales increased 6.5%, compared with 15.9% in fiscal 2020. Gasoline contributed 7.0 percentage points; merchandise comparable sales declined 0.5%, including a 1.7% decrease in grocery and approximately 5.7% growth in general merchandise and services.
At January 29, 2022, cash and cash equivalents were $45.4 million, with $886.9 million of unused ABL capacity. Gross principal debt was approximately $751.9 million ($50.0 million under the ABL Facility and $701.9 million under the First Lien Term Loan); reported long-term debt carrying value was $748.6 million. The ABL Facility matures August 2023 and the term loan February 2024; substantially all borrowings carry variable rates. Operating lease commitments were $3.44 billion, and purchase obligations totaled $1.86 billion.
Material changes versus the prior comparable period
- Revenue growth reflected 6.5% comparable club sales growth and sales from clubs opened in the prior two years. The comparable-sales increase was materially lower than the prior year’s 15.9%.
- Operating income fell despite higher revenue, as cost of sales rose to 83.3% of net sales and SG&A increased. SG&A included $43.1 million in club-team-member wage investments and $17.5 million in accelerated stock-based compensation related to a former executive.
- Net income increased modestly, supported in part by lower net interest expense ($59.4 million versus $84.4 million), following debt repayments. The effective tax rate declined to 23.5% from 24.5%.
- Membership fee income grew 8.4%, renewal improved to 89%, and higher-tier and co-branded card members increased as a share of membership and spending.
- Cash used in investing increased as the company expanded clubs, gas stations and digital capabilities. Fiscal 2021 included five new clubs and seven new gas stations.
Outlook, management commentary, risks and unusual items
The filing provides no numerical earnings or sales guidance. Management said current resources, expected operating cash flow and ABL borrowing capacity should fund operations for at least the next 12 months. It also reported continued strong sales, membership growth and traffic and ticket gains amid the pandemic, while noting supply-chain constraints, inflation and wage inflation. The company raised hourly club and warehouse wages effective September 1, 2021.
BJ’s entered an agreement to acquire four Burris Logistics distribution centers and a related private transportation fleet, expected to close in the second quarter of fiscal 2022. Management expects to bring more of the perishable supply chain in-house; the purchase was expected to be funded with cash and ABL borrowings. Completion, timing, terms and integration outcomes were not assured.
Key risks include inflation and limited ability to pass through cost increases, supply availability and reliance on a distributor for perishables, competition and member retention, COVID-19 effects, labor costs, variable-rate debt and upcoming maturities, LIBOR transition, cybersecurity and payment-data exposure, weather and geographic concentration. The New York metropolitan area represented 23% of fiscal 2021 net sales. The company also disclosed substantial lease commitments and risks from new-club investment.
Unusual or adjusted items included $17.5 million of accelerated stock compensation related to a former executive, $3.5 million of Burris acquisition and integration costs, $2.3 million of severance, and $6.3 million of losses reclassified from cash-flow hedges into interest expense. Adjusted net income was $448.9 million, compared with reported net income of $426.7 million. Management reported no impairment charges in fiscal 2021. Routine legal proceedings were disclosed; management did not expect current matters to have a material adverse effect. Workers’ compensation and general-liability reserves involved significant estimates and were identified as a critical audit matter. The auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Confirm the filing period: this is fiscal 2021, ended January 29, 2022, rather than 2020 Q4.
- Assess whether merchandise sales and margins can recover as pandemic-related demand patterns normalize, while separating gasoline price and mix effects from underlying sales.
- Review the company’s ability to manage inflation, freight and wage costs without weakening its value proposition or member renewal and spending.
- Track refinancing or repayment plans for the ABL Facility and term loan maturities in 2023 and 2024, and sensitivity to variable interest rates and the LIBOR transition.
- Verify the Burris acquisition’s closing, funding, integration costs and effects on perishable-product supply reliability.
- Consider lease and purchase commitments, share repurchases, and the assumptions underlying self-insurance reserves and adjusted performance measures.