BJ's Wholesale Club Holdings, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended August 4, 2018, compared with periods ended July 29, 2017. The request metadata says 2017 Q2, but the filing itself is for fiscal 2018 Q2. BJ's operated 215 clubs in 16 states. It completed its IPO in June 2018 and began trading on the NYSE under “BJ.”
Financial performance
| Metric | 13 weeks ended Aug. 4, 2018 | 13 weeks ended July 29, 2017 | 26 weeks ended Aug. 4, 2018 | 26 weeks ended July 29, 2017 |
|---|---|---|---|---|
| Net sales | $3.237 billion | $3.103 billion | $6.230 billion | $5.987 billion |
| Membership fee income | $70.4 million | $64.2 million | $138.4 million | $127.7 million |
| Operating income | $38.7 million | $74.8 million | $103.2 million | $47.0 million |
| Net income (loss) | $(5.6) million | $19.7 million | $8.5 million | $(39.2) million |
| Adjusted EBITDA | $143.0 million | $135.7 million | $264.6 million | $234.4 million |
| Adjusted EBITDA as % of net sales | 4.4% | 4.4% | 4.2% | 3.9% |
Margins and sales trends: Cost of sales was 84.0% of net sales in Q2 versus 84.2% a year earlier, and 83.9% for the first half versus 84.4%. Comparable club sales increased 5.0% in Q2 and 4.2% in the first half; excluding gasoline, growth was 2.0% in both periods. Gasoline contributed 3.0 and 2.2 percentage points, respectively, largely from price inflation. Membership fee income rose 9.7% in Q2 and 8.4% for the first half, reflecting the January 2018 fee increase and member acquisition.
Cash flow and liquidity: First-half operating cash flow was $203.2 million, capital expenditures were $75.7 million, and free cash flow (a non-GAAP measure) was $127.6 million, compared with $54.0 million, $46.3 million, and $7.7 million, respectively, in the prior-year period. Cash was $31.3 million at August 4, 2018. ABL borrowing availability was $672.9 million, with $93.0 million drawn and $46.7 million in letters of credit.
Debt and capital: At August 4, total debt principal before unamortized discounts and issuance costs was approximately $1.981 billion; balance-sheet carrying value, including current maturities, was approximately $1.956 billion. The company repaid its $623.2 million second-lien term loan using IPO proceeds. The IPO raised approximately $685.9 million net; the company states it used proceeds to repay that loan and for general corporate purposes. Total stockholders' deficit was $317.9 million.
Material changes and unusual items
- Q2 operating income declined to $38.7 million from $74.8 million, while the company reported a net loss. SG&A rose 15.1% to $549.2 million, chiefly due to IPO-related stock compensation, including $48.9 million, and other IPO costs. First-half stock-based compensation expense was $52.1 million versus $5.7 million a year earlier.
- Q2 net interest expense increased to $59.6 million from $43.8 million, including $19.2 million of debt extinguishment and refinancing charges. For the first half, net interest expense was $104.8 million versus $107.9 million.
- First-half operating cash flow improved substantially, which management attributed to improved operating income and margins, higher membership income, working-capital changes, and $73.7 million of option-holder compensation paid in the prior-year period.
- On August 13, after quarter-end, BJ's refinanced its first-lien term loan to an initial principal amount of $1.54 billion, with a 3.00% LIBOR margin or 2.00% base-rate margin, subject to stated leverage stepdowns. On August 17, it amended the ABL facility, extending maturity to August 17, 2023 and reducing interest margins and letter-of-credit fees.
- The Hooksett, New Hampshire club property was classified as held for sale after a $3.0 million impairment charge; it was sold on August 15 for $6.6 million.
Outlook, commentary, and risks
- Management said current resources, operating cash flows, and ABL capacity should be sufficient for operations, debt obligations, and planned capital expenditures. No specific sales or earnings guidance is provided in the supplied filing text.
- The company estimated a 27.2% fiscal 2018 effective tax rate excluding discrete items. Reported first-half effective tax rate was 682%, affected by the tax-law rate change and a stock-option windfall tax benefit; the unusually high percentage reflects the small pretax-loss denominator.
- Management cited continued assortment optimization and private-label penetration as contributors to lower cost of sales as a percentage of sales. It also noted higher marketing and insurance costs. The business is seasonal, with historically stronger sales and operating income in Q2 and Q4.
- Key risks include substantial variable-rate debt and potential interest-rate increases; dependence on membership renewal and consumer spending; competition and pressure to maintain low prices; gasoline price and margin volatility; supply-chain and perishables-distribution concentration; cybersecurity and privacy exposure, including a vendor-related member-data breach disclosed in March 2018; lease commitments; and execution of technology and club-growth plans.
- The company reported no legal proceeding it believed would materially adversely affect its financial position, results, or cash flows. Management concluded disclosure controls were effective as of August 4, 2018. The filing notes that new lease accounting rules are expected to materially increase balance-sheet assets and liabilities.
Important facts for investors to verify
- Whether comparable sales growth excluding gasoline—2.0% in Q2 and the first half—continues, given the substantial contribution from gasoline price inflation.
- How much of Q2 and first-half earnings and adjusted EBITDA reflects recurring operations versus IPO-related stock compensation, refinancing charges, and other adjustments; Adjusted EBITDA is non-GAAP.
- The effect of the August debt refinancings on interest expense, leverage, borrowing availability, and debt maturities, especially given the company's variable-rate exposure.
- Whether operating cash flow and free cash flow remain strong after accounting for working-capital movements and increased capital expenditures.
- Membership growth and renewal trends following the January fee increase, and the potential impact on member loyalty and sales.
- The implications of the filing's post-IPO ownership and governance disclosures: Sponsors held approximately 66% of common stock and BJ's relied on controlled-company exemptions.