Business context and reporting period
BJ’s Wholesale Club Holdings, Inc. operates warehouse clubs and gas stations, with a membership-based retail model. This filing covers the 13 weeks ended October 31, 2020 (fiscal 2020 third quarter) and the 39 weeks ended October 31, 2020, compared with the corresponding 2019 periods. Although the request metadata says “2019 Q3,” the filing itself is for 2020 Q3. At quarter-end, BJ’s operated 219 clubs and 149 gas stations in 17 states.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First 39 weeks 2020 | First 39 weeks 2019 |
|---|---|---|---|---|
| Net sales | $3,646.7 million | $3,152.9 million | $11,236.4 million | $9,493.8 million |
| Total revenues | $3,731.7 million | $3,229.4 million | $11,483.4 million | $9,718.4 million |
| Operating income | $190.4 million | $100.9 million | $497.7 million | $270.4 million |
| Net income | $122.8 million | $55.1 million | $325.1 million | $145.4 million |
| Diluted EPS | $0.88 | $0.40 | $2.34 | $1.04 |
| Adjusted EBITDA | $242.2 million | $154.1 million | $653.0 million | $431.4 million |
Q3 gross margin was approximately 18.1% of net sales, versus 17.2% a year earlier; operating margin was approximately 5.1% of total revenues, versus 3.1%. Adjusted EBITDA was 6.6% of net sales, compared with 4.9%. For the first 39 weeks, Adjusted EBITDA was 5.8% of net sales versus 4.5%.
Membership fee income rose 11.0% to $84.9 million in Q3 and 10.0% to $247.0 million for the first 39 weeks. Comparable club sales increased 14.1% in Q3, including merchandise comparable sales growth of 18.5%; for the first 39 weeks, the increases were 17.0% and 23.2%, respectively.
Cash flow, debt and liquidity
- For the first 39 weeks, operating cash flow was $802.0 million, compared with $221.5 million; capital expenditures, net of disposals, were $152.8 million. Free cash flow, as defined by the company and including sale-leaseback proceeds, was $675.1 million versus $77.1 million.
- Cash at October 31, 2020 was $46.1 million. The company reported $670.8 million of unused ABL revolving capacity, with $310.0 million drawn and $21.2 million of letters of credit outstanding.
- Total debt carrying amount was approximately $1.112 billion, down from $1.803 billion at November 2, 2019. The First Lien Term Loan balance was $801.9 million and ABL borrowings were $310.0 million. The company also reported $260.0 million as the current portion of long-term debt.
- During the quarter, BJ’s borrowed $260 million under the ABL Facility and used it together with $100 million of cash to repay $360 million of First Lien Term Loan principal. For the first 39 weeks, it repurchased $88.1 million of shares under its program.
Material changes, outlook and risks
- Management attributed strong sales growth to pandemic-related demand, especially for grocery, alongside sales increases in general merchandise. It cautioned that this demand could reverse as purchasing behavior changes. Gasoline sales declined 12.8% in Q3 and 21.7% for the first 39 weeks, primarily due to lower retail prices.
- Q3 cost of sales declined to 81.9% of net sales from 82.8%, helped by improved gasoline margins; merchandise margin improved 10 basis points. For the first 39 weeks, cost of sales was 82.3% versus 83.4%, but merchandise margin declined 10 basis points, reflecting pandemic-related distribution costs, weaker apparel and services, and other price and mix effects.
- SG&A increased 8.2% in Q3 and 13.8% for the first 39 weeks. The company cited pandemic-related labor, safety, protective equipment and other operating costs, and expected additional pandemic-related expenses in Q4 and potentially beyond. The filing provides no specific earnings or sales guidance.
- Q3 interest expense included a $5.1 million loss reclassified from accumulated other comprehensive income following the de-designation of part of an interest-rate swap, plus $2.8 million of debt-cost write-offs related to the term-loan prepayment. On November 10, 2020, the company terminated a $360 million-notional swap and paid the counterparty $13.1 million.
- Key risks include uncertain COVID-19 effects on demand, member traffic, operations and costs; supply-chain and staffing disruptions; competition and consumer spending changes; and variable-rate debt exposure. Management said it believed cash, operating cash flows and ABL availability would be sufficient for operations, debt obligations and anticipated capital expenditures. It reported no material expected loss from current legal proceedings and no material change in contractual obligations outside ordinary-course items.
Important facts for investors to verify
- Whether pandemic-driven grocery demand and elevated comparable sales persist or normalize, and how changes in product mix affect margins.
- Whether incremental COVID-19 operating costs continue to rise, and whether they offset further sales or margin gains.
- Cash-flow durability: the reported first-nine-month operating cash flow benefited from working-capital movements, including higher accounts payable and inventory-related changes.
- Debt repayment and refinancing details, including the effects of variable rates and swaps; verify the subsequent $13.1 million swap termination payment.
- Share repurchases, remaining authorization ($161.9 million at quarter-end), and their effect on share count and liquidity.