BJ’s Wholesale Club Holdings, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended May 4, 2019, the first quarter of fiscal 2019. The request metadata says “2018 Q1,” but the filing’s period is Q1 2019; the comparable prior-year quarter ended May 5, 2018. Amounts below are in U.S. dollars.
Business context and results
BJ’s operated 217 warehouse clubs and 138 gasoline stations across 16 states. Its club retail operations are its sole reportable segment. The company cited approximately 5.5 million members and an 87% membership renewal rate for fiscal 2018.
| Metric | Q1 FY2019 | Q1 FY2018 | Change / note |
|---|---|---|---|
| Net sales | $3.070 billion | $2.994 billion | +2.5% |
| Membership fee income | $73.4 million | $68.0 million | +8.0% |
| Total revenues | $3.143 billion | $3.062 billion | +2.7% |
| Operating income | $70.7 million | $64.6 million | Operating margin on total revenue: 2.25% vs. 2.11% |
| Net income | $35.8 million | $14.1 million | Diluted EPS: $0.25 vs. $0.15 |
| Adjusted EBITDA | $124.1 million | $121.6 million | 4.0% vs. 4.1% of net sales; non-GAAP measure |
| Operating cash flow | $44.9 million | $65.4 million | Lower by $20.4 million |
| Capital expenditures | $36.5 million | $42.1 million | Free cash flow: $8.4 million vs. $23.2 million |
Margins, liquidity, and debt
- Cost of sales was 83.7% of net sales, compared with 83.9% a year earlier; the company attributed the improvement mainly to merchandise margin gains, partly offset by a higher gasoline sales mix. Comparable club sales rose 2.0%; merchandise comparable club sales rose 1.9%.
- Cash and cash equivalents were $29.9 million at May 4, 2019. ABL borrowing availability was $560.8 million, with $281.0 million drawn and $29.2 million of letters of credit outstanding. Management said cash, expected operating cash flows, and ABL capacity should be sufficient for operations, debt obligations, and anticipated capital spending for at least 12 months.
- Balance-sheet current assets were $1.343 billion versus current liabilities of $1.674 billion. Long-term debt was $1.544 billion and current debt was $246.4 million. The First Lien Term Loan rate was 5.47%; the ABL revolver rate was 3.73%.
- The company adopted lease accounting standard ASC 842 in Q1 FY2019. At May 4, operating lease right-of-use assets were $2.056 billion on the balance sheet and operating lease liabilities totaled $2.089 billion. Adoption initially recognized $2.040 billion of ROU assets and $2.071 billion of lease liabilities and reduced opening retained earnings by $11.6 million; the filing says adoption did not materially affect quarterly earnings or cash flows.
Material changes and management commentary
- Sales growth was driven by 2.0% comparable club sales. General merchandise sales increased approximately 9%, while perishables declined approximately 1%; gasoline contributed 0.1 percentage point to comparable sales.
- Membership fee growth reflected a 2018 fee increase and member growth. Cost of sales as a share of net sales improved by 0.2 percentage point. SG&A increased 3.2%, which management attributed to continued payroll investment supporting strategic priorities.
- Interest expense declined to $27.8 million from $45.2 million, primarily reflecting repayment of the Second Lien Term Loan and prior repricing of the First Lien Term Loan and ABL. The Second Lien was repaid using IPO proceeds in July 2018.
- The company reported a 15.9% effective tax rate versus 26.2%, primarily due to stock-option windfall tax benefits. Its estimated FY2019 annual effective tax rate was approximately 27.3% excluding discrete items.
- Management cited seasonality, with sales and operating income historically stronger in the second and fourth quarters. No specific full-year sales or earnings guidance was provided in the supplied filing text.
Risks, contingencies, and unusual items
- The company identifies consumer spending and economic conditions, membership growth and renewal, changing product preferences, sourcing and supply constraints, gasoline price volatility, labor costs, inflation, and quarterly seasonality as factors that could affect results. Substantially all borrowings carry variable interest rates; $1.2 billion of floating-rate debt was hedged through swaps fixing the LIBOR component at approximately 3.0%.
- Management reported routine claims and litigation and did not believe any pending matter would materially adversely affect the company. It reported no material changes to the risk factors in its FY2018 Form 10-K and no material changes to contractual obligations.
- Q1 included $1.2 million of costs associated with the March 2019 secondary offering and $2.3 million of preopening expense. Adjusted EBITDA adds back several items, including strategic consulting, stock compensation, and offering costs; it is non-GAAP and may not be comparable to similarly titled measures at other companies.
- Comparative balance sheets and lease disclosures are not fully like-for-like because the company applied ASC 842 prospectively from adoption and did not restate prior periods. The filing says disclosure controls were effective at the reasonable assurance level as of May 4, 2019.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the filing is Q1 FY2019, although the request metadata identifies 2018 Q1.
- Assess whether the decline in operating cash flow and free cash flow reflects timing of payables and accrued expenses, as management states, and whether cash conversion improves in subsequent quarters.
- Monitor comparable sales, membership fee growth and renewal, merchandise margins, and gasoline mix for evidence that sales and profitability trends are sustainable.
- Review debt maturities, variable-rate exposure, ABL borrowing availability, and the effect of lease liabilities on leverage and liquidity comparisons.
- Distinguish GAAP results from Adjusted EBITDA and free cash flow, and account for the stock-option tax benefit when evaluating earnings growth.