BJ’s Wholesale Club Holdings, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 26 weeks ended August 3, 2019—the second quarter and first half of fiscal 2019, respectively. This differs from the request metadata’s “2018 Q2.” Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and reporting period
BJ’s operates membership warehouse clubs, primarily on the U.S. East Coast. At August 3, 2019, it had 217 clubs and 140 gas stations in 16 states, with approximately 5.5 million members. Its business includes club and online merchandise sales, gasoline, and membership fees. Results are seasonal and the company says the second and fourth quarters typically benefit from summer and holiday activity.
Financial performance and liquidity
| Metric | 13 weeks ended August 3, 2019 | 26 weeks ended August 3, 2019 |
|---|---|---|
| Net sales | $3,271.1 million, up 1.1% | $6,340.9 million, up 1.8% |
| Membership fee income | $74.7 million, up 6.0% | $148.1 million, up 7.0% |
| Operating income | $98.7 million | $169.4 million |
| Net income | $54.5 million, versus a $5.6 million loss | $90.3 million, versus $8.5 million |
| Diluted EPS | $0.39, versus a $0.05 loss | $0.65, versus $0.09 |
| Adjusted EBITDA | $153.2 million; 4.7% of net sales | $277.3 million; 4.4% of net sales |
| Free cash flow | $118.4 million | $126.8 million |
For the quarter, comparable club sales increased 0.6%, while merchandise comparable club sales, excluding gasoline, increased 1.6%. For the first half, the respective increases were 1.3% and 1.7%. Cost of sales was 83.6% of net sales in both current periods, compared with 84.0% in the prior-year quarter and 83.9% in the prior-year first half; management attributed the improvement to merchandise margin gains from its category profitability program.
First-half operating cash flow was $215.1 million, versus $203.2 million; capital expenditures were $88.3 million, versus $75.7 million. Cash and cash equivalents were $29.1 million at August 3. Debt carrying value was approximately $1.752 billion, including $230 million outstanding under the ABL facility and approximately $1.522 billion on the First Lien Term Loan. The company reported $558.1 million of ABL borrowing availability. Management stated that cash, expected operating cash flows, and available borrowing capacity should be sufficient for operations, debt obligations, and anticipated capital spending for at least 12 months.
Adoption of the new lease standard brought operating lease right-of-use assets of approximately $2.041 billion and lease liabilities of approximately $2.071 billion onto the balance sheet at adoption. At August 3, operating lease liabilities were approximately $2.076 billion. The company said adoption did not materially affect operating results or cash flows.
Material changes versus prior comparable periods
- Quarterly net income improved from a loss to profit, and first-half net income rose substantially. Comparability is affected by unusually high prior-year stock-based compensation related to the IPO and prior-year debt refinancing and extinguishment charges.
- Quarterly SG&A fell 6.8% to $511.9 million; first-half SG&A fell 2.1% to $1,013.1 million. Management cited much lower IPO-related stock compensation, offering costs, and management fees.
- Net interest expense declined to $26.8 million for the quarter and $54.6 million for the first half, compared with $59.6 million and $104.8 million, respectively. The filing attributes the reduction to repayment of the Second Lien Term Loan, debt repricing, and lower interest margins; prior-year quarter expense included $19.2 million of debt extinguishment charges.
- Sales growth was modest and comparable club sales slowed from prior-year rates. Management reported quarter merchandise growth in general merchandise, while cold and rainy weather weighed on traffic and certain categories.
- First-half free cash flow was $126.8 million, slightly below $127.6 million a year earlier, despite higher operating cash flow, as capital expenditures increased.
Outlook, commentary, risks, and unusual items
- The filing does not provide specific sales, earnings, or comparable-sales guidance. Management projected a 27.0% fiscal-year effective tax rate excluding discrete items.
- Preopening costs included expected openings later in fiscal 2019 of three clubs and five gas stations; the first half also included openings of one club and three gas stations.
- Management said Chinese-sourced goods represented 3% of cost of sales and expected the share to be slightly lower the following year; the company described supply-chain diversification as a tariff mitigation measure.
- Substantially all borrowings carry variable interest rates. The company had interest-rate swaps fixing the LIBOR component of $1.2 billion of floating-rate debt at approximately 3.0%; the swaps had a $41.1 million liability at August 3, with losses recorded in other comprehensive income.
- Risks discussed include consumer and economic trends, membership growth and retention, product mix and sourcing, gasoline-price volatility, labor costs, tariffs, weather, and seasonality. The company reported no material change to previously disclosed risk factors.
- The company repurchased 2.5 million shares for $63.5 million in connection with a June 2019 secondary offering; it reported no publicly announced share-repurchase program. Ordinary-course litigation was not expected by management to have a material adverse effect.
Important facts for investors to verify
- Confirm that comparisons account for prior-year IPO-related stock compensation and debt refinancing charges, which materially affected reported earnings.
- Track whether modest comparable-sales growth improves and whether gasoline sales, weather, or category trends continue to affect reported sales.
- Monitor merchandise margin gains against pricing, product mix, and competitive pressures, and assess Adjusted EBITDA alongside GAAP results.
- Review debt balances, ABL availability, variable-rate exposure, and the performance and accounting effects of the interest-rate swaps.
- Assess lease obligations and upcoming club and gas-station openings, including required capital spending and preopening costs.