BJ’s Wholesale Club Holdings, Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the 13 weeks ended August 1, 2020 (second quarter of fiscal 2020), with comparisons to the 13 weeks ended August 3, 2019. It also reports six-month results through August 1, 2020. BJ’s operated 219 clubs and 147 gas stations in 17 states and had approximately 6.0 million members. The company’s warehouse-club retail operations are its sole reportable segment.
Financial performance and liquidity
| Metric | Q2 FY2020 | Q2 FY2019 | First half FY2020 | First half FY2019 |
|---|---|---|---|---|
| Net sales | $3,871.6 million | $3,271.1 million | $7,589.7 million | $6,340.9 million |
| Total revenue | $3,954.1 million | $3,345.8 million | $7,751.7 million | $6,489.0 million |
| Operating income | $163.6 million | $98.7 million | $307.3 million | $169.4 million |
| Net income | $106.6 million | $54.5 million | $202.4 million | $90.3 million |
| Diluted EPS | $0.76 | $0.39 | $1.46 | $0.65 |
| Adjusted EBITDA | $216.9 million | $153.2 million | $410.8 million | $277.3 million |
| Adjusted EBITDA as % of net sales | 5.6% | 4.7% | 5.4% | 4.4% |
Q2 cost of sales was 82.6% of net sales, versus 83.6% a year earlier. Merchandise margin was flat for the quarter; improved gasoline margins contributed to the lower cost ratio. Six-month merchandise margin declined 20 basis points year over year, partly reflecting pandemic-related distribution costs, a weaker apparel mix, price investments and the temporary first-quarter closure of higher-margin services.
For the first six months, operating cash flow was $733.7 million, capital expenditures net of disposals were $83.0 million, and free cash flow was $654.8 million, including $4.1 million of sale-leaseback proceeds. Cash increased by $138.6 million to $168.8 million from February 1, 2020. At August 1, 2020, debt carrying amount was $1,211.9 million: $1,161.9 million under the First Lien Term Loan and $50.0 million under the ABL Facility. ABL unused capacity was $741.4 million. Total operating lease liabilities were approximately $2,099.6 million.
Material changes versus the prior comparable period
- Q2 net sales rose 18.4%; comparable club sales rose 17.2%, while merchandise comparable club sales rose 24.2%. Grocery sales grew approximately 25% and general merchandise and services approximately 22%.
- Gasoline sales fell 26.9% in Q2 and 26.2% for the first half, primarily because of lower retail prices. Gasoline and other represented 8% of Q2 net sales, versus 13% a year earlier.
- Membership fee income increased 10.4% in Q2 and 9.4% in the first half, attributed to member growth, renewals and higher-tier membership mix.
- Q2 SG&A rose 15.4% to $590.8 million; first-half SG&A rose 16.6% to $1,181.2 million. The filing attributes the increase largely to COVID-19-related compensation, safety equipment and operating costs.
- First-half operating cash flow increased from $215.1 million to $733.7 million, helped by sales performance and working-capital movements, including inventory turnover and higher accounts payable and accrued expenses.
- Debt declined from $1,693.2 million at February 1, 2020 to $1,211.9 million at August 1, 2020. The company repaid $150 million of First Lien Term Loan principal in July and reduced ABL borrowings.
Outlook, risks and unusual items
- The filing provides no formal full-year financial guidance. Management said COVID-19-related expenses were expected to remain elevated in the second half of fiscal 2020 and potentially beyond, but at a lower rate than in the first half. The filing also anticipated two additional club openings and five gas-station openings later in fiscal 2020.
- Management said pandemic-driven grocery demand more than offset declines in general merchandise and services in the first half, but warned demand could reverse and the pandemic’s longer-term effects were uncertain. Pandemic-related risks include reduced traffic or closures, supply and staffing disruptions, changing consumer demand, higher operating costs and financial-market disruption.
- Q2 SG&A included $31.4 million of wage increases and bonus expense, $14.9 million for safety and protective equipment, and $2.3 million of other operating costs related to COVID-19. First-half amounts were $82.7 million, $23.6 million and $4.0 million, respectively.
- The July term-loan prepayment resulted in a $1.3 million write-off of deferred financing costs and original issue discount. First-half financing activities also included $150 million of term-loan repayment and $44.5 million of treasury-stock purchases.
- The company reported routine legal proceedings and did not expect current matters to cause a material loss. It stated that there were no material changes to contractual obligations beyond ordinary-course items, and no off-balance-sheet arrangements.
- Interest-rate exposure remains relevant: substantially all borrowings carry variable rates, while swaps fix the LIBOR component on $1.2 billion of floating-rate debt at approximately 3.0% through February 13, 2022. The reported effective interest rate on debt, including swaps, was 5.22% at August 1, 2020.
Important facts for investors to verify
- Whether unusually strong pandemic-related grocery demand and comparable sales persist, normalize or reverse, and how that affects merchandise margins and inventory.
- The trajectory of COVID-19-related labor, safety and distribution costs, including whether they decline as management expected.
- Debt repayment, ABL availability and cash generation, considering variable-rate exposure and the interest-rate swap position.
- Membership growth, renewal trends and fee income; the filing cites an 87% renewal rate at fiscal 2019 year-end, not a current-quarter renewal rate.
- Share repurchases: the company reported $34.1 million of program repurchases in Q2 and $38.1 million in the first half, with $211.9 million remaining under the $250 million authorization as of August 1, 2020.
- Planned club and gas-station openings, and the associated capital spending and pre-opening costs.