BJ's Wholesale Club Holdings, Inc. annual report, FY2019

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BJ’s Wholesale Club Holdings, Inc. — Form 10-K Summary

Period clarification: The filing is for fiscal 2019, the 52 weeks ended February 1, 2020, and was filed March 19, 2020. It is not a 2018 annual filing; the report separately provides unaudited fourth-quarter results for the fiscal year ended February 1, 2020.

Business context and reporting period

BJ’s operates membership warehouse clubs primarily in the eastern United States. At year-end it had 217 clubs in 17 states, about 5.5 million paid memberships, and 143 gasoline stations. Its model combines membership fees, value-priced merchandise, private labels, gasoline and online and delivery services. The company reports one operating segment.

Financial performance and liquidity

  • Fiscal 2019 revenue: Net sales were $12.889 billion, up 1.3%; membership fee income was $302.2 million, up 6.8%; total revenue was $13.191 billion, up 1.4%.
  • Comparable sales: Comparable club sales rose 0.7%, including a 0.6% gasoline contribution; merchandise comparable sales increased 1.3%. Renewal rate was 87%, unchanged from fiscal 2018.
  • Profit: Operating income was $352.2 million versus $303.5 million. Net income was $187.2 million versus $127.3 million; diluted EPS was $1.35 versus $1.05. Operating margin was approximately 2.7% of total revenue and net margin approximately 1.4%.
  • Gross profit and expenses: Cost of sales was 83.5% of net sales, compared with 83.7% a year earlier. Merchandise margin improvement was partly offset by lower gasoline margins. SG&A was $2.059 billion, or 16.0% of net sales, versus 16.1%.
  • Adjusted EBITDA: $581.6 million, compared with $578.4 million; 4.5% of net sales in both years. This is a non-GAAP measure.
  • Cash flow: Operating cash flow was $355.1 million, down from $427.1 million, primarily due to inventory and accounts-payable timing. Capital expenditures, net of disposals, were $196.9 million. Defined free cash flow was $179.8 million versus $281.2 million, including $21.6 million of sale-leaseback proceeds in 2019.
  • Liquidity and debt: Cash was $30.2 million and unused ABL capacity was $496.3 million. Gross borrowings were $1.693 billion, down from $1.819 billion; the debt carrying amount, net of discounts and issuance costs, was $1.681 billion. The company reported $3.464 billion of operating lease commitments, including $319.6 million due within one year.

Material changes versus the prior comparable period

  • Revenue and net sales increased modestly; merchandise comparable sales growth slowed from 2.2% to 1.3%, while total comparable club sales declined from 3.7% to 0.7%.
  • Membership income growth reflected acquisition and conversion efforts, higher-tier membership penetration, an 87% renewal rate, and a membership fee increase; the fee increase accounted for about one-third of the increase.
  • Interest expense declined to $108.2 million from $164.5 million, following debt repayment and refinancing. The First Lien Term Loan rate was reduced to LIBOR plus 225 basis points in January 2020; its stated rate at year-end was 3.90%.
  • Operating cash flow and free cash flow fell, while capital spending rose with increased technology, club and gas-station investment.
  • Adoption of lease accounting standard ASC 842 brought operating lease assets and liabilities onto the balance sheet; year-end operating lease liabilities were $2.111 billion. Prior-year balance-sheet figures were not recast.
  • Fourth-quarter net income was $41.8 million, down from $64.3 million in the prior-year quarter, despite higher net sales of $3.395 billion versus $3.344 billion. Quarterly gross profit was $622.2 million versus $628.9 million.

Outlook, risks, contingencies and unusual items

  • The filing provides no quantified earnings or sales guidance. Management expects continued infrastructure investment and club growth; fiscal 2019 pre-opening costs included openings and planned future openings.
  • Key disclosed risks include intense price competition, member retention and spending, cost and availability of merchandise, gasoline price and margin volatility, labor costs, and dependence on a third-party distributor for a substantial majority of perishables.
  • The company highlighted exposure to public-health emergencies, natural disasters and severe weather, with operations concentrated on the East Coast. Such events could disrupt suppliers, distribution, clubs, demand and cash flows.
  • Substantial variable-rate debt creates interest-rate exposure. Swaps fixed the LIBOR component on $1.2 billion of debt at approximately 3.0% through February 2022. A 100-basis-point rate increase was estimated to raise annual interest expense by about $6 million. LIBOR transition uncertainty was also disclosed.
  • Fiscal 2019 included $13.3 million of long-lived asset impairment charges, including $9.6 million for lease right-of-use assets; two clubs closed in the fourth quarter. Management reported no goodwill or trade-name impairment. The auditor identified the trade-name impairment assessment as a critical audit matter, citing significant valuation assumptions.
  • Legal proceedings were described as routine; management did not expect current matters to result in a material loss. No material off-balance-sheet arrangements were reported.
  • The board authorized a $250 million share-repurchase program, available through fiscal 2021; no purchases under that program had occurred by year-end. The company does not expect to pay cash dividends for the foreseeable future.
  • The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.

Important facts for investors to verify

  • Reconcile fiscal-year and fourth-quarter trends, particularly the sharp year-over-year decline in fourth-quarter net income and lower gross profit.
  • Assess whether merchandise comparable-sales growth and membership-fee gains can persist, and monitor renewal rates and higher-tier member engagement.
  • Review cash conversion, inventory and payable timing, capital spending, and the company’s definition and reconciliation of free cash flow.
  • Track debt repayment, ABL availability, lease commitments, interest-rate exposure and the transition from LIBOR-based contracts.
  • Evaluate the assumptions supporting goodwill and trade-name valuations, club-level impairment charges, and expected returns on new clubs and technology investment.