BJ’s Wholesale Club Holdings, Inc. — Form 10-Q Summary
Period clarification: The request metadata says “2022 Q1,” but this filing reports the 13 weeks ended April 29, 2023 (first quarter of fiscal 2023), compared with the 13 weeks ended April 30, 2022. Fiscal 2023 is a 53-week year ending February 3, 2024.
Business context
BJ’s operates membership warehouse clubs concentrated in the eastern United States. At quarter-end it had 237 clubs and 167 gas stations in 18 states, with more than 6.5 million paying members. Club retail operations are its sole reportable segment.
Financial results
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $4.621 billion | $4.400 billion | +5.0% |
| Membership fee income | $102.5 million | $96.6 million | +6.1% |
| Total revenues | $4.723 billion | $4.496 billion | +5.0% |
| Operating income | $186.8 million | $150.3 million | +24.3% |
| Net income | $116.1 million | $112.5 million | +3.2% |
| Diluted EPS | $0.85 | $0.82 | +3.7% |
| Adjusted EBITDA | $257.0 million | $220.8 million | +16.4% |
| Operating cash flow | $119.1 million | $44.3 million | Higher |
| Free cash flow | $27.0 million | $(46.2) million | Improved |
Comparable club sales rose 2.0%; merchandise comparable sales increased 5.7%, while gasoline’s impact was negative 3.7 percentage points. Grocery sales rose 8.1%. Grocery represented 71% of net sales, general merchandise and services 10%, and gasoline and other 19%.
Cost of sales was 83.2% of net sales versus 84.2% a year earlier. Management reported a 100-basis-point improvement in merchandise gross margin, primarily from lower supply-chain costs. Adjusted EBITDA margin was 5.6% of net sales versus 5.0%.
Liquidity, debt and capital allocation
Cash and equivalents were $23.4 million at April 29, 2023. Debt was $850.0 million gross: $400.0 million drawn on the ABL Revolving Facility and $450.0 million under the First Lien Term Loan. ABL unused capacity was $645.0 million, with $11.8 million of letters of credit outstanding. The respective interest rates were 6.08% and 7.58%. Management said cash, expected operating cash flows and borrowing capacity should fund operations for at least the next 12 months.
Operating cash flow increased mainly from higher pre-tax income, excluding non-cash items, and favorable working-capital movements. Capital expenditures were $92.1 million. The company used $42.4 million in total for treasury-stock acquisitions in the cash-flow statement, including employee tax-withholding shares; it repurchased 204,040 shares under its public program for $15.3 million. About $303.4 million remained under the $500 million authorization.
Material changes and management commentary
- Net sales growth was led by merchandise; lower gasoline prices reduced reported comparable-sales growth.
- SG&A increased 8.5% to $689.3 million, primarily from labor and occupancy costs associated with new club and gas-station openings and continued strategic investments. Management expects SG&A to rise with investment and footprint growth.
- Net interest expense increased to $14.7 million from $7.8 million, mainly due to higher interest rates. Substantially all borrowings carry variable rates.
- The effective tax rate rose to 32.6% from 21.1%, primarily due to an immaterial prior-period deferred-tax-asset adjustment and lower excess tax benefits. The projected FY2023 annual effective tax rate is 28.3%, excluding discrete items.
- The First Lien Term Loan was amended in January 2023: maturity extended to February 2027 and the rate transitioned to SOFR plus 275 basis points. The company had repaid approximately $151.9 million of principal in connection with the amendment.
- The Burris Logistics distribution-center and transportation acquisition, completed May 2, 2022 for approximately $375.6 million, is reflected in the current-year comparison; prior-year quarter included $7.9 million of acquisition costs.
Outlook, risks and contingencies
The filing provides no formal sales, earnings or EPS guidance. Management describes continued investment in clubs, supply-chain infrastructure, information systems and digital shopping capabilities, alongside membership growth and cost discipline. The business is seasonal, and first-quarter results are not necessarily indicative of full-year results.
Risks highlighted include consumer spending and inflation or interest-rate changes, supply-chain and vendor availability, gasoline-price volatility, competition, member retention, execution of club growth and omnichannel initiatives, cybersecurity, labor, climate and natural disasters, and indebtedness. Management does not expect routine legal proceedings to have a material adverse effect. It reported no material changes to previously disclosed risk factors or material cash commitments, and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether merchandise-sales momentum and membership-fee growth continue, and how gasoline prices affect reported comparable sales.
- Whether merchandise-margin improvement persists as inflation, supply costs and pricing conditions change.
- Effects of variable-rate debt and interest expense on earnings and cash flow; confirm borrowing capacity and covenant compliance.
- Capital spending and new-club returns, particularly as growth is weighted toward owned clubs and SG&A is expected to increase.
- Tax-rate normalization and the drivers of the gap between GAAP net income growth and adjusted net income, which was $115.6 million versus $118.4 million in the prior-year quarter.
- Execution and member response to the rebranded Club+ and BJ’s One/One+ rewards and credit-card programs.