BJ'S WHOLESALE CLUB HOLDINGS, INC. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and the related notes thereto in our Annual Report on Form 10-K for the fiscal year 2019. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause such differences are discussed in the sections of this Quarterly Report on Form 10-Q titled "Forward-Looking Statements" and "Item 1A. Risk Factors," and in Part I. "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year 2019 and Form 10-Q for the quarter endedMay 2, 2020 . We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to the last day of January. Accordingly, references herein to "fiscal year 2020" relate to the 52 weeks endingJanuary 30, 2021 , and references herein to "fiscal year 2019" relate to the 52 weeks endedFebruary 1, 2020 . The second quarter of fiscal year 2020 ended onAugust 1, 2020 , and the second quarter of fiscal year 2019 ended onAugust 3, 2019 , and both include thirteen weeks. OverviewBJ's Wholesale Club is a leading warehouse club operator on the east coast ofthe United States . We deliver significant value to our members, consistently offering 25% or more savings on a representative basket of manufacturer-branded groceries compared to traditional supermarket competitors. We provide a curated assortment focused on perishable products, continuously refreshed general merchandise, services and gasoline to deliver a differentiated shopping experience that is further enhanced by our omnichannel capabilities. Since pioneering the warehouse club model inNew England in 1984, we have grown our footprint to 219 large-format, high volume warehouse clubs spanning 17 states. In our coreNew England markets, which have high population density and generate a disproportionate part ofU.S. gross domestic product, we operate almost three times the number of clubs compared to the next largest warehouse club competitor. In addition to shopping in our clubs, members are able to shop when and how they want through our website, www.bjs.com; our highly-rated mobile app and our integrated same-day delivery offering. Our goal is to offer our members significant value and a meaningful return in savings on their annual membership fee. As of the end of the second quarter of fiscal year 2020, we had approximately 6.0 million members paying annual fees to gain access to savings on groceries, consumables, general merchandise, services and gasoline. The annual membership fee for our Inner Circle® membership is$55 , and the annual membership fee for our BJ's Perks Rewards® membership, which offers additional value-enhancing features, is$110 . We believe that members can save over ten times the price of their$55 Inner Circle membership fee versus what they would otherwise pay at traditional supermarket competitors when they spend$2,500 or more per year at BJ's on manufacturer-branded groceries. In addition to providing significant savings on a representative basket of manufacturer-branded groceries, we accept all manufacturer coupons and also carry our own exclusive brands that enable members to save on price without compromising on quality. Our two private label brands, Wellsley Farms® and Berkley Jensen®, represented over$2 billion in annual sales for fiscal year 2019, and are the largest brands we sell. Our customers recognize the relevance of our value proposition across economic environments, as demonstrated by over 20 consecutive years of membership fee income growth. Our membership fee income was$302.2 million for fiscal year 2019. Our business is moderately seasonal in nature. Historically, our business has realized a slightly higher portion of net sales, operating income and cash flows from operations in the second and fourth fiscal quarters, attributable primarily to the impact of the summer and year-end holiday season, respectively. Factors Affecting Our Business COVID-19 Impact. During the first half of fiscal year 2020, the COVID-19 pandemic had a positive impact on our results of operations. Increased demand for our grocery products more than offset declines in our general merchandise and services division, which resulted in significant growth in comparable club sales compared to the first half of fiscal year 2019. This increased demand for our grocery products could reverse in the future if consumer purchasing behavior changes. However, the COVID-19 pandemic is unprecedented and continuously evolving, and the long-term impacts to our financial condition and results of operations are still uncertain. For a further discussion of the impact of the COVID-19 pandemic on our business, see the section entitled "Thirteen Weeks EndedAugust 1, 2020 (Second Quarter of Fiscal Year 2020) Compared to Thirteen Weeks EndedAugust 3, 2019 (Second Quarter of Fiscal Year 2019)" included below. The COVID-19 pandemic may impact many of the factors discussed in this section, including, among others, overall economic trends, consumer preferences and demand, product mix, quarterly fluctuations and sourcing, which in turn could adversely affect our business, financial condition and results of operations. See Part II. "Item 1A. Risk Factors". 21 -------------------------------------------------------------------------------- Overall economic trends. The overall economic environment and related changes in consumer behavior have a significant impact on our business. In general, positive conditions in the broader economy promote customer spending in our clubs, while economic weakness, which generally results in a reduction of customer spending, may have a different or more extreme effect on spending at our clubs. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, business conditions, changes in the housing market, the availability of credit, interest rates, tax rates and fuel and energy costs. In addition, during periods of low unemployment, we may experience higher labor costs. Size and loyalty of membership base. The membership model is a critical element of our business. Members drive our results of operations through their membership fee income and their purchases. The majority of members renew within six months following their renewal date. Therefore, our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. We have grown our membership fee income each year for the past two decades. Our membership fee income totaled$302.2 million in fiscal year 2019. Our membership renewal rate, a key indicator of membership engagement, satisfaction and loyalty, was 87% at the end of fiscal year 2019. Consumer preferences and demand. Our ability to maintain our appeal to existing customers and attract new customers primarily depends on our ability to originate, develop and offer a compelling product assortment responsive to customer preferences. If we misjudge the market for our products, fail to adjust to changes in our member needs, or there is otherwise a decrease in consumer spending and confidence, including in response to the COVID-19 pandemic, we may be faced with excess inventories for some products and may be required to become more promotional in our selling activities, which would impact our net sales and gross profit. Infrastructure investment. Our historical operating results reflect the impact of our ongoing investments to support our growth. We have made significant investments in our business that we believe have laid the foundation for continued profitable growth. We believe that strengthening our management team and enhancing our information systems, including our distribution center management and point-of-sale systems, will enable us to replicate our profitable club format and provide a differentiated shopping experience. We expect these infrastructure investments to support our successful operating model across our club operations. Product mix. Changes in our product mix affect our performance. For example, we have continued to add private label products to our assortment of product offerings at our clubs, which we generally price lower than the manufacturer branded products of comparable quality that we also offer. Accordingly, a shift in our sales mix in which we sell more units of our private label products and fewer units of our manufacturer branded products would generally have a positive impact on our profit margins but an adverse impact on our overall net sales. Changes in our revenues from gasoline sales may also negatively affect our performance. Since gasoline generates lower profit margins than the remainder of our business, we could expect to see our overall gross profit margin rates decline as sales of gasoline increase. Effective sourcing and distribution of products. Our net sales and gross profit are affected by our ability to purchase our products in sufficient quantities at competitive prices. While we believe our vendors have adequate capacity to meet our current and anticipated demand, our level of net sales could be adversely affected in the event of constraints in our supply chain, including our inability to procure and stock sufficient quantities of some merchandise in a manner that is able to match market demand from our customers, leading to lost sales. Gasoline prices. The market price of gasoline impacts our net sales and comparable club sales, and large fluctuations in the price of gasoline may produce a short-term impact on our margins. Retail gasoline prices are driven by daily crude oil and wholesale commodity market changes and are volatile, as they are influenced by factors that include changes in demand and supply of oil and refined products, global geopolitical events, regional market conditions and supply interruptions caused by severe weather conditions. Typically, the change in crude oil prices impacts the purchase price of wholesale petroleum fuel products, which in turn impacts retail gasoline prices at the pump. During times when prices are particularly volatile, differences in pricing and procurement strategies between the Company and its competitors may lead to temporary margin contraction or expansion depending on whether prices are rising or falling, and this impact could affect our overall results for a fiscal quarter. In addition, the relative level of gasoline prices from period to period may lead to differences in our net sales between those periods. Further, because we generally attempt to maintain a fairly stable gross profit per gallon, this variance in net sales, which may be substantial, may or may not have a significant impact on our operating income. 22 --------------------------------------------------------------------------------
Fluctuation in quarterly results. Our quarterly results have historically varied depending upon a variety of factors, including our product offerings, promotional events, club openings, weather related events and shifts in the timing of holidays, among other things. As a result of these factors, our working capital requirements and demands on our product distribution and delivery network may fluctuate during the year.
Inflation and deflation trends. Our financial results can be expected to be directly impacted by substantial increases in product costs due to commodity cost increases or general inflation, which could lead to a reduction in our sales, as well as greater margin pressure, as costs may not be able to be passed on to consumers. Changes in commodity prices and general inflation have not materially impacted our business. In response to increasing commodity prices or general inflation, we seek to minimize the impact of such events by sourcing our merchandise from different vendors, changing our product mix or increasing our pricing when necessary. Tariffs. We are implementing a variety of mitigation measures in order to reduce the risk associated with our direct exposure to tariffs. We have diversified our global supply chain to reduce our reliance onChina by sourcing high-quality products from other markets in bothAsia andAfrica . Chinese-sourced goods represent 1% of our cost of sales during the first half of fiscal year 2020. We believe that this gives us a much smaller exposure to tariffs than many other retailers. Refinancings. We repriced the First Lien Term Loan during fiscal year 2019 and we paid down a portion of our First Lien Term Loan during the first half of fiscal year 2020, resulting in a reduction to the applicable interest rate How We Assess the Performance of Our Business In assessing our performance, we consider a variety of performance and financial measures. The key generally accepted accounting principles inthe United States of America ("GAAP") measures include net sales, membership fee income, cost of sales, SG&A and net income. In addition, we also review other important metrics such as Adjusted EBITDA, comparable club sales and merchandise comparable club sales. Net sales Net sales are derived from direct retail sales to customers in our clubs and online, net of merchandise returns and discounts. Growth in net sales is impacted by opening new clubs and increases in comparable club sales. Comparable club sales Comparable club sales, also known as same store sales, is an important measure throughout the retail industry. In determining comparable club sales, we include all clubs that were open for at least thirteen months at the beginning of the period and were in operation during the entirety of both periods being compared, including relocated clubs and expansions. There may be variations in the way in which some of our competitors and other retailers calculate comparable club or same store sales. As a result, data in this Quarterly Report on Form 10-Q regarding our comparable club sales may not be comparable to similar data made available by other retailers. Comparable club sales allow us to evaluate how our club base is performing by measuring the change in period-over-period net sales in clubs that have been open for the applicable period. Various factors affect comparable club sales, including consumer preferences and trends, product sourcing, promotional offerings and pricing, customer experience and purchase amounts, weather and holiday shopping period timing and length. Merchandise comparable club sales Merchandise comparable club sales represents comparable club sales from all merchandise other than our gasoline operations for the applicable period. Membership fee income Membership fee income reflects the amount collected from our customers to be a member of our clubs. Membership fee income is recognized in revenue on a straight-line basis over the life of the membership, which is typically twelve months. 23 -------------------------------------------------------------------------------- Cost of sales Cost of sales consists primarily of the direct cost of merchandise and gasoline sold at our clubs, including the following: •costs associated with operating our distribution centers, including payroll, payroll benefits, occupancy costs and depreciation; •freight expenses associated with moving merchandise from vendors to our distribution centers and from our distribution centers to our clubs; and •vendor allowances, rebates and cash discounts. Selling, general and administrative expenses ("SG&A") SG&A consists of various expenses related to supporting and facilitating the sale of merchandise in our clubs, including the following: •payroll and payroll benefits for club and corporate employees; •rent, depreciation and other occupancy costs for retail and corporate locations; •advertising expenses; •tender costs, including credit and debit card fees; •amortization of intangible assets; and •consulting, legal, insurance and other professional services expenses. SG&A includes both fixed and variable components and, therefore, is not directly correlated with net sales. In addition, the components of our SG&A may not be comparable to those of other retailers. We expect that our SG&A will increase in future periods due to investments to spur comparable club sales growth and our continuing club growth. In addition, any increase in future stock option or other stock-based grants or modifications will increase our stock-based compensation expense included in SG&A. Net Income Net income reflects the Company's net sales, less cost of sales, SG&A, interest, taxes and other expenses. Adjusted EBITDA Adjusted EBITDA is defined as income from continuing operations before interest expense, net, provision for income taxes and depreciation and amortization, adjusted for the impact of certain other items, including: stock-based compensation expense; pre-opening expenses; non-cash rent; strategic consulting; offering costs; and other adjustments. For a reconciliation of Adjusted EBITDA to income from continuing operations, the most directly comparable GAAP measure, see "Non-GAAP Financial Measures." 24 -------------------------------------------------------------------------------- Non-GAAP Financial Measures Adjusted EBITDA We present Adjusted EBITDA, which is not a recognized financial measure under GAAP, because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, including pre-opening expenses. The amount and timing of pre-opening expenses are dependent on, among other things, the size of new clubs opened and the number of new clubs opened during any given period. You are encouraged to evaluate the adjustments described above and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be considered as an alternative to any other performance measure derived in accordance with GAAP and should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA in the future, and any such modification may be material. In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries. Further, Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for any analysis of our results as reported under GAAP. Management believes Adjusted EBITDA is helpful in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We use Adjusted EBITDA in connection with establishing discretionary annual incentive compensation; to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies; to make budgeting decisions; and to compare our performance against that of other peer companies using similar measures. The following is a reconciliation of our income from continuing operations to Adjusted EBITDA and Adjusted EBITDA as a percentage of net sales for the periods presented: Twenty-Six Weeks Thirteen Weeks Ended EndedAugust 1, 2020 August
3, 2019
20,741 26,783 42,585 54,572
Provision for income taxes 36,186 17,665 62,350 24,473
Depreciation and amortization 41,332 39,001 82,171 77,671
Stock-based compensation expense (a) 9,064 4,952 14,578 8,796
Pre-opening expenses (b) 1,969 2,127 4,570 4,423
Non-cash rent (c) 511 3,019 2,015 3,773
Strategic consulting (d) - 4,610 - 11,349
Offering costs (e) - 706 - 1,928
Other adjustments (f) 379 31 86 (100)
Adjusted EBITDA $ 216,850 $ 153,187 $ 410,765 $ 277,263
Adjusted EBITDA as a percentage of net
sales 5.6 % 4.7 % 5.4 % 4.4 %
(a)Represents total stock-based compensation expense.
(b)Represents direct incremental costs of opening or relocating a facility that
are charged to operations as incurred.
(c)Consists of an adjustment to remove the non-cash portion of rent expense.
(d)Represents fees paid to external consultants for strategic initiatives of
limited duration.
(e)Represents costs related to registered offerings by selling stockholders.
(f)Other non-cash items, including non-cash accretion on asset retirement
obligations and obligations associated with our post-retirement medical plan.
25
--------------------------------------------------------------------------------Free cash flow
We present free cash flow, which is not a recognized financial measure under
GAAP, because we use it to report to our board of directors and we believe it
assists investors and analysts in evaluating our liquidity. Free cash flow
should not be considered as an alternative to cash flows from operations as a
liquidity measure. We define free cash flow as net cash provided by operating
activities less additions to property and equipment, net of disposals, plus
proceeds from sale leaseback transactions.
Our presentation of free cash flow should not be considered as an alternative to
any other measure derived in accordance with GAAP and should not be construed as
an inference that the Company's future results will be unaffected by unusual
or non-recurring items. In addition, free cash flow may not be comparable to
similarly titled measures used by other companies in our industry or across
different industries. Further, free cash flow has limitations as an analytical
tool, and you should not consider it in isolation or as a substitute for
analysis of our results as reported under GAAP.
The following is a reconciliation of our net cash from operating activities to
free cash flow for the periods presented:
Twenty-Six Weeks
Thirteen Weeks Ended Ended
(dollars in thousands) August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019
Net cash provided by operating activities
47,750 51,764 82,962 88,298
Plus: Proceeds from sale leaseback transaction 4,061 - 4,061 -
Free cash flow $ 220,101 © Edgar Online, source
