BJ'S WHOLESALE CLUB HOLDINGS, INC. The following discussion and analysis and the information in Part II. "Item 6. Selected Financial Data" should be read in conjunction with our audited consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and assumptions. 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 Annual Report on Form 10-K in Part I. "Item 1A. Risk Factors." 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 2019" and "fiscal year 2018" relate to the 52 weeks endingFebruary 1, 2020 andFebruary 2, 2019 , respectively, and references herein to "fiscal year 2017" relate to the 53 weeks endingFebruary 3, 2018 . 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, gasoline and other ancillary services 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 217 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. GDP, 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. We have approximately 5.5 million members paying annual fees to gain access to savings on groceries, consumables, general merchandise, gasoline and other ancillary services. 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 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®, represent over$2.0 billion in annual sales, 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 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 result 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 over 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. 34
-------------------------------------------------------------------------------- Consumer preferences and demand. Our ability to maintain our appeal to existing customers and attract new customers 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, 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.
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 had 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 3% of our cost of sales, which we expect to be slightly lower next year. We believe that this gives us a much smaller exposure to tariffs than many other retailers. Refinancings. We used the proceeds of the IPO to repay indebtedness under our senior secured second lien term loan ("Second Lien Term Loan") which reduced our cost of capital and debt service obligations. In addition, in January of fiscal year 2019, we repriced our First Lien Term Loan, resulting in a reduction to the applicable interest rate. 35 -------------------------------------------------------------------------------- Adoption of Accounting Standards Codification ("ASC") 842, Leases and related amendments. We adopted ASC 842 effectiveFebruary 3, 2019 using the modified retrospective method and applying transitional relief allowing entities to initially apply the requirements at the adoption date by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, results and disclosures for the reporting periods beginning onFebruary 3, 2019 are reported and presented under ASC 842, while prior period amounts and disclosures are not adjusted and continue to be reported and presented under ASC 840, Leases. See Note 4, "Leases" of our consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding our adoption of ASC 842. 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 13 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 Annual Report on Form 10-K 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. 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.
36
--------------------------------------------------------------------------------Selling, general and administrative expenses ("SG&A") SG&A consist 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 (benefit) for income taxes and depreciation and
amortization, adjusted for the impact of certain other items, including:
compensatory payments related to options, stock-based compensation
expense; pre-opening expenses; management fees; non-cash rent; strategic
consulting; costs related to our IPO and the registered offerings by selling
stockholders (such offering costs, collectively, "offering costs"); club closing
and impairment charges; reduction in force severance 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."
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.
37
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Management believes Adjusted EBITDA is helpful in highlighting trends in our
core operating performance, while other measures 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 sales for the periods
presented:
Fiscal Year Ended
February 1, 2020 February 2, 2019 February 3, 2018
(in thousands)
Income from continuing operations $ 187,757 $ 127,092 $ 51,975
Interest expense, net 108,230 164,535 196,724
Provision (benefit) for income taxes 56,212 11,826 (28,427 )
Depreciation and amortization 157,000 162,223 164,061
Compensatory payments related to options(1) - - 77,953
Stock-based compensation expense(2) 18,796 58,917 9,102
Pre-opening expenses(3) 15,152 6,118 3,004
Management fees(4) - 3,333 8,038
Non-cash rent(5) 8,374 4,864 5,391
Strategic consulting(6) 11,349 33,486 30,316
Reduction in force severance(7) 3,994 - 9,065
Offering costs(8) 1,928 3,803 -
Club closing and Impairment charges(9) 15,383 4,237 -
Other adjustments(10) (2,551 ) (2,008 ) 6,305
Adjusted EBITDA $ 581,624 $ 578,426 $ 533,507
Adjusted EBITDA as a percentage of net sales 4.5 % 4.5 % 4.3 %
__________
(1) Represents payments to holders of our stock options made pursuant to
antidilutive provisions in connection with dividends paid to our
stockholders.
(2) Represents total stock-based compensation expense and includes expense
related to certain restricted stock and stock option awards issued in
connection with our IPO.
(3) Represents direct incremental costs of opening or relocating a facility that
are charged to operations as incurred.
(4) Represents management fees paid to the Sponsors (or advisory affiliates
thereof) in accordance with our management services agreement, which
terminated upon closing of the IPO.
(5) Consists of an adjustment to remove the non-cash portion of rent expense.
(6) Represents fees paid to external consultants for strategic initiatives of
limited duration.
(7) Represents severance charges associated with a reduction in workforce
announced in
packages issued in
(8) Represents costs related to our IPO and the registered offerings by selling
stockholders.
(9) Represents primarily closing costs associated with two clubs, which closed
in the fourth quarter of fiscal 2019 and other impairment charges. In
addition, the prior year period includes impairment charges related to a
club that was relocated in fiscal 2018.
(10) Other non-cash items, including gains from the 2019 sales leaseback
transaction, non-cash accretion on asset retirement obligations, termination
costs to former executives and obligations associated with our
post-retirement medical plan. Fiscal 2018 also includes amortization of a
deferred gain from sale leaseback transactions in fiscal 2013.
38
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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:
Fiscal Year Ended
February 1, February 2, February 3,
2020 2019 2018
(in thousands)
Net Cash provided by operating activities $ 355,143 $ 427,103 $ 210,085
Less: Additions to property and equipment, net of disposals 196,901 145,913 137,466
Plus: Proceeds from sale leaseback transaction 21,606 - -
Free cash flow $ 179,848 $ 281,190 $ 72,619
39--------------------------------------------------------------------------------
Results of Operations
Information pertaining to fiscal year 2017 was included in the Company's Annual Report on Form 10-K for the year endedFebruary 2, 2019 on page 40 under Part II, Item 7, "Management's Discussion and Analysis of Financial Position and Results of Operations," which was filed with theSEC onMarch 25, 2019 . The following tables summarize key components of our results of operations for the periods indicated: Fiscal Year Ended February 1, 2020 February 2, 2019 February 3, 2018 Statement of Operations Data (dollars in thousands): Net sales$ 12,888,556 $ 12,724,454 $ 12,495,995 Membership fee income 302,151 282,893 258,594 Total revenues 13,190,707 13,007,347 12,754,589 Cost of sales 10,763,926 10,646,452 10,513,492 Selling, general and administrative expenses 2,059,430 2,051,324 2,017,821 Pre-opening expenses 15,152 6,118 3,004 Operating income 352,199 303,453 220,272 Interest expense, net 108,230 164,535 196,724 Income from continuing operations before income taxes 243,969 138,918 23,548 Provision (benefit) for income taxes 56,212 11,826 (28,427 ) Income from continuing operations 187,757 127,092 51,975 Income (loss) from discontinued operations, net of income taxes (581 ) 169 (1,674 ) Net income $ 187,176 $ 127,261 $ 50,301 Operational Data: Total clubs at end of period 217 216 215 Comparable club sales 0.7 % 3.7 % 0.8 % Merchandise comparable club sales 1.3 % 2.2 % (0.9 )% Adjusted EBITDA $ 581,624 $ 578,426$ 533,507 Free cash flow 179,848 281,190 72,619 Membership renewal rate 87 % 87 % 86 % Fiscal Year 2019 Compared to Fiscal Year 2018Net Sales Net sales for fiscal year 2019 were$12.9 billion , a 1.3% increase from net sales reported for fiscal year 2018 of$12.7 billion . The increase was due primarily to a 0.7% increase in comparable club sales and incremental sales from four new clubs opened since the beginning of fiscal year 2018. Comparable club sales Fiscal Year Ended February 1, 2020 Comparable club sales 0.7 %
Less: contribution from gasoline sales (0.6 )% Merchandise comparable club sales
1.3 %
40
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Merchandise comparable club sales increased 1.3% in fiscal year 2019. The
increase was driven by growth in sales of general merchandise and non-edible
groceries of approximately 4% and 1%, respectively, partially offset by a
decrease in sales of perishables of approximately 1% and sales of edible
groceries were flat.
The increase in general merchandise sales was driven by growth in our B2B
channel and stronger sales of small and seasonal appliances, tires and video
games. Sales of non-edible groceries improved primarily due to growth in paper
products and pet care, partially offset by softer sales in baby care. Sales of
perishables and edible grocery were negatively impacted by a timing shift in EBT
spending versus last year and slight deflation in eggs and seafood.
Membership fee income
Membership fee income was $302.2 million in fiscal year 2019, compared to $282.9
million in fiscal year 2018, a 6.8% increase. The growth in membership fee
income was due to successful member acquisition efforts, maintaining our strong
renewal rate of 87%, increasing higher tier membership penetration and improving
the quality of memberships by converting trial members to paid members.
Membership fee income also grew due to an increase in our membership fees. This
fee increase constituted approximately 33% of the growth.
Cost of sales
Cost of sales was $10.8 billion , or 83.5% of net sales, in fiscal year 2019,
compared to $10.6 billion , or 83.7% of net sales, in fiscal year 2018. The 0.2%
decrease as a percentage of net sales was driven by merchandise margin gains of
approximately 0.3% over last year from the continued progress in our category
profitability improvement program, partially offset by lower gas margin versus
last year.
Selling, general and administrative expenses
SG&A were $2.1 billion , or 16.0% of net sales, in fiscal year 2019, compared to
$2.1 billion , or 16.1% of net sales, in fiscal year 2018. SG&A in fiscal year
2019 included charges of $14.4 million , consisting of impairment charges and
other related expenses associated with closing two clubs in January of fiscal
year 2019, $4.0 million of severance charges related to the elimination of
positions in our home office and field organization in January of fiscal year
2019, $1.9 million of offering costs related to our secondary offerings, and a
$2.6 million gain from the sale leaseback of one of our new clubs in Michigan .
SG&A in fiscal year 2018 included charges of $48.9 million for stock
compensation related to awards issued in conjunction with our IPO, $4.0 million
of impairment charges on fixed assets for a club that was relocated, $3.8
million of offering costs related to our IPO and secondary offerings and $3.3
million of management fees paid to the Sponsors. Other items included in SG&A as
a percent of net sales increased by approximately 0.2% due to investments in our
capabilities and talent in areas such as promotions, data analytics, category
profitability improvement program procurement and optical services as well as
higher rent and other occupancy costs due to our new club openings.
Pre-opening expenses
Pre-opening expenses were $15.2 million in fiscal year 2019, compared to $6.1
million in fiscal year 2018. Pre-opening expenses for fiscal year 2019 included
charges for three new clubs and six gas stations that opened in fiscal year 2019
and two new club openings, which are expected for fiscal year 2020. Pre-opening
expenses for fiscal year 2018 included charges for one new club and five new gas
stations that opened in fiscal year 2018 and new club and gas station openings
that occurred in fiscal year 2019.
Interest expense, net
Interest expense, net was $108.2 million for fiscal year 2019, compared to
$164.5 million for fiscal year 2018. Interest expense, net for fiscal year 2019
included interest expense of $96.7 million related to debt service on
outstanding borrowings, $3.8 million of fees and write-offs of deferred
financing costs and original issue discounts associated with the partial
prepayment and the repricing of our First Lien Term Loan in October and January
of fiscal year 2019, respectively, $5.2 million of amortization expense on
deferred financing costs and original issue discounts on our outstanding
borrowings, and $2.5 million of other interest charges.
Interest expense, net for fiscal year 2018 included interest expense of $128.6
million related to debt service on outstanding borrowings, $25.4 million of
charges related to the repricing of our outstanding borrowings, $6.6 million of
amortization expense on deferred financing costs and original issue discounts on
our outstanding borrowings, and $3.9 million of other interest charges.
41
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Provision for income taxes
The Company's effective income tax rate from continuing operations was 23.0% for
fiscal year 2019 and 8.5% for fiscal year 2018. The increase in the effective
tax rate in fiscal year 2019 resulted primarily from lower excess tax benefits
on share-based compensation of $8.8 million in the current year as compared to
$20.0 million in the prior period.
Seasonality
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. Our
quarterly results have been and will continue to be affected by the timing of
new club openings and their associated pre-opening expenses. As a result of
these factors, our financial results for any single quarter or for periods of
less than a year are not necessarily indicative of the results that may be
achieved for a full fiscal year.
42
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Liquidity and Capital Resources
Our primary sources of liquidity are cash flows generated from club operations
and borrowings from our ABL Facility. As of February 1, 2020 , cash and cash
equivalents totaled $30.2 million , and we had $496.3 million of unused capacity
under our ABL Facility. We believe that our current resources, together with
anticipated cash flows from operations and borrowing capacity under our ABL
Facility will be sufficient to finance our operations, meet our current debt
obligations, and fund anticipated capital expenditures.
Summary of Cash Flows
A summary of our cash flows from operating, investing and financing activities
is presented in the following table:
Fiscal Year Ended
February 1, February 2, February 3,
2020 2019 2018
(in thousands)
Net cash provided by operating activities $ 355,143 $ 427,103 $ 210,085
Net cash used in investing activities (175,295 ) (145,913 ) (137,466 )
Net cash used in financing activities (176,790 )
(288,998 ) (69,629 )
Net increase (decrease) in cash and cash equivalents
Net Cash from Operating Activities Net cash provided by operating activities was$355.1 million in fiscal year 2019, compared to$427.1 million in fiscal year 2018. The decrease in operating cash flow was primarily due to timing of inventory purchases and related accounts payable compared to the prior year. Net cash provided by operating activities was$427.1 million in fiscal year 2018 compared to$210.1 million in fiscal year 2017. The increase in operating cash flow was primarily due to higher operating income from improved margin rates and increased membership fee income, lower interest payments due to the paydown of the Second Lien Term Loan, and strong working capital management, including better management of accounts payable. Additionally, fiscal year 2018 operating cash flows increased due to non-recurring costs of$88.2 million related to the dividend transaction inFebruary 2017 , including the compensatory payments related to stock options and debt issuance costs that could not be deferred. See Note 5, "Dividend and Recapitalization" of our consolidated financial statements included in this Annual Report on Form 10-K for additional information.Net Cash from Investing Activities Cash used in investing activities was$175.3 million in fiscal year 2019, compared to$145.9 million in fiscal year 2018. The increase was due to more investments in technology and more spending on new clubs and gas stations compared to the prior year. Cash used in investing activities was$145.9 million in fiscal year 2018, compared to$137.5 million in fiscal year 2017. The increase was due to more investments in technology and more spending on new and relocated clubs compared to the prior year.Net Cash from Financing Activities Cash used in financing activities in fiscal year 2019 was$176.8 million , compared to$289.0 million in fiscal year 2018. In fiscal year 2019, we completed a$200.0 million paydown of the First Lien Term Loan, which was financed through borrowings from the ABL Facility, which lowered the interest rate calculation to LIBOR plus 275 basis points. InJanuary 2020 , the Company completed a refinancing of the First Lien Term Loan, which lowered the interest rate calculation to LIBOR plus 225 basis points. Net proceeds from the ABL Facility were$89.0 million in fiscal year 2019 and$72.0 million in fiscal year 2018. The decrease over last year was partially offset by the acquisition of$67.3 million of treasury stock in fiscal year 2019 compared with$19.1 million in fiscal year 2018. Cash used in financing activities in fiscal year 2018 was$289.0 million , compared to$69.6 million in fiscal year 2017. The increase is due mainly to the extinguishment of the Second Lien Term Loan in the second quarter of fiscal year 2018 and the partial paydown of the First Lien Term Loan in conjunction with its repricing in the third quarter of fiscal year 2018. Net proceeds from the ABL Facility were$72.0 million in fiscal year 2018 and$162.0 million in fiscal year 2017. The increase in cash used for financing activities was also offset by net proceeds of$691.0 million from the IPO. 43 --------------------------------------------------------------------------------
Debt and Borrowing Capacity
OnAugust 13, 2018 , the Company refinanced its First Lien Term Loan and reduced the applicable interest rates and the principal on the loan. The Company drew$350.0 million under its ABL Facility to fund the transaction. As amended, the First Lien Term Loan had an initial principal amount of$1,537.7 million and interest was calculated either at LIBOR plus 275 to 300 basis points or a base rate plus 175 to 200 basis points based on the Company achieving a net leverage ratio of 3.00 to 1.00. The Company paid debt costs of$1.8 million and accrued interest of$1.2 million at closing of the refinancing. OnAugust 17, 2018 , we amended the ABL Facility to extend the maturity date fromFebruary 3, 2022 toAugust 17, 2023 and reduce the applicable interest rates and letter of credit fees on the facility. As amended, interest on the revolving credit facility was calculated either at LIBOR plus a range of 125 to 175 basis points or a base rate plus a range of 25 to 75 basis points; and interest on the term loan was calculated at LIBOR plus a range of 200 to 250 basis points or a base rate plus a range of 100 to 150 basis points, in all cases based on excess availability. The applicable spread of LIBOR and base rate loans at all levels of excess availability stepped down by 12.5 basis points upon achieving total net leverage of 3.00 to 1.00. The Company paid debt costs of approximately$1.0 million at closing. OnNovember 13, 2018 , the Company entered into three forward starting interest rate swaps (the "Interest Rate Swaps"), which were effective starting onFebruary 13, 2019 . The Company has fixed the LIBOR component of$1.2 billion of its floating rate debt at a rate of approximately 3.0% fromFebruary 13, 2019 untilFebruary 13, 2022 . The Interest Rate Swaps are recorded as a liability of$40.0 million and$19.4 million in fiscal year 2019 and fiscal year 2018, respectively, with the net of tax amount recorded in other comprehensive income. OnNovember 1, 2019 , the Company borrowed$200.0 million from the ABL Facility. The proceeds from the Company's borrowing were used to pay a portion of the principal amount due on the First Lien Term Loan. In connection with the payment, the Company expensed$2.0 million of previously capitalized deferred debt issuance costs and original issue discount. OnJanuary 29, 2020 , the Company amended its First Lien Term Loan to reduce the applicable interest rates. As amended, the First Lien Term Loan has an initial principal amount of$1,315.2 million and interest is calculated either at LIBOR plus 225 basis points basis or a base rate plus 125 basis points. Total fees associated with the refinancing were approximately$1.7 million . The Company wrote-off$0.1 million of previously capitalized debt issuance costs and original issue discount and expensed$1.7 million of new third-party fees. AtFebruary 2, 2020 , the interest rate for the First Lien Term Loan was 3.90% and there was$1,315.2 million outstanding. See Note 6, "Debt and Credit Arrangements" of our consolidated financial statements included in this Annual Report on Form 10-K for additional information. Contractual Obligations The following table summarizes our significant contractual obligations as ofFebruary 1, 2020 : Payments Due by Period Less than 1 More than 5 (Dollars in thousands) Total year 1-3 Years 3-5 Years Years Outstanding borrowings and interest(1)$ 1,933,254 $ 410,067 $ 146,388 $ 1,376,799 $ - Operating leases 3,463,776 319,628 629,741 570,766 1,943,641 Financing leases including interest 34,010 3,412 6,878 6,878 16,842 Purchase obligations(2) 743,289 687,629 42,664 12,996 - Total$ 6,174,329 $ 1,420,736 $ 825,671 $ 1,967,439 $ 1,960,483
(1) Total interest payments associated with these borrowings are included within
this amount and are estimated to be
rate of 3.90% on the First Lien Term Loan and 2.78% on the ABL Facility,
which were the rates in effect at
have been adjusted for the floating to fixed rate interest rate swap on
billion of the outstanding borrowings.
(2) Includes our significant contractual unconditional purchase obligations. For
cancellable agreements, any penalty due upon cancellation is included. These
commitments do not exceed our projected requirements and are in the normal
course of business. Examples include firm commitments for merchandise
purchase orders, gasoline and information technology.
44--------------------------------------------------------------------------------
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are, in the opinion of management, reasonably likely to have, a current or future material effect on our results of operations or financial position. We do, however, enter into letters of credit and purchase obligations in the normal course of our operations.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We review our estimates on an ongoing basis and make judgments about the carrying value of assets and liabilities based on a number of factors. These factors include historical experience and assumptions made by management that are believed to be reasonable under the circumstances. Although management believes the judgment applied in preparing estimates is reasonable based on circumstances and information known at the time, actual results could vary materially from estimates based on assumptions used in the preparation of our consolidated financial statements. This section summarizes critical accounting policies and the related judgments involved in their application. The most significant accounting estimates involve a high degree of judgment or complexity. Management believes the estimates and judgments most critical to the preparation of our consolidated financial statements and to the understanding of our reported financial results include those made in connection with impairment of indefinite-lived intangible and long-lived assets; and self-insurance reserves. Our significant accounting policies related to these accounts in the preparation of our consolidated financial statements are described below.
Impairment of Indefinite-Lived Intangible and Long-Lived Assets
Indefinite-Lived Intangible Assets
We consider the BJ's trade name to be an indefinite-lived intangible asset, as we currently anticipate that this trade name will contribute cash flows to us indefinitely. We evaluate whether the trade name continues to have an indefinite life on an annual basis. Our trade name is reviewed for impairment annually in the fourth fiscal quarter and may be reviewed more frequently if indicators of impairment are present. If the recorded carrying value of the intangible asset exceeds its estimated fair value, we record a charge to write the intangible asset down to its estimated fair value. Calculating the fair value requires significant judgment. We determine the fair value of our trade name using the relief from royalty method, a variation of the income approach. The use of different assumptions, estimates or judgments, such as the estimated future cash flows, the discount rate used to discount such cash flows or the estimated royalty rate, could significantly increase or decrease the estimated fair value of the intangible asset.
We assessed the recoverability of the BJ's trade name and determined that its estimated fair value exceeded its carrying value and that no impairment was recorded in fiscal years 2019, 2018 or 2017.
Long-Lived Assets
We review the realizability of our long-lived assets at the lowest level for which identifiable cash flows are present, our club level, periodically and whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We monitor our club portfolio to identify clubs that are underperforming. When we identify an underperforming club, we perform a review to reassess the future cash flows of the club. Current and expected operating results and cash flows and other factors are considered in connection with our reviews. Significant judgments are made in projecting future cash flows and are based on a number of factors, including the maturity level of the club, historical experience of clubs with similar characteristics, recent sales, margin and other trends and general economic assumptions. Our estimates of future cash flows are based on our experience, knowledge and judgments. These estimates can be affected by factors that are difficult to predict including future revenue, operating results and economic conditions. While we believe our estimates are reasonable, different assumptions regarding future cash flows could affect our analysis and result in future impairment. Impairment losses are measured and recorded as the difference between the carrying amount and the fair value of the assets. In fiscal year 2019, we recorded$13.3 million of impairment charges to lower the carrying value of the assets to estimated fair value. The total impairment charges consisted of$1.7 million related to technology assets,$2.0 million related to fixed assets and$9.6 million related to operating lease right of use ("ROU") assets. In fiscal year 2018, we recorded an impairment loss of$4.0 million on the assets of a club to lower the carrying value of them to the estimated fair value less cost to sell those assets. No impairment charges were recorded in fiscal year 2017. 45 --------------------------------------------------------------------------------
Self-Insurance Reserves
We are primarily self-insured for workers' compensation, general liability claims and medical claims. Reported reserves for these claims are derived from estimated ultimate costs based upon individual claim file reserves and estimates for incurred but not reported claims. Estimates are based on historical claims experience and other actuarial assumptions believed to be reasonable under the circumstances.
Recent Accounting Pronouncements
See Note 2, "Summary of Significant Accounting Policies" of our consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding recently issued accounting pronouncements.
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