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 2020. 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 in Part I. "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year 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 2021" relate to the 52 weeks endingJanuary 29, 2022 , and references herein to "fiscal year 2020" relate to the 52 weeks endedJanuary 30, 2021 . The second quarter of fiscal year 2021 ended onJuly 31, 2021 , and the second quarter of fiscal year 2020 ended onAugust 1, 2020 , and both include thirteen weeks. OverviewBJ's Wholesale Club Holdings, Inc. and its wholly-owned subsidiaries is a leading warehouse club operator primarily 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 222 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, and our highly rated mobile app, which allows them to use our buy-online-pickup-in-club ("BOPIC") service, curbside delivery, same day delivery to their home or traditional ship-to-home service. Our leadership team has implemented significant cultural and operational changes to our business, including transforming how we use data to improve member experience, instilling a culture of cost discipline, adopting a more proactive approach to growing our membership base and building an omnichannel offering oriented towards making shopping at BJ's more convenient. 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 2021, we had more than six 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, Wellesley Farms® and Berkley Jensen®, represented over$2.5 billion in annual sales for fiscal year 2020 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$333.1 million for fiscal year 2020. 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. As the impact of the COVID-19 pandemic has evolved, we have continued to experience strong sales at a rate reflective of the national trend. The COVID-19 pandemic is unprecedented and demand may change in the future if consumer purchasing behavior changes as the COVID-19 pandemic continues to evolve, and the long-term impacts to our financial condition and results of operations are still uncertain. 20 -------------------------------------------------------------------------------- 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, sourcing and labor shortages, which in turn could adversely affect our business, financial condition and results of operations. 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, changes to theSupplemental Nutrition Assistance Program (SNAP), government stimulus programs, tax legislation, business conditions, changes in the housing market, the availability of credit, interest rates, tax rates and fuel and energy costs. In addition, unemployment rates and benefits may cause us to 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$333.1 million in fiscal year 2020. Our membership renewal rate, a key indicator of membership engagement, satisfaction and loyalty, was 88% at the end of fiscal year 2020. 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, 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 and investment in hardware and digitally enabled shopping capabilities for convenience, such as BOPIC and curbside pickup, 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. Recently, we have experienced challenges in the global supply chain, which we expect to continue for the foreseeable future. As a result, our level of net sales could be adversely affected due to 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. 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 impact 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. 21 -------------------------------------------------------------------------------- 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 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 impacted several categories of 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 have implemented a variety of mitigation measures in order to reduce the risk associated with our direct exposure to tariffs. We continue to work on diversifying our global supply chain to reduce our reliance onChina by sourcing high-quality products from other markets in bothAsia andAfrica . Chinese-sourced goods represent approximately 4% of our cost of sales during the first half of fiscal year 2021. 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. 22 -------------------------------------------------------------------------------- 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, 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 and number of new clubs opening during any given period. 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 measures 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. 23 -------------------------------------------------------------------------------- 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 our company 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: Thirteen Weeks Ended Twenty-Six Weeks Ended July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020 (dollars in thousands) Income from continuing operations$ 110,997 $ 106,668 $ 192,583 $ 202,410 Interest expense, net 16,428 20,741 35,713 42,585 Provision for income taxes 36,359 36,186 61,742 62,350 Depreciation and amortization 45,448 41,332 89,834 82,171 Stock-based compensation expense (a) 7,334 9,064 34,634 14,578 Pre-opening expenses (b) 1,633 1,969 2,194 4,570 Non-cash rent (c) 1,765 511 3,182 2,015 Severance charges (d) - - 2,300 - Other adjustments (e) 176 379 367 86 Adjusted EBITDA$ 220,140 $
216,850
5.4 % 5.6 % 5.4 % 5.4 %
(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 severance charges associated with labor reductions that resulted
from the realignment of our field operations.
(e)Other non-cash items, including non-cash accretion on asset retirement
obligations and obligations associated with our post-retirement medical plan.
Free cash flow
We present free cash flow, which is not a recognized financial measure under
GAAP, as 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.
24
--------------------------------------------------------------------------------The following is a reconciliation of our net cash provided by operating activities to free cash flow for the periods presented:
Thirteen Weeks Ended Twenty-Six Weeks Ended
(in thousands) July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020
Net cash provided by operating activities
$ 733,692 Less: Additions to property and equipment, net of disposals 73,118 47,750 147,808 82,962 Plus: Proceeds from sale leaseback transactions 2,450 4,061 19,080 4,061 Free cash flow$ 239,680 $ 220,101 $ 430,585 $ 654,791
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