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Item 5. Market for Registrant’s Common Equity

2021-03-19 compared with 2020-03-19 · 390 added, 20 removed, 62 unchanged (87% of the section changed)

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock began trading on the NYSE under the symbol "BJ" on June 28, 2018.

As of the end of business on March 13, 2020, the trading price of our common stock closed at $23.78 per share.

As of March 13, 2020, there were approximately 20 record holders of our common stock.

As of the end of business on March 12, 2021, the trading price of our common stock closed at $42.32 per share.

As of March 12, 2021, there were approximately 10 record holders of our common stock.

This number does not include beneficial owners whose shares were held in street name.

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Performance Graph

The following graph illustrates a comparison of the total cumulative return on our common stock with the total cumulative return for (i) the S&P 500 Index and (ii) the S&P 500 Retail Index for the period from June 28, 2018 (the date our common stock commenced trading on the NYSE) through February 1, 2020.

The graph assumes an investment of $100 in our common stock and in each index at market close on June 28, 2018 and the reinvestment of all dividends.

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June 28, 2018

February 2, 2019

August 3, 2019

February 1, 2020

August 1, 2020

January 30, 2021

BJ's Wholesale Club, Inc.

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November 1, 2020 - November 28, 2020

December 1, 2019 - January 4, 2019

January 5, 2020 - February 1, 2020

On December 19, 2019, the Company’s board of directors authorized the repurchase of up to $250.0 million of the Company's outstanding common stock from time to time as market conditions warrant.

November 29, 2020 - January 2, 2021

January 3, 2021 - January 30, 2021

On December 19, 2019, the Company’s board of directors authorized the repurchase of up to $250.0 million of the Company's outstanding common stock from time to time as market conditions warrant.

The share repurchase program expires at the end of fiscal year 2021 and may be suspended or discontinued at any time without notice.

178 shares of common stock surrendered to the Company by employees to satisfy their tax withholding obligations in connection with the vesting of restricted stock awards.

See Note 10 "Stock Incentive Plans" in the Notes to Audited Consolidated Financial Statements included in this Annual Report on Form 10-K.

Recent Sales of Unregistered Securities

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of February 1, 2020, regarding our common stock that may be issued under the BJ’s Wholesale Club Holdings, Inc.

2018 Incentive Award Plan (the "2018 Incentive Award Plan"), the Fourth Amended and Restated 2011 Stock Option Plan of BJ’s Wholesale Club Holdings, Inc.

(f/k/a Beacon Holding Inc.), as amended (the "2011 Stock Option Plan"), the 2012 Director Stock Option Plan of BJ’s Wholesale Club Holdings, Inc.

(f/k/a Beacon Holding Inc.), as amended (the "2012 Director Stock Option Plan") and the BJ’s Wholesale Club Holdings, Inc.

The following table provides information as of January 30, 2021, regarding our common stock that may be issued under the BJ’s Wholesale Club Holdings, Inc.

2018 Incentive Award Plan (the "2018 Incentive Award Plan"), the Fourth Amended and Restated 2011 Stock Option Plan of BJ’s Wholesale Club Holdings, Inc.

(f/k/a Beacon Holding Inc.), as amended (the "2011 Stock Option Plan"), the 2012 Director Stock Option Plan of BJ’s Wholesale Club Holdings, Inc.

(f/k/a Beacon Holding Inc.), as amended (the "2012 Director Stock Option Plan") and the BJ’s Wholesale Club Holdings, Inc.

Employee Stock Purchase Plan (the "ESPP").

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Weighted-average Exercise Price of Outstanding Options, Warrants, and Rights

Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected

in column (a))

Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))

Plan category:

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The shares available for grant under the 2018 Incentive Award Plan includes 985,369 shares of common stock that, as of July 2, 2018, remained available for issuance, collectively, under the 2011 Stock Option Plan and the 2012 Director Stock Option Plan.

Includes (i) 29,818 shares of common stock issuable pursuant to restricted stock units outstanding as of February 1, 2020 and (ii) 3,140,722 shares of common stock issuable upon the exercise of outstanding options.

Because there is no exercise price associated with the restricted stock units, such units are not included in the weighted average exercise price calculation.

Includes (i) 28,371 shares of common stock issuable pursuant to restricted stock units outstanding, (ii) 2,898,516 shares of common stock issuable upon the exercise of outstanding options, and (iii) 526,861 

shares of common stock issuable pursuant to performance stock units as of January 30, 2021.

Because there is no exercise price associated with the restricted stock units and performance stock units, such units are not included in the weighted-average exercise price calculation.

Does not include purchase rights accruing under the ESPP because the purchase price (and therefore the number of shares to be purchased) will not be determined until the end of the purchase period.

The aggregate number of shares of common stock reserved for issuance under our ESPP is equal to the sum of (i) 973,014 shares and (ii) an annual increase on the first day of each calendar year beginning in 2019 and ending in 2028 equal to the lesser of (A) 486,507 shares, (B) 0.5% of the shares outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (C) such smaller number of shares as determined by the board of directors.

The aggregate number of shares of common stock reserved for issuance under our ESPP is equal to the sum of (i) 973,014 shares and (ii) an annual increase on the first day of each calendar year beginning in 2019 and ending in 2028 equal to the lesser of (A) 486,507 shares, (B) 0.5% of the shares outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (C) such smaller number of shares as determined by the board of directors.

Selected Financial Data

We have derived the following selected consolidated statements of operations and cash flow data for fiscal years 2019, 2018 and 2017 and the consolidated balance sheet data for the fiscal years ended February 1, 2020 and February 2, 2019 from our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

We have derived the following selected consolidated statements of operations and cash flow data for fiscal years 2016 and 2015 and the consolidated balance sheet data as of February 3, 2018, January 28, 2017 and January 30, 2016 from our consolidated financial statements not included in this Annual Report on Form 10-K.

We have derived the following selected Consolidated Statements of Operations and cash flow data for fiscal years 2020, 2019 and 2018 and the Consolidated Balance Sheet data for the fiscal years ended January 30, 2021 and February 1, 2020 from our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

We have derived the following selected Consolidated Statements of Operations and cash flow data for fiscal years 2017 and 2016 and the Consolidated Balance Sheet data as of February 2, 2019, February 3, 2018 and January 28, 2017 from our consolidated financial statements not included in this Annual Report on Form 10-K.

The historical results presented below are not necessarily indicative of the results to be expected for any future period.

You should read the selected financial data presented below in conjunction with Part II.

Management’s Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

(Dollars in thousands, except per share amounts and total clubs)

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Outstanding borrowings

Stockholders' deficit

Stockholders' equity (deficit)

Clubs open at end of year

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became a publicly traded entity in connection with its IPO.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis and the information in Part II.

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 section of this Annual Report on Form 10-K entitled "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 2020", "fiscal year 2019" and " fiscal year 2018" relate to the 52 weeks ended January 30, 2021, February 1, 2020 and February 2, 2019, respectively.

BJ’s Wholesale Club is a leading warehouse club operator concentrated primarily on the east coast of the 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 in New England in 1984, we have grown our footprint to 221 large-format, high volume warehouse clubs spanning 17 states.

In our core New England markets, which have high population density and generate a disproportionate part of U.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.

Over the last five years, we have made multiple senior management hires and changes, adding consumer packaged goods, digital and consulting experience to our leadership team.

This 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.

These changes have delivered results rapidly, evidenced by income from continuing operations growth of 124%, consecutive quarter comparable club sales growth over the last three years and adjusted EBITDA growth of 61% over the last three years.

Our goal is to offer our members significant value and a meaningful return, in savings, on their annual membership fee.

We have more than six million members paying annual fees to gain access to savings on groceries and general merchandise and 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 $2.5 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 $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 . During 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 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 on 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 "Fiscal Year 2020 Compared to 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.

Risk Factors".

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 $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 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, 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.

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 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.

 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 on China by sourcing high-quality products from other markets in both Asia and Africa.

Chinese-sourced goods represent approximately 3% of our cost of sales during fiscal year 2020, which we expect to be slightly lower in fiscal year 2021.

We believe that this gives us a much smaller exposure to tariffs than many other retailers.

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 in the 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 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;

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;

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, our continuing club growth and incremental expenses associated with the  

COVID-19 pandemic.

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 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;

management fees, non-cash rent;

strategic consulting;

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.

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 net sales for the periods presented:

Fiscal Year Ended

January 30, 2021

February 1, 2020

February 2, 2019

(In thousands)

Income from continuing operations

Interest expense, net

Provision for income taxes

Depreciation and amortization

Stock-based compensation expense (1)

Pre-opening expenses (2)

Management fees (3)

Non-cash rent (4)

Strategic consulting (5)

Reduction-in-force severance (6)

Offering costs (7)

Club closing and impairment charges (8)

Other adjustments, net (9)

Adjusted EBITDA

Adjusted EBITDA as a percentage of net sales

Represents total stock-based compensation expense and includes expense related to certain restricted stock and stock option awards issued in connection with our IPO.

Represents direct incremental costs of opening or relocating a facility that are charged to operations as incurred.

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.

Consists of an adjustment to remove the non-cash portion of rent expense.

Represents fees paid to external consultants for strategic initiatives of limited duration.

Represents severance charges associated with a reduction in workforce announced in January 2020.

Represents costs related to our IPO and the registered offerings by selling stockholders.

Represents primarily closing costs associated with our clubs in Charlotte, N.C.

and Geneva, N.Y., which closed in the fourth quarter of fiscal 2019, and other impairment charges.

Other non-cash items, including gains from 2019 sale leaseback transactions, 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, 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 provided by operating activities to free cash flow for the periods presented:

Fiscal Year Ended

January 30, 2021

February 1, 2020

February 2, 2019

(In thousands)

Net cash provided by operating activities

Additions to property and equipment, net of disposals

Proceeds from sale leaseback transactions

Free cash flow

Results of Operations

Information pertaining to fiscal year 2018 was included in the Company’s Annual Report on Form 10-K for the year ended February 1, 2020 on page 40 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Position and Results of Operations,”

which was filed with the SEC on March 19, 2020.

The following tables summarize key components of our results of operations for the periods indicated:

Statement of Operations Data (dollars in thousands):

Fiscal Year Ended

January 30, 2021

February 1, 2020

February 2, 2019

Membership fee income

Total revenues

Cost of sales

Selling, general and administrative expenses

Pre-opening expenses

Operating income

Interest expense, net

Income from continuing operations before income taxes

Provision for income taxes

Income from continuing operations

Income (loss) from discontinued operations, net of income taxes

Operational Data:

Total clubs at end of period

Comparable club sales

Merchandise comparable club sales

Adjusted EBITDA

Free cash flow

Membership renewal rate

Fiscal Year 2020 Compared to Fiscal Year 2019

Net sales for fiscal year 2020 were $15.1 billion, a 17.1% increase from net sales reported for fiscal year 2019 of $12.9 billion.

The increase was due primarily to a 15.9% increase in comparable club sales and incremental sales from new clubs opened over the past two years. Gasoline sales decreased 18.3% from fiscal year 2019 due to a decline in retail prices.

Comparable club sales

Fiscal Year Ended

January 30, 2021

Comparable club sales

Contribution from gasoline sales

Merchandise comparable club sales

Merchandise comparable club sales increased 21.3% in fiscal year 2020.

The increase was driven by growth in sales of groceries and general merchandise and services of approximately 24% and 11%, respectively.

In grocery, sales were most robust in categories impacted by the COVID-19 pandemic, including paper products, cleaning supplies, wellness solutions, fresh meat, frozen, dairy, fresh produce, packaged goods and beverages.

In general merchandise and services, sales were strongest in televisions, small appliances, computer equipment, indoor furniture and seasonal goods.

Membership fee income

Membership fee income was $333.1 million in fiscal year 2020, compared to $302.2 million in fiscal year 2019, a 10.2% increase.

The growth in membership fee income was due to successful member acquisition efforts, improving our strong renewal rate to 88%, increasing higher tier membership penetration and improving the quality of memberships by eliminating reliance on trial memberships, which now represent less than 1% of members.

Cost of sales

Cost of sales was $12.5 billion, or 82.5% of net sales, in fiscal year 2020, compared to $10.8 billion, or 83.5% of net sales, in fiscal year 2019.

The 1.0% decrease as a percentage of net sales was driven by increased gas margins due to the continued dislocation in the gasoline market that contributed to a lower cost per gallon.

Merchandise gross margin rate increased approximately 10 basis points over fiscal year 2019.

While merchandise margins benefited from strong sales performance and execution of our category profitability improvement initiatives, these drivers were offset by costs associated with the COVID-19 pandemic, cost inflation in certain commodities and the decline in our higher-margin apparel and service businesses.

Selling, general and administrative expenses

SG&A were $2.3 billion, or 15.4% of net sales, in fiscal year 2020, compared to $2.1 billion, or 16.0% of net sales, in fiscal year 2019.

The year-over-year increase in SG&A was primarily driven by incremental costs related to the COVID-19 pandemic, including increased labor costs of $79.6 million, safety, sanitation and protective equipment costs of $34.5 million and bonus incentive program costs of $36.1 million. 

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.

Pre-opening expenses

Pre-opening expenses were $9.8 million in fiscal year 2020, compared to $15.2 million in fiscal year 2019.

Pre-opening expenses for fiscal year 2020 included charges for four new clubs and seven gas stations that opened in fiscal year 2020 and four new club openings, that are expected for fiscal year 2021.

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, that occurred in fiscal year 2020.

Interest expense, net

Interest expense, net was $84.4 million for fiscal year 2020, compared to $108.2 million for fiscal year 2019.

Interest expense, net for fiscal year 2020 included interest expense of $65.3 million related to debt service on outstanding borrowings and $4.1 million of fees and write-offs of deferred financing costs and original issue discounts associated with the partial prepayments of our First Lien Term Loan in October and July of fiscal year 2020.

Additionally, interest expense included $4.4 million of amortization expense on deferred financing costs and original issue discounts on our outstanding borrowings, $6.9 million of reclassified unrealized losses on interest rate swap agreements and $3.7 million of other interest charges.

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 charges related to the repricing of our outstanding borrowings, $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.

Provision for income taxes

The Company’s effective income tax rate from continuing operations was 24.5% for fiscal year 2020 and 23.0% for fiscal year 2019.

The increase in the effective tax rate is primarily due to higher income in fiscal year 2020, which resulted in a reduced benefit to the rate from the excess tax benefit for stock-based compensation.

Our business is moderately seasonal in nature.

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.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flows generated from club operations and borrowings from our ABL Facility.

As of January 30, 2021, cash and cash equivalents totaled $43.5 million and we had $641.1 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

January 30, 2021

February 1, 2020

February 2, 2019

(In thousands)

Net cash provided by operating activities

Net cash used in investing activities

Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents

Net Cash from Operating Activities

Net cash provided by operating activities was $868.5 million in fiscal year 2020, compared to $355.1 million in fiscal year 2019.

The increase in operating cash flow was due to strong operating performance and working capital benefit generated by higher sales and increased turnover of inventory, as well as increased membership fee income and lower interest payments on debt.

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 from Investing Activities

Cash used in investing activities was $192.4 million in fiscal year 2020, compared to $175.3 million in fiscal year 2019.

The increase was due to continued investments in digital capabilities and more spending on new clubs and gas stations compared to the prior year.

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.

Net Cash from Financing Activities

Cash used in financing activities in fiscal year 2020 was $662.8 million, compared to $176.8 million in fiscal year 2019.

The increase in fiscal year 2020 is due mainly to the repayment of outstanding borrowings on our First Lien Term Loan and ABL Facility, the settlement of one of our interest rate swap agreements and share repurchases of $99.7 million.

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.

In January 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.

Debt and Borrowing Capacity

On August 13, 2018, the Company amended its First Lien Term Loan to reduce the applicable interest rates and reduce 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.

Total fees associated with the refinancing were approximately $1.8 million.

The Company wrote off $4.4 million of previously capitalized debt issuance costs and original issue discounts and expensed $1.8 million of new third-party fees.

On August 17, 2018, we amended the ABL Facility to extend the maturity date from February 3, 2022 to August 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.

On November 13, 2018, the Company entered into three forward starting interest rate swaps (the "Interest Rate Swaps"), which were effective starting on February 13, 2019 and the LIBOR component of $1.2 billion of the Company's floating rate debt at a rate of approximately 3.0% from February 13, 2019 until February 13, 2022.

The Interest Rate Swaps were recorded as a liability of $26.4 million in fiscal year 2020, with the net of tax amount for the effective Interest Rate Swaps recorded in other comprehensive income and the net of tax amount for the ineffective Interest Rate Swaps recorded in interest expense.

The Interest Rate Swaps were recorded as a liability of $40.0 million in fiscal year 2019, with the net of tax amount recorded in other comprehensive income.

On November 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.

On January 29, 2020, the Company amended its First Lien Term Loan to reduce the applicable interest rates.

As amended, the First Lien Term Loan had an initial principal amount of $1,315.2 million and interest was 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.

On July 13, 2020, the Company paid $150.0 million of the principal amount due on the First Lien Term Loan.

In connection with the payment, the Company expensed $1.3 million of previously capitalized deferred debt issuance costs and original issue discount.

On July 29, 2020, due to upgrades in credit ratings, the base rate was reduced to LIBOR plus 200 basis points.

On October 30, 2020, the Company borrowed $260.0 million from the ABL Facility.

The proceeds from the Company's borrowing, as well as $100.0 million of the Company's cash and cash equivalents, were used to pay $360.0 million of the principal amount due on the First Lien Term Loan.

In connection with the payment, the Company expensed $2.8 million of previously capitalized deferred debt issuance costs and original issue discount.

On November 10, 2020, the Company terminated one of the Interest Rate Swaps, which fixed $360.0 million of its floating rate debt at a rate of approximately 3.0%. An additional interest rate swap, which fixed $240.0 million of its floating rate debt at 3.0% was determined to be ineffective.

Gains and losses on the ineffective interest rate swap agreement will be recorded as interest expense.

At January 30, 2021, the interest rate for the First Lien Term Loan before the effect of the interest rate swaps was 2.13% and there was $801.9 million outstanding.

See Note 5, "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 of January 30, 2021:

Payments Due by Period

(Dollars in thousands)

Less than 1 year

More than 5 Years

Outstanding borrowings and interest (1)

Operating leases

Financing leases including interest

Purchase obligations (2)

Total interest payments associated with these borrowings are included within this amount and are estimated to be $56.1 million based on the interest rate of 2.13% on the First Lien Term Loan and 1.25% on the ABL Facility, which were the rates in effect at January 30, 2021.

The interest payments have been adjusted for the floating to fixed rate interest rate swap on $840.0 million of the outstanding borrowings.

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.

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 in the 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.

Workers' Compensation and General Liability Self-insurance Reserves

We are primarily self-insured for workers’

compensation and general liability claims.

Amounts in excess of certain levels, which range from $0.3 million to $1.0 million per occurrence, are insured as a risk reduction strategy, to mitigate catastrophic losses.

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.

The estimates are developed utilizing actuarial methods and are based on historical claims experience and other actuarial assumptions related to loss development factors.

The inherent uncertainty of future loss projections could cause actual claims to differ from our estimates.

When historical losses are not a good measure of future liability, such as in the event of COVID-19, we base our estimates of ultimate liability on our interpretation of current law, claims filed to date and other relevant factors which are subject to change.

These accruals are included in accrued expenses and other current liabilities and other non-current liabilities in the Company's Consolidated Balance Sheets.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity