What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-26 compared with 2022-05-27 · 225 added, 134 removed, 157 unchanged (70% of the section changed)

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Accordingly, references herein to "fiscal year 2022" relate to the 52 weeks ending January 28, 2023, and references herein to "fiscal year 2021" relate to the 52 weeks ended January 29, 2022.

The first quarter of fiscal year 2022 ended on April 30, 2022, and the first quarter of fiscal year 2021 ended on May 1, 2021, and both include thirteen weeks.

The second quarter of fiscal year 2022 ended on July 30, 2022, and the second quarter of fiscal year 2021 ended on July 31, 2021, and both include thirteen weeks.

BJ’s Wholesale Club is a leading warehouse club operator concentrated primarily on the east coast of the United States.

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Since pioneering the warehouse club model in New England in 1984, we have grown our footprint to 229 warehouse clubs spanning 17 states.

Two of these clubs opened after April 30, 2022.

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

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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 first quarter of fiscal year 2022, we had approximately 6.5 million members p aying annual fees to gain access to savings on groceries, consumables, general merchandise, services and gasoline.

As of the end of the second quarter of fiscal year 2022, we had more than 6.5 million members p aying 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.

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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 $371.2 million for the trailing twelve-months ended April 30, 2022.

On May 2, 2022, we closed the previously announced acquisition of the assets and operations of four distribution centers and the related private transportation fleet from Burris Logistics, which brings our end-to-end perishable supply chain in-house.

Our membership fee income was $381.2 million for the trailing twelve-months ended July 30, 2022.

On May 2, 2022, we completed our acquisition of the assets and operations of four distribution centers and the related private transportation fleet from Burris Logistics, which brings our end-to-end perishable supply chain in-house.

See Note 12, "Acquisitions" of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the Acquisition.

Our business is moderately seasonal in nature.

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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.

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.

Impact of the COVID-19 Pandemic

As the impact of the COVID-19 pandemic has evolved, we have continued to experience sales at a higher rate as compared to the comparable pre-pandemic period, although the demand has moderated for certain products.

However, we have continued to face several operational challenges directly or indirectly related to the pandemic, including supply chain constraints, inflation, and wage inflation.

As the impact of the COVID-19 pandemic has evolved, we have continued to face several operational challenges directly or indirectly related to the pandemic, including supply chain constraints, inflation, and wage inflation.

The COVID-19 pandemic is unprecedented and demand may continue to 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.

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.

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.

During the thirteen weeks ended July 30, 2022 we continued to experience elevated supply chain costs, including commodity prices, logistics, and procurement costs.

We expect these market disruptions and inflationary pressures to continue throughout 2022.

Factors Affecting Our Business

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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 or units sold, as well as greater margin pressure, as increased costs for goods may not always be able to be passed on to consumers.

We continue to see increased commodity prices and general inflation, which have impacted several categories of our business.

We continue to see increased commodity prices and general inflation, which have impacted several categories of our business, and expect to continue to see the same throughout 2022.

Events such as the COVID-19 pandemic have resulted in market disruptions, supply chain disruptions and inflationary pressures.

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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 and the quality of our membership mix continues to improve as evidenced by higher tier penetration growth in the first quarter of fiscal year 2022.

Therefore, our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to

the reporting date.

Our membership renewal rate, a key indicator of membership engagement, satisfaction and loyalty, was 89% at the end of fiscal year 2021.

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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, expanding our club footprint, bringing our end-to-end supply chain in-house by acquiring the assets and operations of four distribution centers and the related private transportation fleet from Burris Logistics, LLC, and enhancing our information systems, including our distribution center management system, and investing in hardware and digitally enabled shopping capabilities for convenience, such as BOPIC, curbside pickup, and same day home delivery will enable us to replicate our profitable club format and provide a differentiated shopping experience.

We believe that expanding our club footprint, bringing our end-to-end perishable supply chain in-house with the Acquisition, and enhancing our information systems, including our distribution center management system, and investing in hardware and digitally enabled shopping capabilities for convenience, such as BOPIC, curbside pickup, and same day home delivery 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.

Results of Operations

The following table summarizes key components of our results of operations for the periods indicated:

Statement of Operations Data Thirteen Weeks Ended Twenty-Six Weeks Ended

(dollars in thousands) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021

$ 5,005,030 $ 4,088,402 $ 9,404,840 $ 7,870,236

Membership fee income

98,786 88,753 195,411 175,141

Total revenues

5,103,816 4,177,155 9,600,251 8,045,377

Cost of sales

4,243,769 3,413,625 7,949,043 6,555,122

Selling, general and administrative expenses

651,236 598,113 1,287,180 1,198,023

Pre-opening expenses

5,901 1,633 10,801 2,194

Operating income

202,910 163,784 353,227 290,038

Interest expense, net

10,874 16,428 18,715 35,713

Income from continuing operations before income taxes

192,036 147,356 334,512 254,325

Provision for income taxes

51,022 36,359 81,041 61,742

Income from continuing operations

141,014 110,997 253,471 192,583

Loss from discontinued operations, net of income taxes

(7) (9) (14) (16)

$ 141,007 $ 110,988 $ 253,457 $ 192,567

Operational Data:

Total clubs at end of period

Comparable club sales

Merchandise comparable club sales increase (decrease) 7.6%

Adjusted EBITDA (a)

$ 273,700 $ 220,140 $ 494,501 $ 422,549

Free cash flow (a)

300,417 239,680 254,192 430,585

(a) See "Non-GAAP Financial Measures" within Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations for a definition of Adjusted EBITDA and Free cash flow

Thirteen Weeks Ended July 30, 2022 (Second Quarter of Fiscal Year 2022) Compared to Thirteen Weeks Ended July 31, 2021 (Second Quarter of Fiscal Year 2021)

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.

Net sales for the second quarter of fiscal year 2022 were $5.0 billion, a 22.4% increase from net sales reported for the second quarter of fiscal year 2021 of $4.1 billion.

The increase was due primarily to a 19.8% increase in comparable club sales.

Comparable club sales

We believe net sales is an important driver of our profitability, particularly comparable club sales.

Comparable sales growth is a function of increasing shopping frequency from new and existing members and the amount they spend on each visit.

Sales comparisons can be influenced by certain factors that are beyond our control such as changes in the cost of gasoline, macro-economic factors such as inflation and supply chain disruptions.

The higher comparable club sales, the more we can leverage certain of our selling, general and administrative (SG&A) expenses, reducing them as a percentage of sales and enhancing profitability.

Thirteen Weeks Ended

July 30, 2022

Comparable club sales 19.8 %

contribution from gasoline sales 12.2 %

Merchandise comparable club sales 7.6 %

Merchandise comparable club sales increased by 7.6% in the second quarter of fiscal year 2022 compared to the second quarter of fiscal year 2021 driven by an increase in sales of groceries of 8% and an increase in sales of general merchandise and services of approximately 4%.

In grocery, sales increased as demand for beverages, fresh fruit and vegetables, fresh meat, candy, dairy and active nutrition categories increased compared to the second quarter of fiscal year 2021.

General merchandise and services sales increased primarily due to our services business and seasonal categories within general merchandise.

Membership fee income

We continue to see growth in the size and quality of our membership base.

Membership fee income was $98.8 million in the second quarter of fiscal year 2022 compared to $88.8 million in the second quarter of fiscal year 2021, an 11.3% increase.

The increase was primarily driven by membership renewals, new members and increased penetration of higher-tier membership levels, evidencing the strength of our membership quality.

Cost of sales

Cost of sales consists primarily of the direct cost of merchandise and gasoline sold at our clubs, including 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 distribution centers to our clubs, and vendor allowances, rebates and cash discounts.

We continue to experience inflation across most categories and have invested in certain categories to preserve our member value proposition.

Cost of sales was $4.2 billion, or 84.8% of net sales, in the second quarter of fiscal year 2022 compared to $3.4 billion, or 83.5% of net sales, in the second quarter of fiscal year 2021.

Merchandise gross margin rate, which excludes gasoline sales and membership fee income, decreased 50 basis points over the second quarter of fiscal year 2021.

Merchandise margins were impacted by increased freight costs as well as investments in inflationary categories and markdowns in general merchandise inventory.

Selling, general and administrative expenses

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 team members;

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, acquisition and integration costs, and other professional services expenses.

SG&A includes both fixed and variable components and, therefore, is not directly correlated with net sales.

We expect that our SG&A will increase in future periods due to investments made to spur comparable club sales growth and our expanding footprint as we open new clubs.

In addition, any future increases in wages, stock-based grants or modifications will increase our SG&A.

SG&A increased by 8.9% to $651.2 million in the second quarter of fiscal year 2022 from $598.1 million in the second quarter of fiscal year 2021.

The year-over-year increase in SG&A was primarily driven by increased labor costs as a result of last year’s wage investments as well as the acquisition, integration and operating expenses related to the Acquisition.

Pre-opening expenses

Pre-opening expenses include startup costs for new clubs and expenses will vary based on the number of new club openings, geography of the club, whether the club is owned or leased, and timing of the opening relative to our period end.

Pre-opening expenses were $5.9 million in the second quarter of fiscal year 2022 compared to $1.6 million in the second quarter of fiscal year 2021.

Pre-opening expenses increased due to timing of spend for club and gas station openings year-over-year.

Expansion plans remain on track with 11 new club openings expected in fiscal year 2022.

Interest expense

Interest expense was $10.9 million in the second quarter of fiscal year 2022 compared to $16.4 million in the second quarter of fiscal year 2021.

The decrease is due to lower debt balances outstanding throughout the second quarter of fiscal year 2022 as compared to the second quarter of fiscal year 2021 before refinancing the ABL Facility on July 28, 2022.

In addition, the second quarter of fiscal year 2021 included net losses on our ineffective cash flow hedges in connection with the payment of outstanding amounts under the ABL Facility.

Provision for income taxes

The Company’s effective income tax rate from continuing operations was 26.6% and 24.7% for the second quarters of fiscal years 2022 and 2021, respectively.

The increase in the effective tax rate is due primarily to lower excess tax benefits from stock-based compensation in the current year period.

Twenty-Six Weeks Ended July 30, 2022 (First Six Months of Fiscal Year 2022) Compared to Twenty-Six Weeks Ended July 31, 2021 (First Six Months of Fiscal Year 2021)

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.

Net sales for the first six months of fiscal year 2022 were $9.4 billion, a 19.5% increase from net sales reported for the first six months of fiscal year 2021 of $7.9 billion.

The increase was due primarily to a 17.2% increase in comparable club sales.

Comparable club sales

We believe net sales is an important driver of our profitability, particularly comparable club sales.

Comparable sales growth is a function of increasing shopping frequency from new and existing members and the amount they spend on each visit.

Sales comparisons can be influenced by certain factors that are beyond our control such as changes in the cost of gasoline and macro-economic factors such as inflation and supply chain disruptions.

The higher comparable club sales, the more we can leverage certain of our SG&A, reducing them as a percentage of sales and enhancing profitability.

Twenty-Six Weeks Ended

July 30, 2022

Comparable club sales 17.2 %

contribution from gasoline sales 11.3 %

Merchandise comparable club sales 5.9 %

Merchandise comparable club sales increased by 5.9% in the first six months of fiscal year 2022 compared to the first six months of fiscal year 2021 driven by an increase in sales of groceries of approximately 8% offset by a decrease in sales of general merchandise and services of approximately 4% .

I n grocery, sales increased as demand for beverages, candy, active nutrition, fresh meat, dairy and bakery categories increased compared to the first six months of fiscal year 2021.

General merchandise realized headwinds in consumer electronics, apparel and seasonal categories as consumers face pressure around discretionary spend due to inflation.

Membership fee income

We continue to see growth in the size and quality of our membership base.

Membership fee income was $195.4 million in the first six months of fiscal year 2022 compared to $175.1 million in the first six months of fiscal year 2021, an 11.6% increase.

The increase was primarily driven by membership renewals, new members and increased penetration of higher-tier membership levels, evidencing the strength of our membership quality.

Cost of sales

freight expenses associated with moving merchandise from vendors to our distribution centers and from distribution centers to our clubs, and vendor allowances, rebates and cash discounts.

We continue to experience inflation across most categories and have invested in certain categories, such as our full service deli, to preserve our member value proposition.

Cost of sales was $7.9 billion, or 84.5% of net sales, in the first six months of fiscal year 2022 compared to $6.6 billion, or 83.3% of net sales, in the first six months of fiscal year 2021.

Merchandise gross margin rate, which excludes gasoline sales and membership fee income, decreased 40 basis points over the first six months of fiscal year 2021.

Merchandise margins were impacted by increased freight costs, investments in inflationary categories and market driven markdowns in general merchandise categories.

Selling, general and administrative expenses

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 team members;

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, acquisition and integration costs, and other professional services expenses.

SG&A includes both fixed and variable components and, therefore, is not directly correlated with net sales.

We expect that our SG&A will increase in future periods due to investments made to spur comparable club sales growth and our expanding footprint as we open new clubs.

In addition, any future increases in wages, stock-based grants or modifications will increase our SG&A.

SG&A increased by 7.4% to $1.3 billion in the first six months of fiscal year 2022 from $1.2 billion in the first six months of fiscal year 2021.

Pre-opening expenses

Pre-opening expenses were $10.8 million in the first six months of fiscal year 2022 compared to $2.2 million in the first six months of fiscal year 2021.

Pre-opening expenses increased due to timing of spend for club and gas station openings year-over-year.

Expansion plans remain on track with 11 new club openings expected in fiscal year 2022.

Interest expense

Interest expense was $18.7 million in the first six months of fiscal year 2022 compared to $35.7 million in the first six months of fiscal year 2021.

The decrease is due to lower debt balances outstanding throughout the first half of fiscal year 2022 as compared to the first half of fiscal year 2021 before refinancing the ABL Facility on July 28, 2022.

In addition, the first half

of fiscal year 2021 included net losses on our ineffective cash flow hedges in connection with the payment of outstanding amounts under the ABL Facility.

Provision for income taxes

The Company’s effective income tax rate from continuing operations was 24.2% and 24.3% for the first six months of fiscal years 2022 and 2021, respectively.

The slight decrease in the effective tax rate is due primarily to higher excess tax benefits from stock-based compensation in the current year period.

Non-GAAP Financial Measures

The accompanying Condensed Consolidated Financial Statements, including the related notes, are presented in accordance GAAP.

The accompanying Condensed Consolidated Financial Statements, including the related notes, are presented in accordance with GAAP.

In addition to relevant GAAP measures we also provide non-GAAP measures, including adjusted EBITDA, comparable club sales, free cash flow, adjusted net income and adjusted net income per diluted share because management believes these metrics are useful to investors and analysts by excluding items that we do not believe are indicative of our core operating performance.

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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

April 30, 2022 May 1, 2021

(in thousands)

Thirteen Weeks Ended Twenty-Six Weeks Ended

(in thousands) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021

Income from continuing operations $ 141,014 $ 110,997 $ 253,471 $ 192,583

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Pre-opening expenses (a)

5,901 1,633 10,801 2,194

Non-cash rent (b)

1,256 1,765 2,102 3,182

Acquisition and integration costs (c)

3,588 — 11,467 —

Severance (d)

Other adjustments (e)

674 176 1,309 367

Adjusted EBITDA $ 273,700 $ 220,140 $ 494,501 $ 422,549

Adjusted EBITDA as a percentage of net sales 5.5 % 5.4 % 5.3 % 5.4 %

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

(b) Represents an adjustment to remove the non-cash portion of rent expense.

(c) Represents costs related to the acquisition and integration of assets from Burris Logistics, including due diligence, legal, and other consulting expenses.

(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, obligations associated with our post-retirement medical plan and incremental rent expense as the Company transitions from the current home office to a new home office building in fiscal year 2022.

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

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

Represents costs related to the acquisition and integration of assets from Burris Logistics, including due diligence, legal, and other consulting expenses.

Represents severance charges associated with labor reductions that resulted from the realignment of our field operations.

Other non-cash items, including non-cash accretion on asset retirement obligations, obligations associated with our post-retirement medical plan and incremental rent expense as the Company transitions from the current home office to a new home office building in fiscal year 2022.

Comparable Club Sales and Merchandise Comparable Club Sales

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Merchandise comparable club sales represents comparable club sales from all merchandise other than our gasoline operations for the applicable period.

Refer to "Results of Operations" below for further discussion of comparable club sales and merchandise comparable club sales.

Free Cash Flow

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The following is a reconciliation of our net cash provided by operating activities to free cash flow for the periods presented:

Thirteen Weeks Ended

(in thousands) April 30, 2022 May 1, 2021

Thirteen Weeks Ended Twenty-Six Weeks Ended

(in thousands) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021

Net cash provided by operating activities $ 398,744 $ 310,348 $ 443,052 $ 559,313

2 unchanged sentences

Free cash flow $ 300,417 $ 239,680 $ 254,192 $ 430,585

Free cash flow declined year-over-year as a result of cash outflows for higher working capital, specifically inventory as we pulled forward purchases in response to the challenging supply chain and inflationary pressures, in addition to the timing of capital expenditures as we continue to expand our footprint.

Free cash flow increased to $300.4 million for the second quarter of fiscal year 2022 compared to $239.7 million for the second quarter of fiscal year 2021 as a result of increased income from operations as well as positive changes in working capital.

Free cash flow declined to $254.2 million in the first six months of fiscal year 2022 compared to $430.6 million in the first six months of 2021 as a result of cash outflows for higher working capital, specifically inventory related to new club growth and other strategic actions we’ve taken to better position our business, such as improving in-stock levels over last year.

Adjusted Net Income

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We believe adjusted net income and adjusted net income per diluted share are useful metrics to investors and analysts because they present more accurate year-over-year comparisons for our net income and net income per diluted share because adjusted items are not the result of our normal operations.

Thirteen Weeks Ended

(in thousands) April 30, 2022 May 1, 2021

Thirteen Weeks Ended Twenty-Six Weeks Ended

(in thousands) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021

Net income as reported $ 141,007 $ 110,988 $ 253,457 $ 192,567

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Acquisition and integration costs (b)

3,587 — 11,467 —

Incremental home office expense (c)

600 — 1,199 —

(Gain) loss on cash flow hedge (d)

— 3,245 (165) 7,954

Charges related to debt payments (e)

389 — 389 657

Severance (f)

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(d) Represents the reclassification into earnings of accumulated other comprehensive income associated with the de-designation of hedge accounting.

(e) Represents the expensing of fees and deferred fees and original issue discount associated with the partial prepayment of debt.

(e) Represents the expensing of fees and deferred fees and original issue discount associated with the partial prepayment of debt in fiscal year 2021 and extinguishment cost related to the ABL Facility in fiscal year 2022.

(f) Represents severance charges associated with labor reductions that resulted from the realignment of our field operations.

(g) Represents the tax effect of the above adjustments at a statutory tax rate of approximately 28%.

(h) Adjusted net income per diluted share is measured using weighted average diluted shares outstanding.

Results of Operations

The following table summarizes key components of our results of operations for the periods indicated:

Statement of Operations Data Thirteen Weeks Ended

(dollars in thousands) April 30, 2022 May 1, 2021

$ 4,399,810 $ 3,781,834

Membership fee income

96,625 86,388

Total revenues

4,496,435 3,868,222

Cost of sales

3,705,838 3,141,497

Selling, general and administrative expenses

635,380 599,910

Pre-opening expenses

Operating income

150,317 126,254

Interest expense, net

Income from continuing operations before income taxes

142,476 106,969

Provision for income taxes

30,019 25,383

Income from continuing operations

112,457 81,586

Loss from discontinued operations, net of income taxes

$ 112,450 $ 81,579

Operational Data:

Total clubs at end of period

Comparable club sales

Merchandise comparable club sales

Adjusted EBITDA

$ 220,801 $ 202,410

Free cash flow

(46,225) 190,905

Thirteen Weeks Ended April 30, 2022 (First Quarter of Fiscal Year 2022) Compared to Thirteen Weeks Ended May 1, 2021 (First Quarter of Fiscal Year 2021)

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.

Net sales for the first quarter of fiscal year 2022 were $4,399.8 million, a 16.3% increase from net sales reported for the first quarter of fiscal year 2021 of $3,781.8 million.

The increase was due primarily to a 14.4% increase in comparable club sales.

Comparable club sales

We believe net sales is an important driver of our profitability, particularly comparable club sales.

Comparable sales growth is a function of increasing shopping frequency from new and existing members and the amount they spend on each visit.

Sales comparisons can be influenced by certain factors that are beyond our control such as changes in the cost of gasoline and macro-economic factors such as inflation.

The higher comparable club sales, the more we can leverage certain of our selling, general and administrative (SG&A) expenses, reducing them as a percentage of sales and enhancing profitability.

Thirteen Weeks Ended

April 30, 2022

Comparable club sales 14.4 %

contribution from gasoline sales 10.3 %

Merchandise comparable club sales 4.1 %

Merchandise comparable club sales increased by 4.1% in the first quarter of fiscal year 2022 driven by an increase in sales of groceries of 7.0% offset by a decrease in sales of general merchandise and services of approximately 10.3%.

In grocery, sales increased as demand for beverages, candy, active nutrition, fresh meat, dairy and bakery categories increased compared to the first quarter of fiscal year 2021.

General merchandise realized headwinds in consumer electronics and seasonal categories as discretionary spend normalized and the Northeast markets experienced unseasonable weather.

Membership fee income

We continue to see growth in the size and quality of our membership base.

Membership fee income was $96.6 million in the first quarter of fiscal year 2022 compared to $86.4 million in the first quarter of fiscal year 2021, an 11.9% increase.

The increase was primarily driven by membership renewals, new members and increased penetration of higher-tier membership levels, evidencing the strength of our membership quality.

Cost of sales

freight expenses associated with moving merchandise from vendors to our distribution centers and from distribution centers to our clubs, and vendor allowances, rebates and cash discounts.

We continue to experience inflation across most categories and have invested in certain categories to preserve our member value proposition.

Cost of sales was $3,705.8 million, or 84.2% of net sales, in the first quarter of fiscal year 2022 compared to $3,141.5 million, or 83.1% of net sales, in the first quarter of fiscal year 2021.

Merchandise gross margin rate, which excludes gasoline sales and membership fee income, decreased 30 basis points over the first quarter of fiscal year 2021.

Merchandise margins were impacted by increased freight costs and tactical investments in inflationary categories.

Selling, general and administrative expenses

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 team members;

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, acquisition and integration costs, and other professional services expenses.

SG&A includes both fixed and variable components and, therefore, is not directly correlated with net sales.

We expect that our SG&A will increase in future periods due to investments to spur comparable club sales growth and our expanding footprint as we open new clubs.

In addition, any future increases in wages, stock options or other stock-based grants or modifications will increase our SG&A expenses.

SG&A increased by 5.9% to $635.4 million in the first quarter of fiscal year 2022 from $599.9 million in the first quarter of fiscal year 2021.

The year-over-year increase in SG&A was primarily driven by increased labor costs as a result of last year’s wage investments, occupancy costs as a result of new club openings, and acquisition and integration expenses related to the acquisition of assets from Burris Logistics, which closed on May 2, 2022.

Pre-opening expenses

Pre-opening expenses were $4.9 million in the first quarter of fiscal year 2022 compared to $0.6 million in the first quarter of fiscal year 2021.

Pre-opening expenses increased due to timing of spend for club and gas station openings year-over-year.

Interest expense

Interest expense was $7.8 million in the first quarter of fiscal year 2022 compared to $19.3 million in the first quarter of fiscal year 2021.

The decrease is due to lower debt balances outstanding.

Provision for income taxes

The Company’s effective income tax rate from continuing operations was 21.1% and 23.7% for the first quarter of fiscal year 2022 and first quarter of fiscal year 2021, respectively.

The decrease in the effective tax rate for the first quarter of fiscal year 2022, compared to the first quarter of fiscal year 2021 is due primarily to higher excess tax benefits from stock-based compensation in the current year period.

Liquidity and Capital Resources

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

As of April 30, 2022, cash and cash equivalents totaled $38.0 million and we had $859.1 million of unused capacity under our ABL Facility.

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

As of July 30, 2022, cash and cash equivalents totaled $163.7 million and we had $576.7 million of unused capacity under our ABL Revolving Facility.

Our principal liquidity needs for the next twelve months and beyond are to fund normal recurring operational expenses and anticipated capital expenditures;

fund share repurchases and meet debt service and principal repayment obligations.

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 for at least the next twelve months.

In the first quarter of fiscal year 2022, we used $35.8 million of available cash to repurchase 570,506 shares under the 2021 Repurchase Program.

Subsequent to April 30, 2022, we closed the previously announced acquisition of assets from Burris Logistics, which was funded with a combination of available cash and borrowings under our ABL Facility.

We believe that our current resources, together with anticipated cash flows from operations and borrowing capacity under our ABL Revolving Facility, will be sufficient to finance our operations for at least the next twelve months.

In the first six months of fiscal year 2022, we used $58.6 million of available cash to repurchase 923,506 shares under the 2021 Repurchase Program.

In addition, we used $50.0 million of available cash to extinguish the term loan associated with the ABL Facility.

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.

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A summary of our cash flows from operating, investing and financing activities is presented in the following table:

Thirteen Weeks Ended

April 30, 2022 May 1, 2021

(in thousands)

Twenty-Six Weeks Ended

(in thousands) July 30, 2022 July 31, 2021

Net cash provided by operating activities $ 443,052 $ 559,313

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Net Cash from Operating Activities

Net cash provided by operating activities was $44.3 million for the first quarter of fiscal year 2022 compared to $249.0 million for the first quarter of fiscal year 2021.

The decrease in operating cash flow was primarily due to cash outflows for inventory purchases related to merchandise rebuilding and higher procurement costs as well as changes to incentive compensation and other accruals compared to the prior year.

Net cash provided by operating activities was $443.1 million for the first six months of fiscal year 2022 compared to $559.3 million for the first six months of fiscal year 2021.

The decrease in operating cash flow was primarily due to cash

outflows due to inflation in inventory, improvement in inventory position for key categories, partially offset by income from operations c ompared to the prior year.

Net Cash from Investing Activities

Cash used for capital expenditures was $90.5 million for the first quarter of fiscal year 2022, compared to $58.1 million for the first quarter of fiscal year 2021.

The increase is primarily due to the timing, volume and cost of property, plant and equipment additions as we continue to expand our footprint.

Cash used for capital expenditures was $565.4 million for the first six months of fiscal year 2022, compared to $128.7 million for the first six months of fiscal year 2021.

The increase is primarily due to the Acquisition, as well as the timing, volume and cost of property, plant and equipment additions as we continue to expand our footprint.

Net Cash from Financing Activities

Net cash provided by financing activities for the first quarter of fiscal year 2022 was $38.7 million compared to net cash used in financing activities of $171.5 million for the first quarter of fiscal year 2021.

The change is due primarily to the draw down of debt on the ABL Facility, offset by higher share repurchases in the first quarter of fiscal year 2022 as compared to debt payments and lower share repurchases in the first quarter of fiscal year 2021.

Net cash provided by financing activities for the first six months of fiscal year 2022 was $240.6 million compared to net cash used in financing activities of $431.7 million for the first six months of fiscal year 2021.

The change is due primarily to the draw down of debt on the ABL Facility and the ABL Revolving Facility in the first six months of fiscal year 2022 as compared to debt payments in the six months quarter of fiscal year 2021.

Debt and Borrowing Capacity

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In connection with the payment, the Company expensed $0.7 million of previously capitalized debt issuance costs and original issue discount.

At April 30, 2022, there was $130.0 million outstanding in loans under the ABL Facility and $10.9 million in outstanding letters of credit.

The interest rate on the revolving credit facility was 1.89%, the interest rate on the term loan was 2.45%, and unused capacity was $859.1 million.

At April 30, 2022, the interest rate for the First Lien Term Loan was 2.52% and there was $701.9 million outstanding.

On July 28, 2022, the Company entered into the ABL Revolving Facility in an aggregate ABL Revolving Commitment of $1.2 billion pursuant to that certain credit agreement with Bank of America, N.A., as administrative agent and collateral agent, and other lenders party thereto.

The maturity date of the ABL Revolving Facility is July 28, 2027.

As part of this transaction, the Company extinguished the ABL Facility.

At July 30, 2022, there was $350.0 million outstanding in loans under the ABL Revolving Facility and $12.9 million in outstanding letters of credit.

The interest rate on the revolving credit facility was 3.42% and unused capacity was $576.7 million.

At July 30, 2022, the interest rate for the First Lien Term Loan was 3.96% and there was $701.9 million outstanding.

See Note 4, "Debt and Credit Arrangements" of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.

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These material cash commitments impact our short-term and long-term liquidity and capital needs.

As of April 30, 2022, other than those items related to the ordinary course of operations of our business such as inventory purchases, new leases and lease amendments, there were no material changes to our material cash commitments from those described in our Annual Report on Form 10-K for the fiscal year 2021.

As of July 30, 2022, other than those items related to the ordinary course of operations of our business such as inventory purchases, new leases and lease amendments, there were no material changes to our material cash commitments from those described in our Annual Report on Form 10-K for the fiscal year 2021.

Critical Accounting Policies and Use of Estimates

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The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures.

Our critical accounting policies are described under the heading "Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the fiscal year 2021.

Except as described below, there were no material changes in critical accounting policies and estimates during the period covered by this Quarterly Report on Form 10-Q.

Refer to Item 7., "Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies and Estimates," in our Annual Report on Form 10-K for the fiscal year 2021 for a complete list of our Critical Accounting Policies and Estimates.

Business Combinations

We account for business combinations under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations, which requires an allocation of the consideration we paid to the identifiable assets, intangible assets

and liabilities based on the estimated fair values as of the closing date of the acquisition.

The excess of the fair value of the purchase price over the fair values of these identifiable assets, intangible assets and liabilities is recorded as goodwill.

The valuation of acquired assets will impact future operating results.

We utilize third-party valuation specialists to assist us in the determination of the fair value of the assets acquired.

Specifically, the fair value of the buildings and site improvement were determined using a combination of the cost, income and sales comparison approaches with the ultimate valuation primarily based on the income approach and the market approach was utilized to determine the fair value of trailers acquired.

The remaining useful lives of depreciable assets have a significant impact on earnings.

The selected lives are based on the expected periods that the assets will provide value to the Company subsequent to the business combination.

The Company may adjust the amounts recognized for a business combination during a measurement period after the acquisition date.

Any such adjustments are based on the Company obtaining additional information that existed at the acquisition date regarding the assets acquired or the liabilities assumed.

Measurement-period adjustments are generally recorded as increases or decreases to the goodwill recognized in the transaction.

The measurement period ends once the Company has obtained all necessary information that existed as of the acquisition date, but does not extend beyond one year from the date of acquisition.

Any adjustments to assets acquired or liabilities assumed beyond the measurement period are recorded through earnings.

Recent Accounting Pronouncements

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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-Q

Item 2. Management’s Discussion and Analysis