BJ's Wholesale Club Holdings, Inc. 10-Q

Item 1. Financial Statements. BJ’S WHOLESALE CLUB HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except par value) (Unaudited) July 30, 2022 January 29, 2022 July 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 163,681 $ 45,436 $ 42,414 Accounts receivable, net 204,495 173,951 169,135 Merchandise inventories 1,376,526 1,242,935 1,033,555 Prepaid expenses and other current assets 57,844 54,734 46,446 Total current assets 1,802,546 1,517,056 1,291,550 Operating lease right-of-use assets, net 2,192,548 2,131,986 2,138,690 Property and equipment, net 1,232,103 942,331 841,521 Goodwill 1,008,816 924,134 924,134 Intangibles, net 120,123 124,640 129,881 Deferred income taxes 4,525 5,507 2,973 Other assets 26,583 23,240 18,850 Total assets $ 6,387,244 $ 5,668,894 $ 5,347,599 LIABILITIES Current liabilities: Short-term debt $ 350,000 $ — $ — Current portion of operating lease liabilities 171,568 141,453 134,421 Accounts payable 1,243,286 1,112,783 1,029,726 Accrued expenses and other current liabilities 719,291 748,245 675,049 Total current liabilities 2,484,145 2,002,481 1,839,196 Long-term operating lease liabilities 2,118,467 2,059,760 2,069,148 Long-term debt 699,406 748,568 747,730 Deferred income taxes 64,354 52,850 41,635 Other non-current liabilities 167,281 157,127 161,538 Commitments and contingencies (see Note 5) STOCKHOLDERS’ EQUITY Preferred stock; par value $ 0.01 ; 5,000 shares authorized, and no shares issued — — — Common stock, par value $ 0.01 ; 300,000 shares authorized, 146,157 shares issued and 135,052 outstanding at July 30, 2022; 145,451 shares issued and 135,506 outstanding at January 29, 2022; and 144,300 shares issued and 136,347 outstanding at July 31, 2021 1,461 1,454 1,443 Additional paid-in capital 928,548 902,704 867,792 Accumulated earnings (deficit) 384,770 131,313 ( 102,772 ) Accumulated other comprehensive income (loss) 2,010 1,305 ( 6,225 ) Treasury stock, at cost, 11,105 shares at July 30, 2022; 9,945 shares at January 29, 2022; and 7,953 shares at July 31, 2021 ( 463,198 ) ( 388,668 ) ( 271,886 ) Total stockholders’ equity 853,591 648,108 488,352 Total liabilities and stockholders’ equity $ 6,387,244 $ 5,668,894 $ 5,347,599 The accompanying notes are an integral part of the condensed consolidated financial statements. 4 BJ’S WHOLESALE CLUB HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Amounts in thousands, except per share amounts) (Unaudited) Thirteen Weeks Ended July 30, 2022 July 31, 2021 Net sales $ 5,005,030 $ 4,088,402 Membership fee income 98,786 88,753 Total revenues 5,103,816 4,177,155 Cost of sales 4,243,769 3,413,625 Selling, general and administrative expenses 651,236 598,113 Pre-opening expenses 5,901 1,633 Operating income 202,910 163,784 Interest expense, net 10,874 16,428 Income from continuing operations before income taxes 192,036 147,356 Provision for income taxes 51,022 36,359 Income from continuing operations 141,014 110,997 Loss from discontinued operations, net of income taxes ( 7 ) ( 9 ) Net income $ 141,007 $ 110,988 Income per share attributable to common stockholders—basic: Income from continuing operations $ 1.05 $ 0.82 Loss from discontinued operations — — Net income $ 1.05 $ 0.82 Income per share attributable to common stockholders—diluted: Income from continuing operations $ 1.03 $ 0.80 Loss from discontinued operations — — Net income $ 1.03 $ 0.80 Weighted average shares of common stock outstanding: Basic 134,341 135,521 Diluted 136,567 138,197 Other comprehensive income: Amounts released from other comprehensive income, net of tax $ — $ 3,511 Unrealized gain on cash flow hedge, net of income tax provision of $ 1,143 , at July 31, 2021 — 2,940 Total other comprehensive income — 6,451 Total comprehensive income $ 141,007 $ 117,439 The accompanying notes are an integral part of the condensed consolidated financial statements. 5 BJ’S WHOLESALE CLUB HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Amounts in thousands, except per share amounts) (Unaudited) Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 Net sales $ 9,404,840 $ 7,870,236 Membership fee income 195,411 175,141 Total revenues 9,600,251 8,045,377 Cost of sales 7,949,043 6,555,122 Selling, general and administrative expenses 1,287,180 1,198,023 Pre-opening expenses 10,801 2,194 Operating income 353,227 290,038 Interest expense, net 18,715 35,713 Income from continuing operations before income taxes 334,512 254,325 Provision for income taxes 81,041 61,742 Income from continuing operations 253,471 192,583 Loss from discontinued operations, net of income taxes ( 14 ) ( 16 ) Net income $ 253,457 $ 192,567 Income per share attributable to common stockholders—basic: Income from continuing operations $ 1.89 $ 1.42 Loss from discontinued operations — — Net income $ 1.89 $ 1.42 Income per share attributable to common stockholders—diluted: Income from continuing operations $ 1.86 $ 1.39 Loss from discontinued operations ( 0.01 ) — Net income $ 1.85 $ 1.39 Weighted average shares of common stock outstanding: Basic 134,293 135,615 Diluted 136,635 138,430 Other comprehensive income: Amounts released from other comprehensive income, net of tax $ 117 $ 8,176 Unrealized gain on cash flow hedge, net of income tax provision of $ 229 and $ 2,383 , respectively 588 6,127 Total other comprehensive income 705 14,303 Total comprehensive income $ 254,162 $ 206,870 The accompanying notes are an integral part of the consolidated financial statements. 6 BJ’S WHOLESALE CLUB HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Amounts in thousands) (Unaudited) Common Stock Additional Paid-in Capital Accumulated Earnings Accumulated Other Comprehensive Income Treasury Stock Total Stockholders’ Equity Shares Amount Shares Amount Balance, January 29, 2022 145,451 $ 1,454 $ 902,704 $ 131,313 $ 1,305 ( 9,945 ) $ ( 388,668 ) $ 648,108 Net income — — — 112,450 — — — 112,450 Amounts released from other comprehensive income, net of tax — — — — 117 — — 117 Unrealized gain on cash flow hedge, net of tax — — — — 588 — — 588 Common stock issued under stock incentive plans 490 5 ( 5 ) — — — — — Stock-based compensation expense — — 9,115 — — — — 9,115 Net cash received from option exercises — — 2,306 — — — — 2,306 Treasury stock purchases — — — — — ( 801 ) ( 51,342 ) ( 51,342 ) Balance, April 30, 2022 145,941 1,459 914,120 243,763 2,010 ( 10,746 ) ( 440,010 ) 721,342 Net income — — — 141,007 — — — 141,007 Common stock issued under stock incentive plans 172 2 ( 2 ) — — — — — Common stock issued under ESPP 44 — 2,331 — — — — 2,331 Stock-based compensation expense — — 9,387 — — — — 9,387 Net cash received from option exercises — — 2,712 — — — — 2,712 Treasury stock purchases — — — — — ( 359 ) ( 23,188 ) ( 23,188 ) Balance, July 30, 2022 146,157 $ 1,461 $ 928,548 $ 384,770 $ 2,010 ( 11,105 ) $ ( 463,198 ) $ 853,591 The accompanying notes are an integral part of the condensed consolidated financial statements. 7 BJ’S WHOLESALE CLUB HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Amounts in thousands) (Unaudited) Common Stock Additional Paid-in Capital Accumulated (Deficit) Accumulated Other Comprehensive Loss Treasury Stock Total Stockholders’ Equity Shares Amount Shares Amount Balance, January 30, 2021 143,428 $ 1,434 $ 826,377 $ ( 295,339 ) $ ( 20,528 ) ( 6,236 ) $ ( 192,617 ) $ 319,327 Net income — — — 81,579 — — — 81,579 Amounts released from other comprehensive income, net of tax — — — — 4,665 — — 4,665 Unrealized loss on cash flow, net of tax — — — — 3,187 — — 3,187 Common stock issued under stock incentive plans 590 6 ( 6 ) — — — — — Stock-based compensation expense — — 27,300 — — — — 27,300 Net cash received from option exercises — — 1,497 — — — — 1,497 Treasury stock purchases — — — — — ( 542 ) ( 24,031 ) ( 24,031 ) Balance, May 1, 2021 144,018 1,440 855,168 ( 213,760 ) ( 12,676 ) ( 6,778 ) ( 216,648 ) 413,524 Net income — — — 110,988 — — — 110,988 Amounts released from other comprehensive income, net of tax — — — — 3,511 — — 3,511 Unrealized loss on cash flow, net of tax — — — — 2,940 — — 2,940 Common stock issued under stock incentive plans 223 2 ( 2 ) — — — — — Common stock issued under ESPP 59 1 1,876 — — — — 1,877 Stock-based compensation expense — — 7,334 — — — — 7,334 Net cash received from option exercises — — 3,416 — — — — 3,416 Treasury stock purchases — — — — — ( 1,175 ) ( 55,238 ) ( 55,238 ) Balance, July 31, 2021 144,300 $ 1,443 $ 867,792 $ ( 102,772 ) $ ( 6,225 ) ( 7,953 ) $ ( 271,886 ) $ 488,352 The accompanying notes are an integral part of the condensed consolidated financial statements. 8 BJ’S WHOLESALE CLUB HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 253,457 $ 192,567 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 97,093 89,834 Amortization of debt issuance costs and accretion of original issue discount 1,663 1,724 Debt extinguishment charges 389 657 Stock-based compensation expense 18,502 34,634 Deferred income tax provision (benefit) 12,212 ( 6,260 ) Changes in operating leases and other non-cash items 32,067 3,187 Increase (decrease) in cash due to changes in: Accounts receivable ( 29,605 ) 3,584 Merchandise inventories ( 45,519 ) 172,140 Prepaid expenses and other current assets 1,097 ( 1,665 ) Other assets ( 1,858 ) 790 Accounts payable 130,503 41,652 Accrued expenses and other current liabilities ( 31,019 ) 26,049 Other non-current liabilities 4,070 420 Net cash provided by operating activities 443,052 559,313 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment, net of disposals ( 191,534 ) ( 147,808 ) Proceeds from sale leaseback transactions 2,674 19,080 Acquisitions ( 376,521 ) — Net cash used in investing activities ( 565,381 ) ( 128,728 ) CASH FLOWS FROM FINANCING ACTIVITIES Payments on long term debt ( 50,000 ) — Payments on First Lien Term Loan — ( 100,000 ) Proceeds from revolving lines of credit 905,000 — Payments on revolving lines of credit ( 555,000 ) ( 260,000 ) Debt issuance costs paid ( 2,701 ) — Net cash received from stock option exercises 5,018 4,913 Net cash received from Employee Stock Purchase Plan (ESPP) 2,331 1,877 Treasury stock purchases ( 74,530 ) ( 79,269 ) Proceeds from financing obligations 13,083 1,333 Other financing activities ( 2,627 ) ( 543 ) Net cash provided by (used in) financing activities 240,574 ( 431,689 ) Net increase (decrease) in cash and cash equivalents 118,245 ( 1,104 ) Cash and cash equivalents at beginning of period 45,436 43,518 Cash and cash equivalents at end of period $ 163,681 $ 42,414 Supplemental cash flow information: Interest paid $ 15,689 $ 23,348 Income taxes paid 81,512 62,844 Non-cash financing and investing activities: Lease liabilities arising from obtaining right-of-use assets 181,411 160,452 Property additions included in accrued expenses 19,489 18,044 The accompanying notes are an integral part of the condensed consolidated financial statements. 9 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Description of Business BJ’s Wholesale Club Holdings, Inc. and its wholly-owned subsidiaries is a leading warehouse club operator concentrated primarily on the east coast of the United States. As of July 30, 2022, the Company operated 229 warehouse clubs and 160 gas stations in 17 states. The Company follows and reports based on the National Retail Federation’s fiscal calendar. The thirteen week periods ended July 30, 2022 and July 31, 2021 are referred to herein as the "second quarter of fiscal year 2022" and the "second quarter of fiscal year 2021," respectively. Events and global business conditions such as inflation, the ongoing coronavirus (“COVID-19”) pandemic and the war in Ukraine have resulted in certain impacts to the global economy, including market disruptions and supply chain challenges. During the second quarter of fiscal year 2022 we continued to experience elevated supply chain costs, including increased commodity prices, logistics, and procurement costs. We expect these market disruptions and inflationary pressures to continue throughout 2022. On May 2, 2022, the Company closed the previously announced acquisition of the assets and operations of four distribution centers and the related private transportation fleet from Burris Logistics, LLC. The Company financed the purchase price with a combination of available cash and borrowings under the ABL Facility. See Note 12, "Acquisitions" of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying interim financial statements of BJ’s Wholesale Club Holdings, Inc. are unaudited and, in the opinion of management, reflect all normal recurring adjustments considered necessary for a fair statement of the Company’s financial statements in accordance with GAAP. The condensed consolidated balance sheet as of January 29, 2022 is derived from the audited consolidated balance sheet as of that date. The unaudited results of operations for the second quarter of fiscal year 2022 are not necessarily indicative of future results or results to be expected for fiscal year 2022. The Company’s business, in common with the business of retailers generally, is subject to seasonal influences. The Company’s sales and operating income have typically been highest in the fourth quarter holiday season and lowest in the first quarter of each fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year 2021, as filed with the Securities and Exchange Commission on March 17, 2022. Recently Adopted Accounting Pronouncements The accounting policies the Company follows are set forth in its audited financial statements for fiscal year 2021 included in its Annual Report on Form 10-K for the fiscal year 2021. There have been no material changes to these accounting policies and no material pronouncements adopted. 3. Revenue Recognition Performance Obligations The Company identifies each distinct performance obligation to transfer goods (or bundle of goods) or services. The Company recognizes revenue as it satisfies a performance obligation by transferring control of the goods or services to the customer. Net sales—The Company recognizes net sales at clubs and gas stations when the customer takes possession of the goods and tenders payment. Sales tax is recorded as a liability at the point of sale. Revenue is recorded at the point of sale based on the 10 transaction price on the shelf sign, net of any applicable discounts, sales tax and expected refunds. For e-commerce sales, the Company recognizes sales when control of the merchandise is transferred to the customer, which is typically at the shipping point. The following tables summarize the Company’s point of sale transactions at clubs and gas stations, excluding sales tax, as a percentage of both net sales and total revenues: Thirteen Weeks Ended July 30, 2022 July 31, 2021 Point of sale transactions, excluding sales tax, as a percent of net sales 92 % 93 % Point of sale transactions, excluding sales tax, as a percent of total revenues 90 % 91 % Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 Point of sale transactions, excluding sales tax, as a percent of net sales 92 % 93 % Point of sale transactions, excluding sales tax, as a percent of total revenues 90 % 91 % BJ’s Perks Rewards and My BJ’s Perks programs—The Company’s BJ’s Perks Rewards ® membership program allows participating members to earn 2 % cash back, up to a maximum of $ 500 per year, on qualified purchases made at BJ’s. The Company also offers a co-branded credit card program, the My BJ’s Perks ® program, which allows My BJ’s Perks ® Mastercard credit card holders to earn up to 5 % cash back on eligible purchases made at BJ’s and up to 2 % cash back on purchases made with the card outside of BJ’s. Cash back is in the form of electronic awards issued in $ 10 increments that may be used online or in-club at the register and expire six months from the date issued. Earned awards may be redeemed on future purchases made at the Company. The Company recognizes revenue for earned awards when customers redeem such awards as part of a purchase at one of the Company’s clubs or on the Company’s website or app. The Company accounts for these transactions as multiple element arrangements and allocates the transaction price to separate performance obligations using their relative fair values. The Company includes the fair value of award dollars earned in deferred revenue at the time the award dollars are earned. This liability was $ 40.0 million at July 30, 2022, $ 30.3 million at January 29, 2022 and $ 25.8 million at July 31, 2021. Royalty revenue received in connection with the My BJ’s Perks co-brand credit card program is variable consideration and is considered deferred until the card holder makes a purchase. The Company’s total deferred royalty revenue related to the outstanding My BJ’s Perks Rewards was $ 28.5 million, $ 17.8 million and $ 18.8 million at July 30, 2022, January 29, 2022 and July 31, 2021, respectively. The timing of revenue recognition is driven by actual customer activities, such as redemptions and expirations. As of July 30, 2022, the Company expects to recognize $ 26.6 million by the end of fiscal year 2022 and expects the remainder to be recognized in the periods thereafter. Membership—The Company charges a membership fee to its customers. That fee allows customers to shop in the Company’s clubs, shop on the Company’s website and app and purchase gasoline at the Company’s gas stations for the duration of the membership, which is generally 12 months. As the Company has the obligation to provide access to its clubs, website, app and gas stations for the duration of the membership term, the Company recognizes membership fees on a straight-line basis over the life of the membership. The Company’s deferred revenue related to membership fees was $ 185.4 million, $ 174.9 million and $ 169.3 million at July 30, 2022, January 29, 2022 and July 31, 2021, respectively. Gift Card Program—The Company sells BJ’s gift cards in both physical and digital format, which allows customers to redeem the card for future purchases equal to the amount of the original purchase price of the gift card. Revenue from gift card sales is recognized in proportion to its rate of gift card redemptions as the Company’s performance obligation to redeem the gift card for merchandise is satisfied when the gift card is redeemed. The Company also recognizes breakage in proportion to its rate of gift card redemptions. Deferred revenue related to gift cards was $ 11.9 million, $ 11.8 million and $ 9.7 million at July 30, 2022, January 29, 2022 and July 31, 2021, respectively. The Company recognized $ 12.7 million and $ 9.6 million of revenue from gift card redemptions in the second quarter of fiscal year 2022 and second quarter of fiscal year 2021, respectively. The Company recognized $ 23.2 million and $ 18.4 million of revenue from gift card redemptions in the twenty-six weeks ended July 30, 2022 and July 31, 2021 respectively. 11 Disaggregation of Revenue The Company’s club retail operations, which include retail club and other sales procured from our clubs and distribution centers, represent substantially all of its consolidated total revenues, and are the Company’s only reportable segment. All the Company’s identifiable assets are in the United States. The Company does not have significant sales outside the United States, nor does any customer represent more than 10% of total revenues for any period presented. The following table summarizes the Company’s percentage of net sales disaggregated by category: Thirteen Weeks Ended July 30, 2022 July 31, 2021 Grocery 64 % 70 % General Merchandise and Services 12 % 15 % Gasoline and Other 24 % 15 % Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 Grocery 65 % 71 % General Merchandise and Services 12 % 15 % Gasoline and Other 23 % 14 % 4. Debt and Credit Arrangements The following table summarizes the Company’s debt (in thousands): July 30, 2022 January 29, 2022 July 31, 2021 ABL Revolving Facility $ 350,000 $ — $ — ABL Facility — 50,000 50,000 First Lien Term Loan 701,920 701,920 701,920 Unamortized debt discount and debt issuance cost ( 2,514 ) ( 3,352 ) ( 4,190 ) Less: current portion ( 350,000 ) — — Long-term debt $ 699,406 $ 748,568 $ 747,730 ABL Revolving Facility On July 28, 2022, the Company entered into the ABL Revolving Facility with an ABL Revolving Commitment of $ 1.2 billion pursuant to that certain credit agreement (the "Credit Agreement") with Bank of America, N.A., as administrative agent and collateral agent, and the 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. Revolving loans under the ABL Revolving Facility are available in an aggregate amount equal to the lesser of the aggregate ABL Revolving Commitment and a borrowing base based on the value of certain inventory, accounts and credit card receivables, subject to specified advance rebates and reserves as set forth in the Credit Agreement. Indebtedness under the ABL Revolving Facility is secured by substantially all of the assets (other than real estate) of the Company and its subsidiaries, subject to customary exceptions. As amended, interest on the ABL Revolving Facility is calculated either at the Secured Overnight Financing Rate ("SOFR") plus a range of 100 to 125 basis points or a base rate plus 0 to 25 basis points, based on excess availability. The Company will also pay an unused commitment fee of 0.20 % per annum on the unused ABL Revolving Commitment. Each borrowing is for a period of one , three , or six months , as selected by the Company, or for such other period that is twelve months or less requested by the Company and consented to by the lenders and administrative agent. The ABL Revolving Facility places certain restrictions upon the Borrower’s, and its restricted subsidiaries’, ability to, among other things, incur additional indebtedness, pay dividends and make certain loans, investments and divestitures. The ABL Revolving Facility contains customary events of default (including payment defaults, cross-defaults to certain of our other 12 indebtedness, breach of representations and covenants and change of control). The occurrence of an event of default under the ABL Revolving Facility would permit the lenders to accelerate the indebtedness and terminate the ABL Revolving Facility. At July 30, 2022, there were $ 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. ABL Facility - Former Credit Agreement The ABL Revolving Facility replaced the ABL Facility, which comprised of $ 950.0 million revolving credit facility and a $ 50.0 million term loan. Interest on the ABL 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. At January 29, 2022, there were $ 50.0 million outstanding in loans under the ABL Facility and $ 12.7 million in outstanding letters of credit. The interest rate on the revolving credit facility was 1.23 %, the interest rate on the term loan was 2.10 % and unused capacity was $ 886.9 million. At July 31, 2021, there were $ 50.0 million outstanding in loans under the ABL Facility and $ 24.1 million in outstanding letters of credit. The interest rate on the revolving credit facility was 1.23 %, the interest rate of the term loan was 2.10 % and unused capacity was $ 768.2 million. First Lien Term Loan The Company’s First Lien Term Loan matures on February 3, 2024. Voluntary prepayments are permitted. Principal payments must be made on the First Lien Term Loan pursuant to an annual excess cash flow calculation when the net leverage ratio exceeds 3.50 to 1.00. The First Lien Term Loan is subject to certain affirmative and negative covenants, but no financial covenants. It is secured on a senior basis by certain fixed assets of the Company and on a junior basis by certain liquid assets of the Company. On April 30, 2021, the Company used $ 100.0 million of cash and cash equivalents to pay $ 100.0 million of the principal amount outstanding on the First Lien Term Loan. In connection with the payment, the Company expensed $ 0.7 million of previously capitalized debt issuance costs and original issue discount. There was $ 701.9 million outstanding on the First Lien Term Loan at July 30, 2022, January 29, 2022 and July 31, 2021. Interest rates for the First Lien Term Loan were 3.96 %, 2.11 % and 2.10 % at July 30, 2022, January 29, 2022 and July 31, 2021, respectively. 5. Commitments and Contingencies The Company is involved in various legal proceedings that are typical of a retail business. In accordance with applicable accounting guidance, an accrual will be established for legal proceedings if and when those matters present loss contingencies that are both probable and estimable. The Company does not believe the resolution of any current proceedings will result in a material loss to the condensed consolidated financial statements. 6. Stock Incentive Plans On June 13, 2018, the Company’s board of directors adopted, and its stockholders approved, the BJ’s Wholesale Club Holdings, Inc. 2018 Incentive Award Plan (the "2018 Plan"). The 2018 Plan provides for the grant of stock options, restricted stock, dividend equivalents, stock payments, restricted stock units, performance shares, other incentive awards, stock appreciation rights, and cash awards. Prior to the adoption of the 2018 Plan, the Company granted stock-based compensation to employees and non-employee directors under the Fourth Amended and Restated 2011 Stock Option Plan of BJ’s Wholesale Club, Inc. (f/k/a Beacon Holding Inc.), as amended (the "2011 Plan") and the 2012 Director Stock Option Plan of BJ’s Wholesale Club Holdings, Inc. (f/k/a Beacon Holding, Inc.), as amended (the "2012 Director Plan"). No further grants will be made under the 2011 Plan or the 2012 Director Plan. 13 The 2018 Plan authorizes the issuance of 13,148,058 shares, including 985,369 shares that were reserved but not issued under the 2011 Plan and the 2012 Director Plan. If an award under the 2018 Plan, the 2011 Plan or the 2012 Director Plan is forfeited, expires or is settled for cash, any shares subject to such award may, to the extent of such forfeiture, expiration or cash settlement, be used again for new grants under the 2018 Plan. Additionally, shares tendered or withheld to satisfy grant or exercise price, or tax withholding obligations associated with an award under the 2018 Plan, the 2011 Plan or the 2012 Director Plan will be added to the shares authorized for grant under the 2018 Plan. The following shares may not be used again for grant under the 2018 Plan: (1) shares subject to a stock appreciation right ("SAR") that are not issued in connection with the stock settlement of the SAR upon its exercise and (2) shares purchased on the open market with the cash proceeds from the exercise of options under the 2018 Plan, 2011 Plan or 2012 Director Plan. As of July 30, 2022, there were 5,295,613 shares available for future issuance under the 2018 Plan. On April 16, 2021, the Compensation Committee approved a modification to the equity awards agreements under the 2011 Plan, 2012 Director Plan and 2018 Plan. In the event that an employee is terminated due to death or disability, the modified equity award agreements provide for: (i) full vesting of all time-based awards, including restricted stock awards and stock options, (ii) pro-rata vesting of all performance-based awards, including performance share units, based on actual performance as of the end of the applicable performance period, pro-rated based on the period of employment during the applicable performance period, and (iii) the extension of the post-termination exercise window for vested stock options. The following table summarizes the Company’s stock award activity during the twenty-six weeks ended July 30, 2022 (shares in thousands): Stock Options Restricted Stock Restricted Stock Units Performance Stock Shares Weighted Average Exercise Price Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Outstanding, January 29, 2022 2,282 $ 19.68 1,053 $ 34.36 26 $ 46.82 674 $ 39.76 Granted — — 304 67.39 24 58.61 183 67.54 Forfeited/canceled ( 3 ) 25.07 ( 20 ) 39.76 — — ( 4 ) 44.45 Exercised/vested ( 353 ) 14.36 ( 530 ) 30.88 ( 26 ) 46.82 — — Outstanding, July 30, 2022 1,926 $ 20.65 807 $ 48.95 24 $ 58.61 853 $ 45.70 Stock-based compensation expense was $ 9.4 million and $ 7.3 million for the thirteen weeks ended July 30, 2022 and July 31, 2021, respectively. Stock-based compensation was $ 18.5 million and $ 34.6 million for the twenty-six weeks ended July 30, 2022 and July 31, 2021, respectively. Stock-based compensation expense in the twenty-six weeks ended July 31, 2021 included $ 17.5 million of stock-based compensation related to the modification of stock awards associated with the passing of a former executive. On June 14, 2018, the Company’s board of directors adopted, and its stockholders approved, the ESPP, which became effective July 1, 2018. The aggregate number of shares of common stock that were to be reserved for issuance under the ESPP was to be 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 Company's board of directors. The offering under the ESPP commenced on January 1, 2019. The amount of expense recognized for the thirteen weeks ended July 30, 2022 and July 31, 2021 was $ 0.3 million and $ 0.4 million, respectively. The amount of expense recognized for both the twenty-six weeks ended July 30, 2022 and July 31, 2021 was $ 0.5 million. As of July 30, 2022, there were 2,084,348 shares available for issuance under the ESPP. 7. Treasury Shares and Share Repurchase Program Treasury Shares Acquired on Restricted Stock Awards The Company acquired 5,945 shares to satisfy employees’ tax withholding obligations upon the vesting of restricted stock awards in the thirteen weeks ended July 30, 2022, which were recorded as $ 0.3 million of t reasury stock. The Company 14 acquired 120,421 shares to satisfy employees' tax withholding obligations upon the vesting of restricted stock awards in the thirteen weeks ended July 31, 2021, which were recorded as $ 5.6 million of treasury stock. The Company acquired 235,845 shares to satisfy employees' tax withholding obligations upon the vesting of restricted stock awards in the twenty-six weeks ended July 30, 2022, which were recorded as $ 15.9 million of treasury stock. The Company acquired 346,825 shares to satisfy employees' tax withholding obligations upon the vesting of restricted stock awards in the twenty-six weeks ended July 31, 2021, which were recorded as $ 15.7 million of treasury stock. Share Repurchase Program On November 16, 2021, the Company's board of directors approved a share repurchase program (the "2021 Repurchase Program") that allows the Company to repurchase up to $ 500.0 million of its outstanding common stock from time to time as market conditions warrant. The 2021 Repurchase Program expires in January 2025. The Company initiated the 2021 Repurchase Program to mitigate potentially dilutive effects of stock options and shares of restricted stock granted by the Company, in addition to enhancing shareholder value. The Company repurchased 353,000 shares for $ 22.8 million during the thirteen weeks ended July 30, 2022, and 923,506 shares for $ 58.6 million during the twenty-six weeks ended July 30, 2022. As of July 30, 2022, $ 412.6 million remained available to purchase under the 2021 Repurchase Program. 8. Income Taxes The effective income tax rate is based on estimated income from continuing operations for the fiscal year, as well as discrete adjustments, if any, in the applicable quarterly periods. The Company projects the estimated annual effective tax rate for fiscal year 2022 to be 27.4 %, excluding the tax effect of discrete events, such as excess tax benefits from stock-based compensation, changes in tax legislation, settlements of tax audits and changes in uncertain tax positions, among others. The Company’s effective income tax rate from continuing operations was 26.6 % and 24.7 % for the thirteen weeks ended July 30, 2022 and July 31, 2021, respectively, and 24.2 % and 24.3 % for the twenty-six weeks ended July 30, 2022 and July 31, 2021, respectively. The increase in the effective tax rate for the thirteen weeks ended July 30, 2022 compared to the thirteen weeks ended July 31, 2021 is due primarily to lower excess tax benefits from stock-based compensation in the current year period. The slight decrease in the effective tax rate for the twenty-six weeks ended July 30, 2022 compared to the twenty-six weeks ended July 31, 2021 is due to higher excess tax benefits from stock-based compensation in the current year period. The Company is subject to taxation in the U.S. federal and various state taxing jurisdictions. The Company’s tax years from 2017 forward remain open and subject to examination by the Internal Revenue Service and various state taxing authorities. 9. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date or "exit price." The inputs used to measure fair value are generally classified into the following hierarchy: Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities. Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not observable for the asset or liability. Level 3: Unobservable inputs for the asset or liability. Assets and Liabilities Measured at Fair Value on a Recurring Basis The fair values of the Company’s derivative instruments were based on quotes received from third-party banks and represent the estimated amount the Company would pay to terminate the agreements taking into consideration current interest rates as well as the creditworthiness of the counterparties. These inputs were considered to be Level 2. All derivative instruments expired in the first quarter of fiscal year 2022. 15 Financial Assets and Liabilities The gross carrying amount and fair value of the Company’s debt at July 30, 2022 are as follows (in thousands): Carrying Amount Fair Value First Lien Term Loan $ 701,920 $ 700,797 ABL Revolving Facility 350,000 350,000 Total Debt $ 1,051,920 $ 1,050,797 The gross carrying amount and fair value of the Company’s debt at January 29, 2022 are as follows (in thousands): Carrying Amount Fair Value First Lien Term Loan $ 701,920 $ 702,053 ABL Facility 50,000 50,000 Total Debt $ 751,920 $ 752,053 The gross carrying amount and fair value of the Company’s debt at July 31, 2021 are as follows (in thousands): Carrying Amount Fair Value First Lien Term Loan $ 701,920 $ 700,032 ABL Facility 50,000 50,000 Total Debt $ 751,920 $ 750,032 Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis The Company measures certain non-financial assets and liabilities, including long-lived assets, at fair value on a non-recurring basis. The Company believes that the carrying amounts of its other financial instruments, including cash, accounts receivable, and accounts payable, approximates their carrying value due to the short-term maturities of these instruments. 10. Earnings Per Share The table below reconciles basic weighted-average shares of common stock outstanding to diluted weighted-average shares of common stock outstanding for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021: Thirteen Weeks Ended Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Weighted-average shares of common stock outstanding, used for basic computation 134,341,280 135,521,353 134,292,751 135,615,068 Plus: Incremental shares of potentially dilutive securities 2,226,186 2,675,814 2,341,962 2,814,498 Weighted-average shares of common stock and dilutive potential shares of common stock outstanding 136,567,466 138,197,167 136,634,713 138,429,566 The table below summarizes restricted shares, restricted stock units, and ESPP shares that were excluded from the computation of diluted earnings for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021, as their inclusion would have been anti-dilutive: 16 Thirteen Weeks Ended Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Restricted shares 193,412 12,757 144,519 62,758 Restricted stock units 11,811 — 5,905 — ESPP 510 — 255 — 11. Derivative Financial Instruments Interest Rate Swaps On November 13, 2018, the Company entered into three forward starting interest rate swaps (the "interest rate swaps"), which became effective on February 13, 2019. The Company fixed the LIBOR component of $ 1.2 billion of its floating rate debt at a rate of approximately 3.0 % from February 13, 2019 to February 13, 2022. The Company elected hedge accounting for the interest rate swap agreements, and as such, the effective portion of the gains or losses were recorded as a component of other comprehensive income and the ineffective portion of gains or losses were recorded as interest expense. On April 30, 2021, the Company used $ 150.0 million of its cash and cash equivalents to pay $ 100.0 million of the principal amount outstanding on the First Lien Term Loan and $ 50.0 million of the outstanding amounts on the ABL Facility. The Company accelerated the release of unrealized losses into earnings on the ineffective interest rate swap agreements and released $ 4.7 million recorded in other comprehensive income to interest expense, net of tax. On July 30, 2021, the Company used $ 210.0 million of its cash and cash equivalents to pay $ 210.0 million of the principal amount outstanding on the ABL Facility. The Company accelerated the release of unrealized losses into earnings on the ineffective interest rate swap agreements and released $ 3.5 million recorded in other comprehensive income to interest expense, net of tax. The interest rate swaps expired in February 2022. There was no liability recorded as of July 30, 2022 and $ 2.2 million and $ 14.5 million recorded at January 29, 2022 and July 31, 2021, respectively. The net of tax amount for the effective and ineffective interest rate swaps were recorded in other comprehensive income and interest expense, respectively. There were no gains or losses recorded for the thirteen weeks ended July 30, 2022 and $ 4.1 million gain recorded in other comprehensive income for the thirteen weeks ended July 31, 2021. There were gains of $ 0.8 million and $ 8.5 million recorded in other comprehensive income for the twenty-six weeks ended July 30, 2022 and July 31, 2021, respectively. There were no ineffective portion of gains in the thirteen weeks ended July 30, 2022 and $ 0.3 million recorded in interest expense for the twenty-six weeks ended July 30, 2022. The ineffective portion of gains in the thirteen and twenty-six weeks ended July 31, 2021 of $ 1.6 million and $ 3.4 million, respectively, were recorded in interest expense. The fair values of derivative instruments included on the condensed consolidated balance sheets are as follows (in thousands): Fair Value at Accounting for Cash Flow Hedges Notional Amount Fixed Rate Balance Sheet Classification July 30, 2022 January 29, 2022 July 31, 2021 Interest rate swap $ 600,000 3.00 % Other current liabilities $ — $ ( 1,540 ) $ ( 10,374 ) Interest rate swap 360,000 3.00 % Other current liabilities — — — Interest rate swap 240,000 3.00 % Other current liabilities — ( 616 ) ( 4,146 ) Net carrying amount $ 1,200,000 Total liabilities $ — $ ( 2,156 ) $ ( 14,520 ) 12. Acquisitions On May 2, 2022, the Company completed the Acquisition to bring its perishable end-to-end perishable supply chain in-house. The total consideration paid by the Company in connection with the Acquisition was approximately $ 375.6 million, excluding transaction costs. The Company recorded transaction costs related to the Acquisition of $ 3.6 million and 17 $ 11.5 million during the thirteen and twenty-six weeks ended July 30, 2022, respectively. These costs are included in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income. The following table summarizes the consideration paid and the preliminary fair values of the assets acquired and liabilities assumed (in thousands) in connection with the Acquisition: Fair value as of May 2, 2022 Assets: Property and equipment, net $ 203,400 Merchandise inventories 88,072 Goodwill 84,683 Operating lease right-of-use assets, net 15,994 Prepaid expenses and other current assets 433 Intangibles, net 100 Total Assets 392,682 Liabilities: Long-term operating lease liabilities ( 15,994 ) Accrued expenses and other current liabilities ( 1,106 ) Total Liabilities ( 17,100 ) Total consideration paid, including working capital adjustments $ 375,582 Goodwill represents the excess of the purchase price over the net identifiable assets acquired and liabilities assumed. Goodwill is primarily attributable to the assembled workforce and bringing the Company's perishable supply chain in-house. Goodwill deductible for tax purposes is $ 84.7 million. The Acquisition was accounted for as a business combination using the acquisition method with the Company as the accounting acquirer in accordance with ASC 805. Under this method of accounting, the purchase price is allocated to the assets acquired and liabilities assumed of the acquiree based upon their estimated fair values at the acquisition date. The purchase price allocation for the Acquisition is preliminary and the Company's estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuation of certain tangible and intangible assets acquired and liabilities assumed. There can be no assurance that such finalization will not result in material changes from the preliminary purchase price allocation. For each of the thirteen and twenty-six week periods ended July 30, 2022, the Acquisition generated an incremental $ 21.8 million in revenue. It is impracticable to provide historical supplemental pro forma financial information along with earnings during the period subsequent to the Acquisition due to a variety of factors, including access to historical information and the operations of acquirees being integrated within the Company shortly after closing and not operating as discrete entities within the Company’s organizational structure. 18 FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q should be considered forward-looking statements, including, without limitation, statements regarding our future results of operations and financial position, business strategy, transformation, strategic priorities and future progress, including expectations regarding deferred revenue, lease commencement dates, impact of infrastructure investments on our operating model and selling, general and administrative expenses, sales of gasoline and gross profit margin rates, and new club and gas station openings, as well as statements that include terms such as "may", "will", "should", "expect", "plan", "anticipate", "could", "intend", "project", "believe", "estimate", "predict", "continue", "forecast", "would", or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to: • uncertainties in the financial markets and the effect of certain economic conditions or events on consumer and small business spending patterns and debt levels; • risks related to our dependence on having a large and loyal membership; • the effects of competition in, and regulation of, the retail industry; • our dependence on vendors to supply us with quality merchandise at the right time and at the right price; • risks related to our indebtedness; • changes in laws related to, or the governments administration of, the Supplemental Nutrition Assistance Program or its electronic benefit transfer systems; • the risks and uncertainties related to the impact of the COVID-19 pandemic, including the duration, scope and severity of the pandemic, federal, state and local government actions or restrictive measures implemented in response to COVID-19, the effectiveness of such measures, as well as the effect of any relaxation or revocation of current restrictions, and the direct and indirect impact of such measures; • risks related to increases in product costs due to commodity cost increases or general inflation; • risks related to our ability to purchase our products in sufficient quantities at competitive prices; • risks related to climate change and natural disasters; • our ability to identify and respond effectively to consumer trends, including our ability to successfully maintain a relevant omnichannel experience for our members; • risks related to cybersecurity, which may be heightened due to our e-commerce business, including our ability to protect the privacy of member or business information and the security of payment card information; • our ability to attract and retain a qualified management team and other team members; • our ability to implement our growth strategy by opening new clubs and gasoline stations; and • the other risk factors identified in our filings with the Securities and Exchange Commission, including in particular those set forth under "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022 (the "Annual Report on Form 10-K for the fiscal year 2021") and this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on any forward-looking statements. Except as required by applicable law, we assume no obligation to update these forward-looking statements, even if new information becomes available in the future, and you should not rely upon these forward-looking statements after the date of this Quarterly Report on Form 10-Q. 19