What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-16 compared with 2022-03-17 · 189 added, 192 removed, 165 unchanged (70% of the section changed)

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Accordingly, references herein to "fiscal year 2022", "fiscal year 2021" and "fiscal year 2020" relate to the 52 weeks ended January 28, 2023, January 29, 2022 and January 30, 2021, respectively.

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

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

We deliver significant value to our members, consistently offering 25% or more savings on a representative basket of manufacturer-branded groceries compared to traditional supermarket competitors.

We provide a curated assortment focused on perishable products, continuously refreshed general merchandise, gasoline and other ancillary services to deliver a differentiated shopping experience that is further enhanced by our omnichannel capabilities.

Since pioneering the warehouse club model in New England in 1984, we have grown our footprint to 226 large-format, high volume warehouse clubs spanning 17 states.

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

GDP, we operate almost three times the number of clubs compared to the next largest warehouse club competitor.

Our leadership team continues to implement significant cultural and operational changes to our business, including transforming how we use data to improve member experience, instilling a culture of cost discipline, adopting a more proactive approach to growing our membership base and building an omnichannel offering oriented towards making shopping at BJ’s more convenient.

These changes continue to deliver results rapidly, evidenced by year-over-year income from continuing operations growth, consecutive quarter comparable club sales growth over the last three years and adjusted EBITDA growth over the last three years.

We provide a curated assortment focused on perishable products, continuously refreshed general merchandise, gasoline and other ancillary services, coupons, and promotions to deliver a differentiated shopping experience that is further enhanced by our digital capabilities.

Since pioneering the warehouse club model in New England in 1984, and as of the date of this filing, we have grown our footprint to 237 large-format, high volume warehouse clubs and 165 gas stations spanning 18 states.

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

GDP, we operate more than three times the number of clubs compared to the next largest warehouse club competitor.

In addition to shopping in our clubs, members are able to shop when and how they want through our website, bjs.com, and our highly rated mobile app, which allows them to use our BOPIC service, curbside delivery, same-day home delivery or traditional ship-to-home service, as well as through the DoorDash and Instacart marketplaces where members receive preferential pricing by linking their membership.

We also launched Same-Day Select in the first quarter of fiscal year 2022, which offers BJ’s members the ability to pay a one-time fee for either unlimited or twelve same-day grocery deliveries over a one-year period.

Our leadership team continues to focus on transforming how we use data to improve member experience, instilling a culture of cost and capital discipline, adopting a more proactive approach to growing our membership base and building an omnichannel offering oriented towards making shopping at BJ’s more convenient.

These changes continue to deliver results rapidly, evidenced by year-over-year income from continuing operations growth, consecutive quarter comparable club sales growth and adjusted EBITDA growth over the last four years.

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

We have more than six million members paying annual fees to gain access to savings on groceries and general merchandise and services.

The annual membership fee for our Inner Circle® membership is $55, and the annual membership fee for our BJ’s Perks Rewards® membership, which offers additional value-enhancing features, is $110.

We believe that members can save over ten times their $55 Inner Circle membership fee versus what they would otherwise pay at traditional supermarket competitors when they spend $2,500 or more per year at BJ’s on manufacturer-branded groceries.

We have more than six and a half million members paying annual fees to gain access to savings on groceries and general merchandise and services.

The annual membership fee for our Club Card (formerly Inner Circle®) membership is generally $55, and the annual membership fee for our BJ’s Club+ (formerly Perks Rewards®) membership, which offers additional value-enhancing features, is generally $110.

We believe that members can save over ten times their $55 Club Card membership fee versus what they would otherwise pay at traditional supermarket competitors when they spend $2,500 or more per year at BJ’s on manufacturer-branded groceries.

In addition to providing significant savings on a representative basket of manufacturer-branded groceries, we accept all manufacturer coupons and also carry our own exclusive brands that enable members to save on price without compromising on quality.

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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.

On January 25, 2022, the Company entered into an agreement to acquire the assets and operations of four distribution centers and the related private transportation fleet from Burris Logistics, which is expected to bring end-to-end perishable supply chain in-house.

The transaction is expected to close in the second quarter of fiscal year 2022 and the Company expects to finance the purchase price with a combination of available cash and borrowings under the Company’s revolving credit facility.

However, there is no assurance that the transaction will be completed on the time frame or the terms that we expect or that, following the closing of the transaction, we will not experience disruption in our logistics processes that could materially impact sales and profitability for the near term while we integrated the assets into our operations.

Impact of the COVID-19 Pandemic

Despite the ongoing impact and evolution of the COVID-19 pandemic, we have continued to experience strong sales, growth in membership rates, and acceleration in traffic and ticket.

During fiscal year 2021, our grocery division continued to drive higher sales performance as consumer trends continued with greater at-home food consumption.

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

Refer to "Item 1A.

Risk Factors" for additional information.

Effective September 1, 2021, we increased wages for hourly club and warehouse team members.

Additionally, we have continued to invest in health and safety practices, including providing personal protective equipment, enhancing sanitation measures and implementing social distancing protocols to ensure the safety of our members and team members.

The COVID-19 pandemic is unprecedented and continuously evolving, and the long-term impacts on our financial condition and results of operations are still uncertain.

Use of Non-GAAP Financial Measures

The accompanying Consolidated Financial Statements, including the related notes, are presented in accordance with generally accepted accounting principles ("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.

These measures are customary for our industry and commonly used by competitors.

These non-GAAP financial measures should not be reviewed in isolation or considered as an alternative to any other performance measure derived in accordance with GAAP and should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

In addition, adjusted EBITDA, comparable club sales, free cash flow, adjusted net income and adjusted net income per diluted share may not be comparable to similarly titled measures used by other companies in our industry or across different industries.

Adjusted EBITDA

Adjusted EBITDA is defined as income from continuing operations before interest expense, net, provision for income taxes and depreciation and amortization, adjusted for the impact of certain other items, including stock-based compensation expense;

pre-opening expenses;

non-cash rent;

strategic consulting;

offering costs;

club closing and impairment charges;

reduction in force severance;

acquisition and integration costs;

and other adjustments.

The following is a reconciliation of our income from continuing operations to Adjusted EBITDA and Adjusted EBITDA as a percentage of net sales for the periods presented:

Fiscal Year Ended

January 29, 2022 January 30, 2021 February 1, 2020

(In thousands)

Income from continuing operations

$ 426,760 $ 421,182 $ 187,757

Interest expense, net

59,444 84,385 108,230

Provision for income taxes

131,119 136,825 56,212

Depreciation and amortization

180,547 167,454 157,000

Stock-based compensation expense

53,837 32,150 18,796

Pre-opening expenses (1)

14,902 9,809 15,152

Non-cash rent (2)

6,146 4,942 8,374

Acquisition and integration costs (3)

Reduction-in-force severance (4)

2,300 — 3,994

Offering costs (5)

Club closing and impairment charges (6)

Strategic consulting (7)

Other adjustments, net (8)

991 745 (2,551)

Adjusted EBITDA

$ 879,550 $ 857,492 $ 581,624

Adjusted EBITDA as a percentage of net sales

5.4 % 5.7 % 4.5 %

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

Consists of an adjustment to remove the non-cash portion of rent expense, inclusive of incremental rent expense as the Company transitions from the current home office to a new home office building in fiscal year 2022.

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

Represents severance charges associated with labor reductions from the realignment of our field operations in fiscal year 2021 and a reduction in workforce announced in January 2020.

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

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

and Geneva, N.Y., which closed in the fourth quarter of fiscal year 2019.

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

Other non-cash items, including gains from sale leaseback transactions, non-cash accretion on asset retirement obligations and obligations associated with our post-retirement medical plan.

Comparable Club Sales and Merchandise Comparable Club Sales

Comparable club sales, also known as same-store sales, includes all clubs that were open for at least 13 months at the beginning of the period and were in operation during the entirety of both periods being compared, including relocated clubs and expansions.

Comparable club sales allow us to evaluate how our club base is performing by measuring the change in period-over-period net sales in clubs that have been open for the applicable period.

Various factors affect comparable club sales, including consumer preferences and trends, product sourcing, promotional offerings and pricing, customer experience and purchase amounts, weather and holiday shopping period timing and length.

Merchandise comparable club sales 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

We present free cash flow because we use it to report to our board of directors and we believe it assists investors and analysts in evaluating our liquidity.

Free cash flow should not be considered as an alternative to cash flows from operations as a liquidity measure.

We define free cash flow as net cash provided by operating activities less additions to property and equipment, net of disposals, plus proceeds from sale leaseback transactions.

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

Fiscal Year Ended

January 29, 2022 January 30, 2021 February 1, 2020

(In thousands)

Net cash provided by operating activities

$ 831,655 $ 868,546 $ 355,143

Additions to property and equipment, net of disposals

323,591 218,333 196,901

Proceeds from sale leaseback transactions

19,080 25,893 21,606

Free cash flow

$ 527,144 $ 676,106 $ 179,848

Free cash flow continues to be healthy.

The decline year-over-year is a result of the timing of net working capital investments and capital spend in fiscal year 2021 as we opened five new clubs and seven new gas stations.

Adjusted Net Income

The adjusted net income and adjusted net income per diluted share metrics are important measures used by management to compare the performance of core operating results between periods.

We define adjusted net income as net income as reported adjusted for:

stock-based compensation related to acceleration of stock awards;

acquisition and integration costs;

incremental home office expenses;

loss on cash flow hedge;

expenses related to debt payments;

severance charges;

offering costs;

gains on sale leaseback transactions;

club closing and impairment charges;

and the tax impact of the foregoing adjustments on net income.

We define adjusted net income per diluted share as adjusted net income divided by the weighted-average diluted shares outstanding.

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.

52 Weeks Ended

January 29, 2022 52 Weeks Ended January 30, 2021 52 Weeks Ended February 1, 2020

Net income as reported $ 426,652 $ 421,030 $ 187,176

Stock-based compensation related to acceleration of stock awards (1)

Acquisition and integration costs (2)

Incremental home office expense (3)

Loss on cash flow hedge (4)

6,340 6,926 —

Charges related to debt payments (5)

657 4,077 3,820

Severance charges (6)

2,300 — 3,994

Offering costs (7)

Gains on sale leaseback transactions (8)

Club closing and impairment charges (9)

Tax impact of adjustments to net income (10)

(8,641) (3,081) (6,311)

Adjusted net income $ 448,859 $ 428,952 $ 203,405

Weighted-average diluted shares outstanding 138,045 138,876 139,109

Adjusted net income per diluted share (11)

$ 3.25 $ 3.09 $ 1.46

Represents accelerated vesting of equity awards, which were related to the passing of a former executive.

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

Represents incremental rent expense as the Company transitions from the current home office to a new home office building in fiscal year 2022.

Represents the reclassification into earnings of accumulated other comprehensive income associated with the de-designation of hedge accounting on one of our swap agreements due to the payment of debt.

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

Represents severance charges associated with labor reductions from the realignment of our field operations in fiscal year 2021 and a reduction in workforce announced in January 2020.

Represents costs related to registered offerings by selling shareholders.

Represents a gain from the sale leaseback of one of our Michigan locations.

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

and Geneva, N.Y., which closed in the fourth quarter of fiscal year 2019.

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

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

On May 2, 2022, we completed the Acquisition, which brought substantially all of our end-to-end perishable supply chain in-house.

The Company financed the purchase price with a combination of available cash and borrowings under the Company’s revolving credit facility.

Factors Affecting Our Business

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Our membership fee income totaled $396.7 million in fiscal year 2022.

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

Our tenured membership renewal rate, a key indicator of membership engagement, satisfaction and loyalty, was 90% at the end of fiscal year 2022.

Effective sourcing and distribution of products and consumer demands

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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 and enhancing our information systems, including our distribution center management and point-of-sale systems, and investing in hardware and digitally enabled shopping capabilities for convenience, such as BOPIC and curbside pickup, will enable us to replicate our profitable club format and provide a differentiated shopping experience.

We believe that expanding our club footprint, bringing substantially all of our end-to-end perishable supply chain in-house with the Acquisition, and enhancing our information systems, including our distribution center and transportation 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.

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Changes in commodity prices and general inflation have impacted several categories of our business.

This inflationary pressure is due primarily to supply chain disruptions complicated by the COVID-19 pandemic.

Recent inflationary pressures can be attributed a several macro economic factors including supply chain disruptions, government stimulus, interest rates, and other factors which were further complicated by the COVD-19 pandemic and the ongoing conflict in Ukraine.

In response to increasing commodity prices or general inflation, we seek to minimize the impact of such events by sourcing our merchandise from different vendors, changing our product mix or increasing our pricing when necessary.

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Income from continuing operations 514,262 426,760

Income (loss) from discontinued operations, net of income taxes (108) (152)

Loss from discontinued operations, net of income taxes (1,085) (108)

Net income $ 513,177 $ 426,652

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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 fiscal year 2021 were $16.3 billion, an 8.0% increase from net sales reported for fiscal year 2020 of $15.1 billion.

Growth in net sales is impacted by opening new clubs and increases in comparable club sales, which may be impacted by inflation.

Net sales for fiscal year 2022 were $18.9 billion, a 16.0% increase from net sales reported for fiscal year 2021 of $16.3 billion.

The increase was due primarily to a 13.4% increase in comparable club sales and incremental sales from new clubs opened over the past two years.

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Merchandise comparable club sales 6.5 %

Merchandise comparable club sales decreased (0.5)% in fiscal year 2021.

The decrease was driven by a decrease in sales of groceries of 1.7% and growth in sales of general merchandise and services of approximately 5.7%.

In grocery, sales decreased as a result of categories impacted by the COVID-19 pandemic and supply chain challenges, including paper products, cleaning supplies, and dairy.

In general merchandise and services, sales were strongest in apparel, toys, tires and indoor furniture.

Merchandise comparable club sales increased 6.5% in fiscal year 2022.

The increase was driven by an increase in sales of groceries of 8.6%, which comprises approximately 85% of merchandise comparable club sales;

offset by a decrease in sales of general merchandise and services of approximately 3.8%.

In grocery, sales increased in the beverages, snack, dairy and fresh poultry.

In general merchandise and services, sales decreased primarily in electronics and were strongest in paper, food storage, and self-care sundries.

Membership fee income

Our membership structure is pinnacle to our business and we continue to see growth in the size and quality of our membership base, primarily driven by renewals and favorable membership mix.

Our membership structure is key to our business and we continue to see growth in the size and quality of our membership base, primarily driven by renewals and favorable membership mix.

Higher-tier membership penetration has increased year-over-year.

This group consists of our most loyal members with the highest lifetime value.

Membership fee income was $360.9 million in fiscal year 2021, compared to $333.1 million in fiscal year 2020, an 8.4% increase.

The growth in membership fee income was due to successful member acquisition efforts, improving our renewal rate to 89%, increasing higher tier membership penetration and improving the quality of memberships.

Membership fee income was $396.7 million in fiscal year 2022, compared to $360.9 million in fiscal year 2021, a 9.9% increase.

The growth in membership fee income was due to successful member acquisition efforts as well as tenured member renewals, improving our renewal rate to 90%, increasing higher tier membership penetration and improving the quality of memberships.

Cost of sales

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Cost of sales was $15.9 billion, or 84.0% of net sales, in fiscal year 2022, compared to $13.6 billion, or 83.3% of net sales, in fiscal year 2021.

The 0.9% increase as a percentage of net sales was driven by higher penetration of gas sales.

Merchandise gross margin rate increased approximately 20 basis points over fiscal year 2020.

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

The approximate 0.6% increase as a percentage of net sales was primarily driven by higher penetration of gas sales.

Merchandise gross margin rate decreased approximately 20 basis points over fiscal year 2021.

While merchandise margins benefited from strong sales performance, margins were impacted by increased supply chain costs as well as investments in inflationary categories and markdowns in general merchandise inventory.

Selling, general, and administrative expenses

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SG&A expenses were $2.7 billion, or 14.1% of net sales, in fiscal year 2022, compared to $2.4 billion, or 15.0% of net sales, in fiscal year 2021.

The year-over-year increase in SG&A was primarily driven by $43.1 million in investments in club team member wages, $19.3 million in occupancy costs, $17.5 million of accelerated stock-based compensation expense related to a former executive, increased depreciation and amortization expense, and other operating costs related to volume and continued investments to drive strategic priorities.

The year-over-year increase in SG&A was primarily driven by increased labor and occupancy costs as a result of new club and gas station openings, as well as incremental costs related to the transition of the Company’s new club support center and other variable costs related to company growth and continued investments to drive strategic priorities.

Pre-opening expenses

Pre-opening expenses include startup costs for new clubs.

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 fiscal year end.

Expenses will vary based on the number of new club openings, geography of the club, and whether the club is owned or leased, and timing of the opening relative to our fiscal year end.

Pre-opening expenses were $24.9 million in fiscal year 2022, compared to $14.9 million in fiscal year 2021.

Pre-opening expenses for fiscal year 2021 included charges for new clubs and gas stations that opened in fiscal year 2021 and new club openings that are expected for fiscal year 2022.

Pre-opening expenses for fiscal year 2022 increased due to the timing and increase in new club openings year-over-year with nine new clubs opened in fiscal year 2022 compared to five in fiscal year 2021.

Interest expense, net

Interest expense, net was $47.5 million for fiscal year 2022, compared to $59.4 million for fiscal year 2021.

Interest expense, net for fiscal year 2022 included interest expense of $37.5 million related to debt service on outstanding borrowings and $3.3 million of fees and write-offs of deferred financing costs and original issue discounts associated with the partial prepayment and amendment of our First Lien Term Loan.

Additionally, interest expense included $2.8 million of amortization expense on deferred financing costs and original issue discounts on our outstanding borrowings, $0.2 million of reclassified unrealized gains on interest rate swap agreements and $4.1 million of other interest charges.

Interest expense, net for fiscal year 2021 included interest expense of $45.1 million related to debt service on outstanding borrowings and $0.7 million of fees and write-offs of deferred financing costs and original issue discounts associated with the partial prepayments of our First Lien Term Loan.

Additionally, interest expense included $3.4 million of amortization expense on deferred financing costs and original issue discounts on our outstanding borrowings, $6.3 million of reclassified unrealized losses on interest rate swap agreements and $3.9 million of other interest charges.

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

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

Provision for income taxes

The Company’s effective income tax rate from continuing operations was 25.5% for fiscal year 2022 and 23.5% for fiscal year 2021.

The decrease in the effective tax rate is primarily due to a higher excess tax benefit from exercises of stock-based awards in fiscal year 2021.

The increase in the effective tax rate is primarily due to higher pre-tax book income and lower excess tax benefits on stock-based compensation in fiscal 2022 compared to fiscal 2021.

Use of Non-GAAP Financial Measures

The accompanying Consolidated Financial Statements, including the related notes, are presented in accordance with generally accepted accounting principles ("GAAP").

These measures are customary for our industry and commonly used by competitors.

Adjusted EBITDA

pre-opening expenses;

non-cash rent;

acquisition and integration costs;

home office transition costs;

reduction-in-force severance, and other adjustments, net.

The following is a reconciliation of our income from continuing operations to Adjusted EBITDA and Adjusted EBITDA as a percentage of net sales for the periods presented:

Fiscal Year Ended

January 28, 2023 January 29, 2022 January 30, 2021

(In thousands)

Income from continuing operations

$ 514,262 $ 426,760 $ 421,182

Interest expense, net

47,462 59,444 84,385

Provision for income taxes

176,262 131,119 136,825

Depreciation and amortization

200,934 180,547 167,454

Stock-based compensation expense

42,617 53,837 32,150

Pre-opening expenses (1)

24,933 14,902 9,809

Non-cash rent (2)

3,991 5,594 4,942

Acquisition and integration costs (3)

12,324 3,504 —

Home office transition costs (4)

Reduction-in-force severance (5)

Other adjustments, net (6)

Adjusted EBITDA

$ 1,038,133 $ 879,550 $ 857,492

Adjusted EBITDA as a percentage of net sales

5.5 % 5.4 % 5.7 %

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 of Burris Logistics, including due diligence, legal, and other consulting expenses.

Represents incremental rent expense, termination fee, other non-recurring lease costs and write-off of impaired assets as the Company transitions home office locations in fiscal 2022.

Represents severance charges associated with labor reductions from the realignment of our field operations in fiscal year 2021.

Other non-cash items, including non-cash accretion on asset retirement obligations and obligations associated with our post-retirement medical plan.

Comparable Club Sales and Merchandise Comparable Club Sales

Comparable club sales allow us to evaluate how our club base is performing by measuring the change in period-over-period net sales in clubs that have been open for the applicable period.

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" above for further discussion of comparable club sales and merchandise comparable club sales.

Adjusted Net Income

The adjusted net income and adjusted net income per diluted share metrics are important measures used by management to compare the performance of core operating results between periods.

We define adjusted net income as net income as reported adjusted for:

stock-based compensation related to acceleration of stock awards;

acquisition and integration costs;

home office transition costs;

loss on termination and impairment on discontinued operations club lease;

gain/loss on cash flow hedge;

charges related to debt payments;

severance charges;

and the tax impact of the foregoing adjustments on net income.

We define adjusted net income per diluted share as adjusted net income divided by the weighted-average diluted shares outstanding.

Fiscal Year Ended

January 28, 2023 January 29, 2022 January 30, 2021

Net income as reported $ 513,177 $ 426,652 $ 421,030

Stock-based compensation related to acceleration of stock awards (1)

Acquisition and integration costs (2)

12,324 3,504 —

Home office transition costs (3)

Loss on termination and impairment on discontinued operations club lease 662 — —

(Gain) loss on cash flow hedge (4)

(165) 6,340 6,926

Charges related to debt (5)

3,256 657 4,077

Severance (6)

Tax impact of adjustments to net income (7)

(8,718) (8,640) (3,081)

Adjusted net income $ 535,242 $ 448,859 $ 428,952

Weighted-average diluted shares outstanding 136,473 138,045 138,876

Adjusted net income per diluted share (8)

$ 3.92 $ 3.25 $ 3.09

Represents accelerated vesting of equity awards, which were related to the passing of a former executive.

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

Represents incremental rent expense, termination fee, other non-recurring lease costs and write-off of impaired assets as the Company transitioned home office locations in fiscal 2022.

Represents the reclassification into earnings of accumulated other comprehensive income/loss associated with the de-designation of hedge accounting.

Represents the expensing of fees and deferred fees and original issue discount associated with the partial prepayment of debt in fiscal 2021 and extinguishment costs related to the Company's ABL Facility and amendment of the senior secured first lien term loan in fiscal 2022.

Represents severance charges associated with labor reductions from the realignment of our field operations in fiscal year 2021.

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

Adjusted net income per diluted share is measured using weighted-average diluted shares outstanding.

Liquidity and Capital Resources

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

As of January 29, 2022, cash and cash equivalents totaled $45.4 million and we had $886.9 million of unused capacity under our ABL Facility.

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

As of January 28, 2023, cash and cash equivalents totaled $33.9 million and we had $535.2 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 pending and possible acquisitions, including the anticipated acquisition of assets from Burris Logistics;

fund possible acquisitions;

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.

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.

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.

8 unchanged sentences

Net cash used in financing activities (52,628) (525,226)

Net increase in cash and cash equivalents $ 1,918 $ 13,314

Net Cash from Operating Activities

Net (decrease) increase in cash and cash equivalents $ (11,521) $ 1,918

Net Operating Cash Flows

Net cash provided by operating activities was $788.2 million in fiscal year 2022, compared to $831.7 million in fiscal year 2021.

The decrease in operating cash flow was due to timing of investments in net working capital.

Net Cash from Investing Activities

Net Investing Cash Flows

Cash used in investing activities was $747.1 million in fiscal year 2022, compared to $304.5 million in fiscal year 2021.

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

Net Cash from Financing Activities

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

Net Financing Cash Flows

Cash used in financing activities in fiscal year 2022 was $52.6 million, compared to $525.2 million in fiscal year 2021.

The decrease in fiscal year 2021 is due mainly to lower levels of repayment of outstanding borrowings on our First Lien Term Loan and ABL Facility, offset by higher share repurchases in fiscal year 2021 of $179.2 million.

The decrease in fiscal year 2022 is due mainly to the draw down of debt on the ABL Facility and ABL Revolving Facility and the amendment of the First Lien Term Loan.

The majority of the year-over-year change is driven by net borrowings to fund the Acquisition.

Free Cash Flow

We present free cash flow because we use it to report to our board of directors and we believe it assists investors and analysts in evaluating our liquidity.

Free cash flow should not be considered as an alternative to cash flows from operations as a liquidity measure.

We define free cash flow as net cash provided by operating activities less additions to property and equipment, net of disposals, plus proceeds from sale leaseback transactions.

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

Fiscal Year Ended

January 28, 2023 January 29, 2022 January 30, 2021

(In thousands)

Net cash provided by operating activities

$ 788,165 $ 831,655 $ 868,546

Additions to property and equipment, net of disposals

397,803 323,591 218,333

Proceeds from sale leaseback transactions

27,266 19,080 25,893

Free cash flow

$ 417,628 $ 527,144 $ 676,106

Free cash flow continues to be healthy.

The decline year-over-year is a result of the timing of net working capital investments and capital spend as we opened nine new clubs and seven new gas stations as compared to five new clubs and seven new gas stations in fiscal year 2022 and fiscal year 2021, respectively.

Debt and Borrowing Capacity

Our primary sources of borrowing capacity are the ABL Facility, which is comprised of a $950.0 million revolving credit facility and a $50.0 million term loan, and is scheduled to mature on August 17, 2023, and the First Lien Term Loan, a senior secured first lien term loan that matures on February 3, 2024.

For a further description of the ABL Facility and First Lien Term Loan, see Note 5, "Debt and Credit Arrangements" of our consolidated financial statements included in this Annual Report on Form 10-K.

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.

Our primary sources of borrowing capacity are the ABL Revolving Facility, which is comprised of a $1.2 billion revolving credit facility and the First Lien Term Loan, that matures on February 3, 2027.

For a further description of the ABL Revolving Facility and First Lien Term Loan, see Note 5 , "Debt and Credit Arrangements" of our consolidated financial statements included in this Annual Report on Form 10-K.

On April 30, 2021, the Company used $100.0 million of its 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.

At January 29, 2022, there was $50.0 million outstanding in loans under the ABL Facility and $12.7 million in outstanding letters of credit.

On January 29, 2022, there was $50.0 million outstanding loans under the ABL Facility and $12.7 million 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 January 29, 2022, there was $701.9 million outstanding under the First Lien Term Loan and the interest rate, before the effect of the interest rate swaps, was 2.11%.

On July 28, 2022, the Company entered into the ABL Revolving Facility with 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.

On January 5, 2023, the Company amended the First Lien Term Loan to extends the maturity date from February 3, 2024 to February 3, 2027 and transition the interest rate, from London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”) and changes the applicable margin from LIBOR plus 200 – 225 basis points per annum to SOFR plus 275 basis points per annum.

In connection with the amendment the Company made a paid approximately $151.9 million of the principal amount.

At January 28, 2023, there was $405.0 million outstanding in loans under the ABL Revolving Facility and $11.5 million in outstanding letters of credit.

The interest rate on the revolving credit facility was 5.63%, and unused capacity was $535.2 million.

At January 28, 2023, the interest rate for the First Lien Term Loan was 7.11% and there was $450.0 million outstanding.

Material Cash Commitments

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Financing leases including interest 37,587

Financing obligations arising from failed sale-leasebacks 19,789

Purchase obligations (2)

Total $ 6,562,015

(1) Total interest payments associated with these borrowings are included within this amount and are estimated to be $31.2 million based on the interest rate of 2.11% on the First Lien Term Loan and 2.10% on the ABL term loan, which were the rates in effect as of January 29, 2022.

(1) Total interest payments associated with these borrowings are included within this amount and are estimated to be $54.8 million based on the interest rate of 7.11% on the First Lien Term Loan and 5.63% on the ABL Revolving Facility, which were the rates in effect as of January 28, 2023.

(2) Includes our material unconditional cash commitments.

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Examples include firm commitments for merchandise purchase orders, capital expenditures, gasoline and information technology.

In addition, On January 25, 2022, we entered into an agreement to acquire the assets and operations of four distribution centers and the related private transportation fleet from Burris Logistics.

The transaction is expected to close in the second quarter of fiscal year 2022 and we expect to finance the purchase price with a combination of available cash and borrowings under the ABL Facility.

Critical Accounting Policies and Estimates

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This section summarizes critical accounting policies and the related judgments involved in their application.

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 improvements were determined using a combination of the cost, income and sales comparison approaches.

Fair value estimates involved significant assumptions.

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.

Workers’ Compensation and General Liability Self-insurance Reserves

We are primarily self-insured for workers’ compensation and general liability claims.

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

Amounts in excess of certain levels, which range from $0.3 million to $1.0 million per occurrence for workers' compensation and general liability, and up to $2.0 million per occurrence for auto liability, are insured as a risk reduction strategy to mitigate the impact of catastrophic losses on net income.

Reported reserves for claims are derived from estimated ultimate costs based upon individual claim file reserves and estimates for incurred but not reported claims.

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

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

These accruals, if any, are included as insurance reserves in accrued expenses and other current liabilities and other non-current liabilities in the Company’s consolidated balance sheets.

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-K

Item 7. Management’s Discussion and Analysis