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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis is intended to promote an understanding of the results of operations and financial condition of the Company and is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and the related notes thereto in our Annual Report on Form 10-K for the fiscal year 2022. The following discussion may contain forward-looking statements that reflect our plans, estimates and assumptions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause such differences are discussed in the sections of this Quarterly Report on Form 10-Q titled "Forward-Looking Statements" and in Part I. "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year 2022. We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to the last day of January. Accordingly, references herein to "fiscal year 2023" relate to the 53 weeks ending February 03, 2024, and references herein to "fiscal year 2022" relate to the 52 weeks ended January 28, 2023. The second quarter of fiscal year 2023 ended on July 29, 2023, and the second quarter of fiscal year 2022 ended on July 30, 2022, and both include thirteen weeks. Overview 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, coupon books, 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, we have grown our footprint to 238 large-format, high volume warehouse clubs and 168 gas stations spanning 19 states as of the date of this filing. In our core New England markets, which have high population density and generate a disproportionate part of U.S. gross domestic product, we operate almost three times the number of clubs compared to the next largest warehouse club competitor. In addition to shopping in our clubs, members are able to shop when and how they want through our website, bjs.com, and our highly rated mobile app, which allows them to use our buy-online-pickup-in-club ("BOPIC") service, curbside delivery, same-day 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 offer Same-Day Select, 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 utilizing data to improve member experience, instilling a culture of cost discipline, adopting a more proactive approach to growing our membership base and building an omnichannel offering oriented towards making shopping at BJ’s more convenient. Our goal is to offer our members significant value and a meaningful return in savings on their annual membership fee. We have approximately 7.0 million members p aying annual fees to gain access to savings on groceries and general merchandise and services. The annual membership fee for our Club Card membership is generally $55, and the annual membership fee for our BJ’s Club+ 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. Our two private label brands, Wellsley Farms® and Berkley Jensen®, represented over $3.7 billion in annual sales for fiscal year 2022 and are the largest brands we sell in terms of volume. Our customers recognize the relevance of our value proposition across economic environments, as demonstrated by over 25 consecutive years of membership fee income growth. Our membership fee income was $407.5 million for the trailing twelve-months ended July 29, 2023. Our business is moderately seasonal in nature. Historically, our business has realized a slightly higher portion of net sales, operating income, and cash flows from operations in the second and fourth fiscal quarters, attributable primarily to the impact of the summer and year-end holiday season, respectively. Our quarterly results have been, and will continue to be, affected by the timing of new club openings and their associated pre-opening expenses. As a result of these factors, our financial results for any single quarter or for periods of less than a year are not necessarily indicative of the results that may be achieved for a full fiscal year. 19 Factors Affecting Our Business Overall economic trends The overall economic environment and related changes in consumer behavior have a significant impact on our business. In general, positive conditions in the broader economy promote customer spending in our clubs, while economic weakness, which generally results in a reduction of customer spending, may have a different or more extreme effect on spending at our clubs. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, changes to the Supplemental Nutrition Assistance Program (SNAP), government stimulus programs, tax legislation, business conditions, changes in the housing market, the availability of credit, interest rates, tax rates and fuel and energy costs. In addition, unemployment rates and benefits may cause us to experience higher labor costs. Size and loyalty of membership base The membership model is a critical element of our business. Members drive our results of operations through their membership fee income and their purchases. The majority of members renew within six months following their renewal date. Therefore, our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. We have grown our membership fee income each year for the past 25 years and the quality of our membership mix is strong as evidenced by our higher tier penetration growth in the first twenty-six weeks of fiscal year 2023. Our 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 Our net sales and gross profit are affected by our ability to purchase our products in sufficient quantities at competitive prices. Further, our ability to maintain our appeal to existing customers and attract new customers primarily depends on our ability to originate, develop and offer a compelling product assortment responsive to customer preferences. As a result, our level of net sales could be adversely affected due to constraints in our supply chain, including our inability to procure and stock sufficient quantities of some merchandise in a manner that is able to match market demand from our customers. Infrastructure investment Our historical operating results reflect the impact of our ongoing investments to support our growth. We have made significant investments in our business that we believe have laid the foundation for continued profitable growth. We believe that expanding our club footprint, bringing substantially all of our end-to-end perishable supply chain in-house, enhancing our information systems, including our distribution center and transportation management systems, 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. Gasoline prices The market price of gasoline impacts our net sales and comparable club sales, and large fluctuations in the price of gasoline may produce a short-term impact on our margins. Retail gasoline prices are driven by daily crude oil and wholesale commodity market changes and are volatile, as they are influenced by factors that include changes in demand and supply of oil and refined products, global geopolitical events, regional market conditions, and supply interruptions caused by severe weather conditions. Typically, the change in crude oil prices impacts the purchase price of wholesale petroleum fuel products, which in turn impacts retail gasoline prices at the pump. During times when prices are particularly volatile, differences in pricing and procurement strategies between the Company and its competitors may lead to temporary margin contraction or expansion, depending on whether prices are rising or falling, and this impact could affect our overall results for a fiscal quarter. In addition, the relative level of gasoline prices from period to period may lead to differences in our net sales between those periods. Further, because we generally attempt to maintain a fairly stable gross profit per gallon, this variance in net sales, which may be substantial, may or may not have a significant impact on our operating income . Inflation and deflation trends 20 Our financial results can be directly impacted by substantial changes in product costs due to commodity cost increases or general inflation, which could lead to a reduction in our sales, as well as greater margin pressure, as costs may not be able to be passed on to consumers. Changes in commodity prices and general inflation have impacted several categories of our business. Inflationary pressures can be attributed to macro economic factors including supply chain disruptions, government stimulus, interest rates, and other factors. 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. Results of Operations The following table summarizes key components of our results of operations for the periods indicated: Statement of Operations Data Thirteen Weeks Ended Twenty-six Weeks Ended (dollars in thousands, except per share amounts) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Net sales $ 4,859,842 $ 5,005,030 $ 9,480,462 $ 9,404,840 Membership fee income 103,698 98,786 206,220 195,411 Total revenues 4,963,540 5,103,816 9,686,682 9,600,251 Cost of sales 4,066,727 4,243,769 7,909,877 7,949,043 Selling, general and administrative expenses 694,960 651,236 1,384,288 1,287,180 Pre-opening expenses 1,584 5,901 5,478 10,801 Operating income 200,269 202,910 387,039 353,227 Interest expense, net 16,274 10,874 30,964 18,715 Income from continuing operations before income taxes 183,995 192,036 356,075 334,512 Provision for income taxes 52,670 51,022 108,762 81,041 Income from continuing operations 131,325 141,014 247,313 253,471 Income (loss) from discontinued operations, net of income taxes — (7) 89 (14) Net income $ 131,325 $ 141,007 $ 247,402 $ 253,457 Weighted-average shares outstanding—basic 133,317 134,341 133,314 134,293 Basic EPS (a) $ 0.99 $ 1.05 $ 1.86 $ 1.89 Weighted-average shares outstanding—diluted 135,129 136,567 135,515 136,635 Diluted EPS (a) $ 0.97 $ 1.03 $ 1.83 $ 1.85 Operational Data: Total clubs at end of period 238 229 238 229 Comparable club sales (b) (5.3)% 19.8% (1.9)% 17.2% Merchandise comparable club sales (b) 1.1% 7.6% 3.3% 5.9% Adjusted EBITDA (b) $ 268,760 $ 273,700 $ 525,743 $ 494,501 Free cash flow (b) 34,200 300,417 61,248 254,192 (a) Basic and diluted EPS are calculated using net income. (b) See "Non-GAAP Financial Measures" and "Liquidity and Capital Resources" within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for definitions. 21 Thirteen Weeks Ended July 29, 2023 (Second Quarter of Fiscal Year 2023) Compared to Thirteen Weeks Ended July 30, 2022 (Second Quarter of Fiscal Year 2022) Net Sales Net sales are derived from direct retail sales to customers, net of merchandise returns and discounts. Fluctuations in net sales are impacted by opening new clubs and comparable club sales. Net sales for the second quarter of fiscal year 2023 were $4.9 billion, a 2.9% decrease from net sales reported for the second quarter of fiscal year 2022 of $5.0 billion. The decrease was due primarily to a decrease in gasoline sales during the second quarter of fiscal year 2023. Comparable Club Sales and Merchandise Comparable Club Sales We believe net sales is an important driver of our profitability, particularly comparable club sales. Changes in comparable sales are driven by variations in shopping frequency from new and existing members and the amount they spend on each visit. Sales comparisons can be influenced by certain factors that are beyond our control such as changes in the cost of gasoline and macro-economic factors such as inflation. The higher comparable club sales, the more we can leverage certain of our selling, general and administrative (SG&A) expenses, reducing them as a percentage of sales and enhancing profitability. Thirteen Weeks Ended July 29, 2023 Comparable club sales (5.3) % Less: impact from gasoline sales (6.4) % Merchandise comparable club sales 1.1 % Merchandise comparable club sales increased by 1.1% in the second quarter of fiscal year 2023 compared to the second quarter of fiscal year 2022 primarily driven by an increase in sales of groceries of 4.1%, partially offset by a decrease in sales of general merchandise and services of approximately 13.3%. In grocery, sales increased for snacks, beverages, breakfast items, dairy, frozen, and bakery categories compared to the second quarter of fiscal year 2022, partially offset by a decrease in sales of fresh meat, vitamins, and household categories. Sales of general merchandise decreased in the second quarter of fiscal year 2023 due to decreased demand for electronics, home, and seasonal merchandise compared to the second quarter of fiscal year 2022, driven by the unfavorable impact of weather and macroeconomic factors. The impact of gasoline sales is a result of lower retail prices in the second quarter of fiscal 2023 as compared to the second quarter of fiscal year 2022, as well as a slight decline in comparable gallons. Membership fee income We continue to see growth in the size of our membership base and continued quality. Membership fee income was $103.7 million in the second quarter of fiscal year 2023 compared to $98.8 million in the second quarter of fiscal year 2022, a 5.0% increase. The increase was primarily driven by membership renewals, new members, and greater penetration of higher-tier membership levels, evidencing the strength of our membership quality. In connection with our co-brand credit card transition in the first quarter of fiscal year 2023, we offered a 5 cent-per-gallon discount on gasoline purchases to our Club+ members. We believe the new program has helped drive continued growth in our higher-tier membership penetration. Cost of sales Cost of sales consists primarily of the direct cost of merchandise and gasoline sold at our clubs, including costs associated with operating our distribution centers, including payroll, payroll benefits, occupancy costs, and depreciation; freight 22 expenses associated with moving merchandise from vendors to our distribution centers and from distribution centers to our clubs; and vendor allowances, rebates, and cash discounts. Cost of sales was $4.1 billion, or 83.7% of net sales, in the second quarter of fiscal year 2023 compared to $4.2 billion, or 84.8% of net sales, in the second quarter of fiscal year 2022. Merchandise gross margin rate, which excludes gasoline sales and membership fee income, increased 90 basis points over the prior year period. The improvement in merchandise margins was primarily due to disinflation, moderated supply chain costs, and improvement of inventory management. Selling, general and administrative expenses SG&A consists of various expenses related to supporting and facilitating the sale of merchandise in our clubs, including the following: payroll and payroll benefits for team members; rent, depreciation, and other occupancy costs for retail and corporate locations; share-based compensation, advertising expenses; tender costs, including credit and debit card fees; amortization of intangible assets; and consulting, legal, insurance, acquisition and integration costs, and other professional services expenses. SG&A includes both fixed and variable components and, therefore, is not directly correlated with net sales. We expect that our SG&A will increase in future periods due to investments to spur comparable club sales growth and our expanding footprint as we open new clubs. In addition, any future increases in wages, stock-based grants or modifications will increase our SG&A. SG&A increased by 6.7% to $695.0 million in the second quarter of fiscal year 2023 from $651.2 million in the second quarter of fiscal year 2022. 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 other continued investments to drive strategic priorities. Our growth profile this year is weighted toward owned clubs, elevating our depreciation expense. We remain focused on investing in member engagement, marketing and digital strategies. 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 period end. Pre-opening expenses were $1.6 million in the second quarter of fiscal year 2023 compared to $5.9 million in the second quarter of fiscal year 2022. Pre-opening expenses decreased due to timing of spend for club openings year-over-year. Interest expense, net Interest expense, net was $16.3 million in the second quarter of fiscal year 2023 compared to $10.9 million in the second quarter of fiscal year 2022. The increase was primarily due to rising interest rates year-over-year. Provision for income taxes The Company’s effective income tax rate from continuing operations was 28.6% and 26.6% for the second quarters of fiscal years 2023 and 2022, respectively. The increase in the effective tax rate is primarily due to a reduction in excess tax benefits from stock-based compensation and lower tax credits in the current period. Twenty-six Weeks Ended July 29, 2023 (First Six Months of Fiscal Year 2023) Compared to Twenty-six Weeks Ended July 30, 2022 (First Six Months of Fiscal Year 2022) Net Sales Net sales for the first six months of fiscal year 2023 were $9.5 billion, a 0.8% increase from net sales reported for the first six months of fiscal year 2022 of $9.4 billion. The increase was due primarily to a net increase of nine club openings, partially offset by lower gasoline sales. 23 Comparable club sales Twenty-six Weeks Ended July 29, 2023 Comparable club sales (1.9) % Less: impact from gasoline sales (5.2) % Merchandise comparable club sales 3.3 % Merchandise comparable club sales increased by 3.3% in the first six months of fiscal year 2023 compared to the first six months of fiscal year 2022 driven by an increase in s ales of groceries of approximately 6.0%, partially offset by a decrease in sales of general merchandise and services of approximately 11.0%. In grocery, sales increased in the current year period as demand for beverages, candy, snacks, dairy, and bakery categories increased compared to the first six months of fiscal year 2022 , partially offset by a decrease in demand for fresh meat and household categories . General merchandise decreased in the current year period due to decreased demand for electronics and seasonal merchandise compared to the first six months of fiscal year 2022. The impact of gasoline sales is a result of lower retail prices through the first six months of fiscal 2023 as compared to the first six months of fiscal year 2022. Gallons remained relatively flat period over period. Membership fee income Membership fee income was $206.2 million in the first six months of fiscal year 2023 compared to $195.4 million in the first six months of fiscal year 2022, a 5.5% increase. The increase was primarily driven by membership renewals, new members, and increased penetration of higher-tier membership levels, evidencing the strength of our membership quality. Cost of sales Cost of sales was $7.9 billion, or 83.4% of net sales, in the first six months of fiscal year 2023, remaining flat compared to $7.9 billion, or 84.5% of net sales, in the first six months of fiscal year 2022. Merchandise gross margin rate, which excludes gasoline sales and membership fee income, increased 100 basis points in the current year period over the first six months of fiscal year 2022. The improvement in merchandise margins was primarily due to disinflation, moderated supply chain costs, and improved inventory management. Selling, general and administrative expenses SG&A increased by 7.5% to $1.4 billion in the first six months of fiscal year 2023 from $1.3 billion in the first six months of fiscal year 2022. 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 other continued investments to drive strategic priorities. Our growth profile this year is weighted toward owned clubs, elevating our depreciation expense. We remain focused on investing in member engagement, marketing and digital strategies. Pre-opening expenses Pre-opening expenses were $5.5 million in the first six months of fiscal year 2023 compared to $10.8 million in the first six months of fiscal year 2022. Pre-opening expenses decreased due to timing of spend for club openings year-over-year. Interest expense, net Interest expense, net was $31.0 million in the first six months of fiscal year 2023 compared to $18.7 million in the first six months of fiscal year 2022. The increase was primarily due to rising interest rates year-over-year. Provision for income taxes The Company’s effective income tax rate from continuing operations was 30.5% and 24.2% for the first six months of fiscal years 2023 and 2022, respectively. The increase was primarily due to an immaterial adjustment to certain deferred tax 24 assets related to prior periods, as well as lower excess tax benefits from stock-based compensation and lower tax credits in the current period. Non-GAAP Financial Measures The accompanying Condensed Consolidated Financial Statements, including the related notes, are presented in accordance with GAAP. In addition to relevant GAAP measures we also provide non-GAAP measures, including adjusted EBITDA, comparable club sales, free cash flow, adjusted net income and adjusted net income per diluted share because management believes these metrics are useful to investors and analysts by excluding items that we do not believe are indicative of our core operating performance. 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. Free cash flow is discussed within the Liquidity and Capital Resources section below. 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; 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: Thirteen Weeks Ended Twenty-six Weeks Ended (in thousands) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Income from continuing operations $ 131,325 $ 141,014 $ 247,313 $ 253,471 Interest expense, net 16,274 10,874 30,964 18,715 Provision for income taxes 52,670 51,022 108,762 81,041 Depreciation and amortization 54,825 49,984 109,015 97,093 Stock-based compensation expense 9,624 9,387 19,631 18,502 Pre-opening expenses (a) 1,584 5,901 5,478 10,801 Non-cash rent (b) 2,281 1,256 3,832 2,102 Acquisition and integration costs (c) — 3,588 — 11,467 Other adjustments (d) 177 674 748 1,309 Adjusted EBITDA $ 268,760 $ 273,700 $ 525,743 $ 494,501 Adjusted EBITDA as a percentage of net sales 5.5 % 5.5 % 5.5 % 5.3 % (a) Represents direct incremental costs of opening or relocating a facility that are charged to operations as incurred. (b) Consists of an adjustment to remove the non-cash portion of rent expense. (c) Represents costs related to the acquisition of four distribution centers and the related private transportation fleet from Burris Logistics on May 2, 2022 ("the Acquisition"), including due diligence, legal, and other consulting expenses. (d) Other non-cash items, including non-cash accretion on asset retirement obligations, obligations associated with our post-retirement medical plan and incremental rent expense as the Company transitioned home office locations in fiscal 2022. 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 25 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. 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 non-recurring, infrequent, or unusual charges, net of the tax impact of such adjustments. 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. Thirteen Weeks Ended Twenty-six Weeks Ended (in thousands, except per share amounts) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Net income as reported $ 131,325 $ 141,007 $ 247,402 $ 253,457 Adjustments: Acquisition and integration costs (a) — 3,587 — 11,467 Home office transition costs (b) — 600 — 1,199 Charges related to debt payments (c) — 389 — 389 Other adjustments (d) (185) — (786) (165) Tax impact of adjustments to net income (e) 52 (1,287) 223 (3,625) Adjusted net income $ 131,192 $ 144,296 $ 246,839 $ 262,722 Weighted-average shares outstanding—diluted 135,129 136,567 135,515 136,635 Adjusted EPS (f) $ 0.97 $ 1.06 $ 1.82 $ 1.92 (a) Represents costs related to the Acquisition, including due diligence, legal, and other consulting expenses. (b) Represents incremental rent expense as the Company transitioned home office locations in fiscal 2022. (c) Represents the expensing of fees and deferred fees associated with the extinguishment of the Company's senior secured asset based revolving credit and term facility ("ABL Facility") in fiscal 2022. (d) Other non-cash items related to the reclassification into earnings of accumulated other comprehensive income / loss associated with the de-designation of hedge accounting and other adjustments. (e) Represents the tax effect of the above adjustments at a statutory tax rate of approximately 28%. (f) Adjusted EPS 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 Revolving Facility. As of July 29, 2023, cash and cash equivalents totaled $26.2 million and we had $726.2 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 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 Revolving Facility, will be sufficient to finance our operations for at least the next twelve months. In the first six months of fiscal year 2023, we used $59.9 million of available cash to repurchase 919,162 shares under the 2021 Repurchase Program. We do not have any off-balance sheet arrangements that have, or are, in the opinion of management, reasonably likely to have, a current or future material effect on our results of operations or financial position. We do, however, enter into letters of credit and purchase obligations in the normal course of our operations. 26 Summary of Cash Flows A summary of our cash flows from operating, investing and financing activities is presented in the following table: Twenty-six Weeks Ended (in thousands) July 29, 2023 July 30, 2022 Net cash provided by operating activities $ 269,500 $ 443,052 Net cash used in investing activities (208,252) (565,381) Net cash (used in) provided by financing activities (68,953) 240,574 Net (decrease) increase in cash and cash equivalents $ (7,705) $ 118,245 Net Operating Cash Flows Net cash provided by operating activities was $269.5 million for the first half of fiscal year 2023 compared to $443.1 million for the first half of fiscal year 2022. The decrease in operating cash flow was primarily due to unfavorable fluctuations in working capital and a decrease in pre-tax net income. The unfavorable fluctuations in working capital were primarily due to merchandise inventories and accounts payable. Net Investing Cash Flows Cash used in investing activities was $208.3 million for the first half of fiscal year 2023, compared to $565.4 million for the first half of fiscal year 2022. The decrease is primarily due to $376.5 million of cash outflows in the prior year related to the Acquisition. Net Financing Cash Flows Net cash used in financing activities for the first half of fiscal year 2023 was $69.0 million compared to net cash provided by financing activities of $240.6 million for the first half of fiscal year 2022. The $309.5 million net increase in financing cash outflows was primarily due to a $344.0 million reduction in net proceeds from our ABL Revolving Facility in the first half of fiscal year 2023 compared to the first half of fiscal year 2022, as well as an incremental $12.7 million outflow for the acquisition of treasury stock, partially offset by a $50.0 million payment on long-term debt in the prior year. 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: Thirteen Weeks Ended Twenty-six Weeks Ended (in thousands) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Net cash provided by operating activities $ 150,368 $ 398,744 $ 269,500 $ 443,052 Less: Additions to property and equipment, net of disposals 122,156 101,001 214,240 191,534 Plus: Proceeds from sale leaseback transactions 5,988 2,674 5,988 2,674 Free cash flow $ 34,200 $ 300,417 $ 61,248 $ 254,192 Free cash flow decreased to $34.2 million for the second quarter of fiscal year 2023 compared to $300.4 million for the second quarter of fiscal year 2022. Free cash flow decreased to $61.2 million for the first half of fiscal year 2023 compared to $254.2 million for the first half of fiscal year 2022. For each comparative period, t he decrease is the primary result of lower cash flows from operating activities as a result of fluctuations in working capital. 27 Debt and Borrowing Capacity Our primary sources of borrowing capacity are the ABL Revolving Facility and the First Lien Term Loan, which are further discussed in Note 4 , "Debt and Credit Arrangements," included in this Quarterly Report on Form 10-Q. 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 extend 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 July 29, 2023, there was $411.0 million outstanding in loans under the ABL Revolving Facility and $11.3 million in outstanding letters of credit. The interest rate on the revolving credit facility was 6.42% and unused capacity was $726.2 million. At July 29, 2023, the interest rate for the First Lien Term Loan was 7.89% and there was $450.0 million outstanding. Material Cash Commitments Our material cash commitments consist primarily of debt obligations, interest payments, leases, and purchase orders for merchandise inventory. These material cash commitments impact our short-term and long-term liquidity and capital needs. As of July 29, 2023, other than those items related to the ordinary course of operations of our business such as inventory purchases, new leases and lease amendments, there were no material changes to our material cash commitments from those described in our Annual Report on Form 10-K for the fiscal year 2022. Critical Accounting Policies and Use of Estimates This discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which we have prepared in accordance with GAAP. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. There were no material changes in critical accounting policies and estimates during the period covered by this Quarterly Report on Form 10-Q. Refer to Item 7., "Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies and Estimates," in our Annual Report on Form 10-K for the fiscal year 2022 for a complete list of our Critical Accounting Policies and Estimates. Recent Accounting Pronouncements There have been no recent accounting pronouncements since those disclosed in our Annual Report on Form 10-K for the fiscal year 2022 that have had a material impact on our financial statements.