What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-03-18 compared with 2023-03-16 · 164 added, 194 removed, 160 unchanged (69% of the section changed)

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

The following discussion and analysis is intended to promote understanding of the results of operations and financial condition of the Company and MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and related notes thereto included in Item 8 in this Annual Report on Form 10-K.

The following discussion and analysis is intended to promote 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 audited consolidated financial statements and related notes thereto included in Item 8.

in this Annual Report on Form 10-K.

The following discussion contains forward-looking statements that reflect our plans, estimates and assumptions.

3 unchanged sentences

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 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 eastern half of the United States.

Accordingly, references herein to "fiscal year 2023", "fiscal year 2022" and "fiscal year 2021" relate to the 53-weeks ended February 3, 2024 and to the 52-weeks ended January 28, 2023 and January 29, 2022, respectively.

BJ’s Wholesale Club is a leading operator of membership warehouse clubs 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, 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.

We provide a curated assortment focused on groceries, 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 omnichannel capabilities.

Since pioneering the warehouse club model in New England in 1984, we have grown our footprint to 244 large-format, high volume warehouse clubs and 175 gas stations spanning 20 states as of the date of this filing.

In our core New England market, which has high population density and generates 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.

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

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 have over 7 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 membership is generally $55, and the annual membership fee for our 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®, represent over $3.7 billion in annual sales, and are the largest brands we sell in terms of volume.

Our two private label brands, Wellsley Farms® and Berkley Jensen®, represent approximately $4.1 billion in annual sales.

Our customers recognize the relevance of our value proposition across economic environments, as demonstrated by over 25 consecutive years of membership fee income growth.

1 unchanged sentence

Our business is moderately seasonal in nature.

Historically, our business has generally 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.

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.

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

2 unchanged sentences

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.

Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include, among others, 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 and inflation, tax rates and fuel and energy costs.

In addition, unemployment rates and benefits may cause us to experience higher labor costs.

4 unchanged sentences

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

We have grown our membership fee income each year for the past two decades.

We have grown our membership fee income each year for over 25 consecutive years and the quality of our membership mix is strong as evidenced by our higher tier penetration growth in fiscal year 2023.

Our membership fee income totaled $420.7 million in fiscal year 2023.

2 unchanged sentences

Our net sales and gross profit are affected by our ability to purchase our products in sufficient quantities at competitive prices.

Recently, we have experienced challenges in the global supply chain, which we expect to continue for the foreseeable future.

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.

3 unchanged sentences

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 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 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.

7 unchanged sentences

Inflation and deflation trends

Our financial results can be directly impacted by substantial increases in product costs due to commodity cost increases or general inflation, which could lead to a reduction in our sales, 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.

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.

Our financial results can be directly impacted by substantial changes in product costs due to commodity cost fluctuations or general inflation, disinflation, or deflation, 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 changes in inflation rates have impacted several categories of our business in fiscal year 2023 and may continue to do so.

Inflationary volatility can be attributed to macro economic factors including supply chain disruptions, government stimulus, interest rates, and other factors.

In response to general inflationary volatility, 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

Information pertaining to fiscal year 2021 was included in the Company’s Annual Report on Form 10-K for the year ended January 29, 2022 in Part II, Item 7, "Management’s Discussion and Analysis of Financial Position and Results of Operations," which was filed with the SEC on March 17, 2022.

Information pertaining to fiscal year 2022 was included in the Company’s Annual Report on Form 10-K for the year ended January 28, 2023 in Part II.

Management’s Discussion and Analysis of Financial Position and Results of Operations," which was filed with the SEC on March 16, 2023.

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

Statement of Operations Data (dollars in thousands):

Fiscal Year Ended

January 28, 2023 January 29, 2022

Statement of Operations Data Fiscal Year Ended

(dollars in thousands, except per share amounts) February 3, 2024 January 28, 2023

Net sales $ 19,548,011 $ 18,918,435

9 unchanged sentences

Income from continuing operations 523,652 514,262

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

Income (loss) from discontinued operations, net of income taxes 89 (1,085)

Net income $ 523,741 $ 513,177

Weighted-average shares outstanding—basic 133,047 134,017

Basic EPS (a)

$ 3.94 $ 3.83

Weighted-average shares outstanding—diluted 135,118 136,473

Diluted EPS (a)

$ 3.88 $ 3.76

Operational Data:

Total clubs at end of period 243 235

Comparable club sales 13.4 % 6.5 %

Merchandise comparable club sales 6.5 % (0.5) %

Adjusted EBITDA $ 1,038,133 $ 879,550

Free cash flow 417,628 527,144

Comparable club sales (b)

(1.0) % 13.4 %

Merchandise comparable club sales (b)

Adjusted EBITDA (b) (c)

$ 1,082,129 $ 1,009,209

Net cash provided by operating activities 718,883 788,165

Adjusted free cash flow (b)

264,118 417,628

Membership renewal rate 90 % 90 %

(a) Basic and diluted EPS are calculated using net income.

(b) See "Fiscal Year 2023 Compared to Fiscal Year 2022," "Non-GAAP Financial Measures" and "Liquidity and Capital Resources" within "Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations" for definitions.

(c) Adjusted EBITDA for the fiscal year ended January 28, 2023 has been recast to exclude adjustments for pre-opening expenses and non-cash rent expense to conform to the current period definition.

Fiscal Year 2023 Compared to Fiscal Year 2022

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, which may be impacted by inflation.

Net sales are derived from direct retail sales to our customers, net of merchandise returns and discounts.

Fluctuations in net sales are impacted by opening new clubs and comparable club sales.

Net sales for fiscal year 2023 were $19.5 billion, a 3.3% increase from net sales reported for fiscal year 2022 of $18.9 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.

The increase was due primarily to strength in the grocery division and an increase of eight clubs, partially offset by lower gasoline sales.

Comparable Club Sales and Merchandise Comparable Club Sales

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

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

Comparable club sales, a key performance indicator, also known as same-store sales in the retail industry, 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 customer preferences and trends, product sourcing, promotional offerings and pricing, shopping frequency from new and existing members and the amount they spend on each visit, weather and holiday shopping period timing and length.

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.

1 unchanged sentence

Fiscal Year Ended

January 29, 2022

February 3, 2024

Comparable club sales (1.0) %

Contribution from gasoline sales 6.9 %

Impact from gasoline sales (2.7) %

Merchandise comparable club sales 1.7 %

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.

Merchandise comparable club sales increased by 1.7% in fiscal year 2023 driven by an increase in sales of groceries of approximately 3.5%, partially offset by a decrease in sales of general merchandise and services of approximately 8.2%.

Sales of groceries increased during fiscal year 2023 as demand for paper products, beverages, candy, snacks, fresh fruit and vegetables, dairy and bakery categories increased compared to fiscal year 2022, partially offset by a decrease in demand for meat and seafood categories.

General merchandise and service sales decreased during fiscal year 2023 due to decreased demand for home goods and seasonal merchandise, as well as lower ancillary income, compared to fiscal year 2022.

The impact of gasoline sales is a result of lower retail prices during fiscal year 2023 as compared to fiscal year 2022, as total gallons sold grew year-over-year.

Membership fee income

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.

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

Membership fee income was $420.7 million in fiscal year 2023, compared to $396.7 million in fiscal year 2022, a 6.0% 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.

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

Cost of sales

Cost of sales consists primarily of the direct cost of merchandise and gasoline sold at our clubs, including costs associated with operating our distribution centers, including payroll, payroll benefits, occupancy costs, and depreciation;

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

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

freight expenses associated with moving merchandise from vendors to our distribution centers and from distribution centers to our clubs;

and vendor allowances, rebates, and cash discounts.

Cost of sales was $16.3 billion, or 83.5% of net sales, in fiscal year 2023, compared to $15.9 billion, or 84.0% of net sales, in fiscal year 2022.

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.

Merchandise gross margin rate, which excludes gasoline sales and membership fee income, increased 50 basis points compared to fiscal year 2022.

Merchandise margins were positively impacted by our category management process, moderated supply chain costs, and the mix of sales .

Selling, general, and administrative expenses

2 unchanged sentences

rent, depreciation, and other occupancy costs for retail and corporate locations;

advertising expenses;

share-based compensation, advertising expenses;

tender costs, including credit and debit card fees;

3 unchanged sentences

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

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

SG&A 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 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.

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

SG&A increased by 5.8% to $2.8 billion in fiscal year 2023 from $2.7 billion in fiscal year 2022.

The year-over-year increase in SG&A was primarily driven by increased labor, occupancy, and depreciation expenses as a result of new club and gas station openings, as well as other continued investments to drive strategic priorities, such as the restructuring of certain corporate functions.

Our growth profile this year was weighted toward owned clubs as opposed to leased clubs, elevating our depreciation expense.

We expect to continue to invest 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, and whether the club is owned or leased, and timing of the opening relative to our fiscal year end.

Pre-opening expenses include startup costs for new clubs and costs for relocated clubs.

Expenses will vary based on the number of 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 $19.6 million in fiscal year 2023 compared to $24.9 million in 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.

Pre-opening expenses decreased due to timing of spend for club openings year-over-year.

Interest expense, net

Interest expense, net was $64.5 million for fiscal year 2023 compared to $47.5 million for fiscal year 2022.

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.

The increase was primarily due to rising interest rates year-over-year on outstanding borrowings.

Provision for income taxes

The Company’s effective income tax rate from continuing operations was 28.8% for fiscal year 2023 and 25.5% for fiscal year 2022.

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 increases in the effective tax rate and income tax expense were driven by lower tax benefits from stock-based compensation as well as an immaterial adjustment to certain deferred tax assets related to prior periods.

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.

In addition to relevant GAAP measures we also provide non-GAAP measures, including adjusted EBITDA, comparable club sales, adjusted free cash flow, adjusted net income, and adjusted net income per diluted share ("adjusted EPS") 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.

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

Adjusted Net Income

The adjusted net income and adjusted EPS 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 EPS as adjusted net income divided by the weighted-average diluted shares outstanding.

We believe adjusted net income and adjusted EPS 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.

Fiscal Year Ended

(in thousands, except per share amounts) February 3, 2024 January 28, 2023

Net income as reported $ 523,741 $ 513,177

Acquisition and integration costs (a)

Home office transition costs (b)

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

Charges related to debt (c)

Restructuring (d)

Other adjustments (e)

Tax impact of adjustments to net income (f)

(4,188) (8,718)

Adjusted net income $ 534,537 $ 535,242

Weighted-average diluted shares outstanding 135,118 136,473

Adjusted EPS (g)

$ 3.96 $ 3.92

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 expensing of fees, deferred fees, and original issue discount associated with the extinguishment of the ABL Facility in fiscal 2022 and amendment of the senior secured first lien term loan in fiscal 2022 and 2023.

Represents charges related to the restructuring of certain corporate functions including, costs for severance, retention, outplacement, and consulting fees.

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.

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

Adjusted EPS is measured using weighted-average diluted shares outstanding.

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;

home office transition costs;

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

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

February 3, 2024 January 28, 2023

(In thousands)

9 unchanged sentences

39,021 42,617

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

Acquisition and integration costs (a)

Home office transition costs (b)

Restructuring (c)

Other adjustments (d)

Adjusted EBITDA (e)

$ 1,082,129 $ 1,009,209

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, 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" 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.

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.

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 costs related to the acquisition and integration of assets from 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.

Represents charges related to the restructuring of certain corporate functions, including costs for severance, retention, outplacement, and consulting fees.

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

Adjusted EBITDA for the fiscal year ended January 28, 2023 has been recast to exclude adjustments for pre-opening expenses and non-cash rent expense to conform to the current period definition.

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 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.

As of February 3, 2024, cash and cash equivalents totaled $36.0 million and we had $802.3 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;

1 unchanged sentence

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.

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.

During fiscal year 2023, we repurchased 1,958,218 shares under the 2021 Repurchase Program for a total purchase price of $130.2 million.

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.

3 unchanged sentences

Fiscal Year Ended

January 28, 2023 January 29, 2022

February 3, 2024 January 28, 2023

(In thousands)

2 unchanged sentences

Net cash used in financing activities (261,984) (52,628)

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

Net increase (decrease) in cash and cash equivalents $ 2,134 $ (11,521)

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 provided by operating activities was $718.9 million for fiscal year 2023, compared to $788.2 million for fiscal year 2022.

The $69.3 million decrease was primarily due to $95.3 million related to accounts payable as a result of timing of inventory receipts and payments, as well as commodity and fuel costs;

$49.4 million of lease-related activity primarily due to prepaid rent based on the timing of year-end;

$28.7 million related to an increase in merchandise inventory due to the increase in club counts and fuel stations;

and $18.7 million related to prepaid expenses and other current assets driven by prepaid advertising and IT maintenance contracts due to the timing of year-end.

The decrease in net operating cash flows was partially offset by a $71.7 million reduction in accounts receivable due to favorable timing of vendor and customer cash receipts, as well as a $10.6 million increase in net income, inclusive of increases of $26.8 million of depreciation and amortization expense and $27.5 million of deferred income tax expense.

Our net cash from operating activities can fluctuate from period to period due to several factors, including:

the timing and mix of sales, which are typically higher in the second and fourth quarters due to seasonality;

the timing of inventory purchases as the Company prepares for holiday seasons, lease-related activity, income tax and other payments.

Net Investing Cash Flows

Cash used in investing activities was $454.8 million in fiscal year 2023, compared to $747.1 million in fiscal year 2022.

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.

The decrease is primarily due to $376.5 million of cash outflows in the prior year related to the Acquisition, partially offset by an increase in capital spending, net of proceeds from sale-leaseback transactions, of $84.2 million as our growth profile in fiscal year 2023 was weighted toward owned clubs as opposed to leased clubs.

Net Financing Cash Flows

Cash used in financing activities in fiscal year 2023 was $262.0 million, compared to $52.6 million in fiscal year 2022.

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:

The increase in cash used in fiscal year 2023 is primarily due to a $491.0 million reduction in net proceeds from our ABL Revolving Facility, partially offset by a net decrease of $253.0 million of principal payments on long-term debt, a decrease of $17.1 million for the acquisition of treasury stock, and an increase of $11.3 million of proceeds from financing obligations compared to the prior year.

Adjusted Free Cash Flow

We present adjusted 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.

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

We define adjusted 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 adjusted free cash flow for the periods presented:

Fiscal Year Ended

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

February 3, 2024 January 28, 2023

(In thousands)

5 unchanged sentences

12,310 27,266

Free cash flow

Adjusted free cash flow

$ 264,118 $ 417,628

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.

Adjusted free cash flow decreased to $264.1 million for fiscal year 2023 compared to $417.6 million for fiscal year 2022.

The decrease is primarily the result of lower cash flows from operating activities primarily due to unfavorable fluctuations in working capital, an increase in capital spending as we open new clubs, and lower proceeds from sale-leaseback transactions.

Debt and Borrowing Capacity

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.

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.

Our primary sources of borrowing capacity are the ABL Revolving Facility and the First Lien Term Loan, which are further discussed in " Note 7 .

Debt and Credit Arrangements" of our consolidated financial statements included in this Annual Report on Form 10-K.

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.

1 unchanged sentence

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.

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 LIBOR to SOFR and change 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 paid approximately $151.9 million of the principal amount.

On 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%.

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

On October 12, 2023, the Company amended the First Lien Term Loan to extend the maturity date from February 3, 2027 to February 3, 2029 and reduce applicable margin in respect of the interest rate, effective immediately, from SOFR plus 275 basis points per annum to SOFR plus 200 basis points per annum.

Prior to the amendment, the Company repaid $50.0 million of the principal amount outstanding under the First Lien Term Loan.

At February 3, 2024, there was $319.0 million outstanding in loans under the ABL Revolving Facility and $18.2 million in outstanding letters of credit.

The interest rate on the revolving credit facility was 6.44%, and unused capacity was $802.3 million.

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

At February 3, 2024, the interest rate for the First Lien Term Loan was 7.33% and there was $400.0 million outstanding.

Material Cash Commitments

The following table summarizes our material cash commitments as of January 28, 2023:

(Dollars in thousands) Total

Outstanding borrowings and interest (1)

Operating leases 3,261,155

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 $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.

For cancellable agreements, any penalty due upon cancellation is included.

These commitments do not exceed our projected requirements and are in the normal course of business.

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

Refer to the descriptions of our material cash commitments, financing arrangements, and contractual obligations outlined below within the following notes to our consolidated financial statements.

See “ Note 6.

Leases” for future operating lease and finance lease commitments.

Lease liabilities exclude legally binding minimum lease payments for certain real estate and gas station leases that have not yet commenced.

The liabilities do not include variable costs such as increases in rental payments based on an index or a percentage of sales, insurance, real estate taxes, and other operating expenses.

See “ Note 7.

Debt and Credit Arrangements” for future payments on the ABL Revolving Facility and First Lien Term Loan, including outstanding borrowings and applicable interest rates.

See “ Note 17.

Other Non-current Liabilities” for long-term liabilities for which it is not reasonably possible for us to predict when they may be paid, including insurance reserves and asset retirement obligations, as well as financing obligations arising from sale-leaseback transactions.

We also have cancellable and non-cancellable purchase obligations under purchase orders for merchandise, agreements for capital items, gasoline, products and services used in our business, information technology, executive employment, and other agreements.

Critical Accounting Policies and Estimates

4 unchanged sentences

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

4 unchanged sentences

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

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

When historical losses are not a good measure of future liability, 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 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

See Note 2 , "Summary of Significant Accounting Policies" of our consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding recently issued accounting pronouncements.

See " Note 2 .

Summary of Significant Accounting Policies" of our consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding recently issued accounting pronouncements.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis