FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended October 25, 1997
Commission file number 1-13143
BJ'S WHOLESALE CLUB, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3360747
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Mercer Road
Natick, Massachusetts 01760
(Address of principal executive offices) (Zip Code)
(508) 651-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
The number of shares of the Registrant's common stock outstanding as of
November 22, 1997: 37,478,142
PART I. FINANCIAL INFORMATION
BJ'S WHOLESALE CLUB, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Thirteen Weeks Ended
-----------------------
October 25, October 26,
1997 1996
----------- -----------
(Dollars In Thousands
Except Per Share Amounts)
Net sales $744,023 $681,847
Membership fees and other 18,415 15,971
-------- --------
Total revenues 762,438 697,818
-------- --------
Cost of sales, including buying and occupancy costs 679,345 623,912
Selling, general and administrative expenses 59,570 53,599
-------- --------
Operating income 23,523 20,307
Interest on debt and capital leases (net) 1,018 4,620
-------- --------
Income before income taxes 22,505 15,687
Provision for income taxes 8,687 6,012
-------- --------
Net income $ 13,818 $ 9,675
======== ========
Net income per common share:
Primary and fully diluted $ 0.36 $ *
======== ========
Number of common shares for earnings per
share computations:
Primary 37,989,464 *
Fully diluted 38,002,752 *
* In accordance with SEC rules, historical earnings per share for periods
prior to the public issuance of common stock are not presented.
The accompanying notes are an integral part of the financial statements.
BJ'S WHOLESALE CLUB, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Thirty-Nine Weeks Ended
-----------------------
October 25, October 26,
1997 1996
----------- -----------
(Dollars In Thousands
Except Per Share Amounts)
Net sales $2,181,963 $2,010,495
Membership fees and other 44,877 43,399
--------- ---------
Total revenues 2,226,840 2,053,894
--------- ---------
Cost of sales, including buying and occupancy costs 1,994,819 1,843,456
Selling, general and administrative expenses 165,166 152,201
--------- ---------
Operating income 66,855 58,237
Interest on debt and capital leases (net) 8,500 12,831
--------- ---------
Income before income taxes 58,355 45,406
Provision for income taxes 22,525 17,662
--------- ---------
Net income $ 35,830 $ 27,744
========= =========
Net income per common share:
Primary and fully diluted $ 0.95 $ *
========= =========
Number of common shares for earnings per
share computations:
Primary 37,653,113 *
Fully diluted 37,657,542 *
* In accordance with SEC rules, historical earnings per share for periods
prior to the public issuance of common stock are not presented.
The accompanying notes are an integral part of the financial statements.
BJ'S WHOLESALE CLUB, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 25, January 25, October 26,
1997 1997 1996
----------- ----------- -----------
(Dollars In Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 8,330 $ - $ -
Accounts receivable 30,901 34,006 27,570
Merchandise inventories 401,291 295,216 357,471
Current deferred income taxes 6,827 6,549 8,556
Prepaid expenses 7,260 6,091 7,120
--------- --------- ---------
Total current assets 454,609 341,862 400,717
--------- --------- ---------
Property at cost:
Land and buildings 277,503 265,971 264,119
Leasehold costs and improvements 40,992 34,764 33,935
Furniture, fixtures and equipment 203,668 186,696 187,346
--------- --------- ---------
522,163 487,431 485,400
Less accumulated depreciation
and amortization 137,265 106,821 105,477
--------- --------- ---------
384,898 380,610 379,923
--------- --------- ---------
Property under capital leases 6,219 6,219 3,793
Less accumulated amortization 1,742 1,618 2,028
--------- --------- ---------
4,477 4,601 1,765
--------- --------- ---------
Other assets 10,776 10,138 9,206
--------- --------- ---------
Total assets $ 854,760 $ 737,211 $ 791,611
========= ========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 245,338 $ 200,024 $ 219,767
Accrued expenses and other
current liabilities 64,269 66,302 62,346
Accrued federal and state
income taxes 8,792 12,431 2,989
Obligations under capital leases
due within one year 181 163 156
--------- --------- ---------
Total current liabilities 318,580 278,920 285,258
--------- --------- ---------
Long-term debt 84,700 - -
Obligations under capital leases,
less portion due within one year 2,473 2,592 2,630
Other noncurrent liabilities 33,848 28,466 28,591
Deferred income taxes 1,947 3,545 3,951
Loans and advances from Waban Inc. - 148,081 221,454
STOCKHOLDERS' EQUITY
Common stock, par value $.01,
authorized 180,000,000 shares,
issued and outstanding 37,476,264,
37,484,937 and 37,484,937 shares 375 375 375
Additional paid-in capital 101,775 - -
Retained earnings 311,062 275,232 249,352
--------- --------- ---------
Total stockholders' equity 413,212 275,607 249,727
--------- --------- ---------
Total liabilities and
stockholders' equity $ 854,760 $ 737,211 $ 791,611
========= ========= =========
The accompanying notes are an integral part of the financial statements.
BJ'S WHOLESALE CLUB, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-Nine Weeks Ended
-----------------------
October 25, October 26,
1997 1996
---------- ---------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 35,830 $ 27,744
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization of property 27,829 24,836
Loss on property disposals 398 251
Other noncash items (net) 39 -
Deferred income taxes (1,876) (148)
Increase (decrease) in cash
due to changes in:
Accounts receivable 3,105 3,372
Merchandise inventories (106,075) (86,033)
Prepaid expenses (1,169) (388)
Other assets (649) (800)
Accounts payable 45,314 50,652
Accrued expenses 1,577 4,436
Accrued income taxes (3,639) (7,113)
Other noncurrent liabilities 5,382 2,557
-------- --------
Net cash provided by operating activities 6,066 19,366
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (36,302) (58,932)
Property disposals 301 42
-------- --------
Net cash used in investing activities (36,001) (58,890)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations (101) (200)
Borrowings of long-term debt 84,700 -
Proceeds from sale and issuance of common stock 328 -
Increase (decrease) in loans and advances from
Waban Inc. (46,662) 39,724
-------- --------
Net cash provided by financing activities 38,265 39,524
-------- --------
Net increase in cash and cash equivalents 8,330 -
Cash and cash equivalents at beginning of year - -
-------- --------
Cash and cash equivalents at end of period $ 8,330 $ -
======== ========
Supplemental cash flow information:
Interest paid $ 8,268 $ 12,864
Income taxes paid 28,040 24,922
Noncash financing and investing activities:
Contribution to capital by Waban Inc. 101,419 -
The accompanying notes are an integral part of the financial statements.
BJ'S WHOLESALE CLUB, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In Thousands Except Per Share Amounts)
------------------------------------------------
Common
Stock Additional Total
Par Value Paid-In Retained Stockholders'
$.01 Capital Earnings Equity
--------- --------- ---------- -----------
Balance, January 27, 1996 $ 375 $ - $221,608 $221,983
Net income - - 27,744 27,744
----- -------- -------- --------
Balance, October 26, 1996 $ 375 $ - $249,352 $249,727
===== ======== ======== ========
Balance, January 25, 1997 $ 375 $ - $275,232 $275,607
Net income - - 35,830 35,830
Sale and issuance of common
stock - 356 - 356
Contribution to capital by
Waban Inc. - 101,419 - 101,419
----- -------- -------- --------
Balance, October 25, 1997 $ 375 $101,775 $311,062 $413,212
===== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BJ's Wholesale Club, Inc. ("BJ's" or the "Company"), which previously
had been a wholly-owned subsidiary of Waban Inc. ("Waban"), became a separate,
publicly traded entity on July 28, 1997, when Waban distributed to its
stockholders on a pro rata basis all of the Company's outstanding common stock
(the "Distribution"). The financial statements of the Company include the
financial statements of those subsidiaries of Waban which, prior to the
Distribution, operated Waban's BJ's Wholesale Club Division.
As of July 26, 1997, Waban transferred all of the assets and liabilities of its
BJ's Wholesale Club Division to the Company and contributed all of the
Company's intercompany debt of $101.4 million to the Company's equity.
2. The results for the first nine months are not necessarily indicative of the
results for the full fiscal year because, among other things, the Company's
business, in common with the business of retailers generally, is subject to
seasonal influences. The Company's sales and operating income have typically
been strongest in the Christmas holiday season and lowest in the first quarter
of each fiscal year.
3. The interim financial statements are unaudited and reflect all normal
recurring adjustments considered necessary by the Company for a fair
presentation of its financial statements in accordance with generally accepted
accounting principles.
4. These interim financial statements should be read in conjunction with the
combined financial statements and related notes for the fiscal year ended
January 25, 1997 contained in the Company's Registration Statement on Form S-1
(Registration No. 333-25511) filed with the Securities and Exchange Commission.
5. Interest on debt and capital leases (net) includes interest on intercompany
indebtedness to Waban of $7,642,000 in the nine months ended October 25, 1997,
(all of which was incurred in the first half of the year) and $4,877,000 and
$13,566,000 in the quarter and nine months ended October 26, 1996,
respectively.
Selling, general and administrative ("SG&A") expenses include certain
allocations of overhead incurred by Waban that supported the Company's business
prior to the Distribution. These allocated expenses (all of which were
incurred in the first half of the year) totaled $2,246,000 in the nine months
ended October 25, 1997 and $995,000 and $2,987,000 in the quarter and nine
months ended October 26, 1996, respectively.
6. Under Waban's cash management system, checks issued by its divisions but
not yet presented to banks resulted in overdraft balances for accounting
purposes in certain periods. The Company had overdraft balances of $2.3
million and $5.7 million as of January 25, 1997 and October 26, 1996,
respectively, which are included in accrued expenses and other current
liabilities on the balance sheets.
7. The historical capitalization of the Company has been retroactively
restated to reflect the issuance of 37,484,937 shares of common stock, the
number of shares of the Company's common stock distributed to Waban's
stockholders on July 28, 1997. Earnings per share calculations for the current
year are based on 37,484,937 shares outstanding through the end of the second
quarter and actual outstanding shares thereafter.
8. Waban's Board of Directors approved the termination of the Waban Inc.
Retirement Plan effective July 26, 1997. However, in accordance with generally
accepted accounting principles, the additional cost to terminate the Plan is
not recognized until the Plan termination is settled. Prior to the
Distribution, Waban Inc. contributed to the Plan amounts sufficient to make the
Plan's assets equal to its estimated termination liabilities, based on
actuarial projections. The Company's share of these amounts is included in
prepaid expenses on its balance sheet. BJ's expects to record a post-tax
charge applicable to its Plan participants of approximately $.5 million in the
fourth quarter of the current fiscal year or in the first quarter of the
following fiscal year, when the Plan termination is settled.
9. The Company operated 84 warehouse clubs on October 25, 1997 versus 79
warehouse clubs on October 26, 1996.
10. Certain amounts in the prior year's financial statements have been
reclassified for comparative purposes.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Thirteen Weeks (Third Quarter) and Thirty-Nine Weeks (Nine Months) Ended
October 25, 1997 versus Thirteen and Thirty-Nine Weeks Ended October 26, 1996.
Forward-Looking Information
- ---------------------------
This report contains "forward-looking statements," including statements
regarding expected expenses to be incurred by BJ's as a stand-alone entity,
planned capital expenditures, certain charges expected to be incurred in
connection with the termination of the Waban Inc. Retirement Plan and other
information with respect to the Company's plans and strategies. Any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause actual events or the Company's actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, the success of the
Company's management team in transitioning the Company to its status as a
stand-alone entity, general economic conditions prevailing in the Company's
markets, competition and the other factors included in the Company's
Registration Statement on Form S-1, File No. 333-25511 under the heading "Risk
Factors."
Results of Operations
- ---------------------
Net sales for the third quarter ended October 25, 1997 rose 9.1% to $744
million from $682 million reported in last year's third quarter. Year-to-date
sales totaled $2.2 billion, 8.5% higher than last year's comparable period.
These increases were due to the opening of new stores and to comparable store
sales increases of 3.3% in the third quarter and 2.4% year-to-date.
Total revenues in the third quarter included membership fees of $16.1 million
versus $13.7 million in last year's third quarter. Year-to-date membership
fees were $38.9 million versus $37.3 million last year. The increase in this
year's third quarter was largely due to timing differences relating to trial
membership promotions conducted in each year. This year's promotion resulted
in a significant amount of membership fees being realized in the third quarter,
as opposed to in the second quarter last year.
Cost of sales (including buying and occupancy costs) was 91.3% of net sales in
the third quarter versus 91.5% in the comparable period last year. For the
first nine months, the cost of sales percentage was 91.4% this year versus
91.7% last year. A favorable merchandise mix resulted in higher gross
merchandise margins this year.
Selling, general and administrative ("SG&A") expenses were 8.0% of net sales in
the third quarter versus 7.9% in last year's comparable period. Year-to-date
SG&A expenses were 7.6% in both years. Excluding incremental SG&A expenses
incurred as a result of the Company becoming a separate, publicly owned entity,
this year's SG&A expenses were 7.9% of sales in the third quarter and 7.5% of
sales year-to-date.
The components of net interest expense were as follows (in thousands):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------- -----------------------
October 25, October 26, October 25, October 26,
1997 1996 1997 1996
---- ---- ---- ----
Interest expense on debt (net) $ 948 $4,546 $8,288 $12,604
Interest on capital leases 70 74 212 227
------ ------ ------ -------
Interest on debt and capital
leases (net) $1,018 $4,620 $8,500 $12,831
====== ====== ====== =======
Interest expense on debt was net of capitalized interest of $77 thousand in
this year's third quarter and $361 thousand year-to-date. Last year's
capitalized interest was $318 thousand in the third quarter and $929 thousand
year-to-date. As described in more detail below, interest expense in this
year's third quarter was lower than last year's third quarter because of
significantly lower borrowing levels and interest rates applied to those
borrowings.
The year-to-date provision rate for income taxes was 38.6% this year versus
38.9% last year. This decrease was attributable to a lower state income tax
rate.
Net income for the third quarter rose to $13.8 million, or $.36 per share, from
$9.7 million in the third quarter of last year. For the first nine months, net
income rose to $35.8 million, or $.95 per share, from $27.7 million last year.
BJ's Wholesale Club, Inc. commenced operations as a separate entity following
its July 28, 1997 spin-off from Waban Inc. Therefore, reported financial
results through the first half of 1997 reflect BJ's historical position as a
division of Waban Inc. and, as such, may not be indicative of performance after
the spin-off. As a separate, publicly owned company, BJ's is now incurring
SG&A costs expected to be approximately $.5 million per quarter in addition to
the amounts shown in the historical financial statements for periods preceding
the spin-off. BJ's interest expense, however, is expected to be less than that
presented in the historical statements for periods before the spin-off, as
interest on intercompany borrowings at an annual rate of 10% has been replaced
by interest on bank borrowings at an assumed rate of approximately 6.5% per
year. The level of debt is also expected to be lower than BJ's historical
debt, primarily due to the contribution to capital of $101.4 million of BJ's
intercompany debt in connection with the spin-off. Restating historical
results for these changes, and reflecting common stock equivalents expected to
be included in earnings per share calculations after the spin-off, net income
for the third quarter of 1997 rose 26.5% to $13.8 million, or $.36 per share,
from $10.9 million, or $.29 per share, in the third quarter of 1996. Operating
income rose 18.8% to $23.5 million compared with $19.8 million last year. On
the same restated basis, net income for the first nine months rose 20.9% to
$38.2 million, or $1.00 per share, from $31.6 million, or $.83 per share last
year, and operating income for the first nine months of 1997 rose 16.1% to
$65.9 million from $56.7 million in 1996.
Waban's Board of Directors approved the termination of the Waban Inc.
Retirement Plan effective July 26, 1997. However, in accordance with generally
accepted accounting principles, the additional cost to terminate the Plan is
not recognized until the Plan termination is settled. Prior to the spin-off,
Waban contributed to the Plan amounts sufficient to make the Plan's assets
equal to its estimated termination liabilities, based on actuarial projections.
The Company's share of these amounts is included in prepaid expenses on its
balance sheet. BJ's expects to record a post-tax charge applicable to its Plan
participants of approximately $.5 million in the fourth quarter of the current
fiscal year or in the first quarter of the following fiscal year, when the Plan
termination is settled.
The Company's business, in common with the business of retailers generally, is
subject to seasonal influences. The Company's sales and operating income have
typically been strongest in the Christmas holiday season and lowest in the
first quarter of each fiscal year.
Statement of Financial Accounting Standards ("SFAS") No. 128 modifies the way
in which earnings per share ("EPS") is calculated and disclosed. Upon adoption
of this standard for the fiscal year ending January 31, 1998, the Company will
disclose basic and diluted EPS for the full fiscal year and will restate all
prior period EPS data presented. Basic EPS excludes dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS, similar to
fully diluted EPS, reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. The effect of adopting SFAS No. 128 is not
expected to be material. If the Company had adopted SFAS No. 128 in the
quarter ended October 25, 1997, basic EPS would have been $.37 per share in the
quarter and $.96 per share year-to-date, or $.01 higher than primary EPS
reported in each period. Diluted EPS would be unchanged from fully diluted EPS
reported in each period.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by net income plus depreciation in this year's first nine
months was $63.7 million versus $52.6 million in last year's comparable period.
A total of $6.1 million was provided by operating activities in the first half
of this year; $19.4 million was provided by operating activities in the same
period last year. This variance was attributable mainly to a higher accounts
payable-to-inventory ratio at the beginning of this year as compared to the
beginning of last year.
Year-to-date cash expended for property additions was $36.3 million this year
versus $58.9 million in the same period last year. The Company opened four new
clubs during the first nine months of this fiscal year and opened eight new
clubs in the same period last year. One club in the Hartford, Connecticut
market was closed in the first quarter of this year.
The Company's capital expenditures are expected to total approximately $70
million in the current fiscal year, based on opening a total of six new clubs.
Three additional clubs that were originally scheduled to open this year are now
expected to open in early 1998. The Company has announced its plans to enter
the Cleveland, Ohio market by opening three or four new clubs in 1998. The
timing of actual club openings and the amount of related expenditures could
vary from these estimates due, among other things, to the complexity of the
real estate development process.
Prior to the spin-off, the Company's operations and expansion were financed
through loans advanced by Waban as needed. In July 1997, the Company entered
into a $200 million unsecured credit agreement with a group of banks which
expires July 9, 2002. The agreement includes a $50 million sub-facility for
letters of credit. The Company is required to pay an annual facility fee which
is currently 0.15% of the total commitment. Interest on borrowings is payable
at the Company's option either at (a) the Eurodollar rate plus a margin which
is currently 0.30%, (b) the agent bank's prime rate or (c) at a rate determined
by competitive bidding. The facility fee and Eurodollar margin are both
subject to change based upon the Company's fixed charge coverage ratio. The
agreement contains covenants which, among other things, include minimum net
worth and fixed charge coverage requirements and a maximum funded debt-to-
capital limitation, and which prohibit the payment of cash dividends.
The Company also maintains a separate credit line in the amount of $30 million
for letters of credit and an additional $20 million uncommitted credit line for
short-term borrowings.
Increases in merchandise inventories and accounts payable since the end of the
previous fiscal year were due mainly to normal seasonal requirements and to new
stores. Increases in inventories from the end of last year's third quarter are
due to new stores and to an increase over last year's somewhat lower than
normal per club inventory levels, reflecting what management believes is a
better inventory position entering this year's holiday season.
Cash and cash equivalents totaled $8.3 million as of October 25, 1997. The
Company expects that its current resources, together with anticipated cash flow
from operations, will be sufficient to finance its operations through January
30, 1999. However, the Company may from time to time seek to obtain additional
financing.
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
11.0 Statement regarding computation of per share earnings
27.0 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated July 29,
1997, filing as exhibits thereto the press release of the
Company dated July 29, 1997 and the press release of Waban Inc.
dated July 28, 1997, each relating to the completion of the
spin-off of the Company by Waban Inc. on July 28, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BJ'S WHOLESALE CLUB, INC.
----------------------------
(Registrant)
Date: December 4, 1997 /S/ JOHN J. NUGENT
---------------- ----------------------------
John J. Nugent
President and Chief
Executive Officer
(Principal Executive Officer)
Date: December 4, 1997 /S/ FRANK D. FORWARD
---------------- ----------------------------
Frank D. Forward
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)