FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended October 31, 1998
Commission file number 001-13143
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 28, 1998: 36,992,984
PART I. FINANCIAL INFORMATION
BJ'S WHOLESALE CLUB, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Thirteen Weeks Ended
-----------------------
October 31, October 25,
1998 1997
----------- -----------
(Dollars in Thousands
except Per Share Amounts)
Net sales $828,477 $744,023
Membership fees and other 19,335 18,828
-------- --------
Total revenues 847,812 762,851
-------- --------
Cost of sales, including buying and occupancy costs 756,553 679,345
Selling, general and administrative expenses 65,311 58,569
Preopening expenses 2,531 1,414
-------- --------
Operating income 23,417 23,523
Interest (income) expense, net (236) 1,018
-------- --------
Income before income taxes 23,653 22,505
Provision for income taxes 9,225 8,687
-------- --------
Net income $ 14,428 $ 13,818
======== ========
Net income per common share:
Basic $ 0.39 $ 0.37
======= =======
Diluted $ 0.38 $ 0.36
======= =======
Number of common shares for earnings per
share computations:
Basic 37,397,356 37,466,652
Diluted 37,981,438 37,989,464
Pro forma amounts assuming accounting
principle changes are applied retroactively:
Net income $ 14,428 $ 12,413
======== ========
Earnings per common share - basic $ 0.39 $ 0.33
======== ========
Earnings per common share - diluted $ 0.38 $ 0.33
======== ========
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 31, October 25,
1998 1997
----------- -----------
(Dollars in Thousands
except Per Share Amounts)
Net sales $2,442,828 $2,181,963
Membership fees and other 54,902 45,290
--------- ---------
Total revenues 2,497,730 2,227,253
--------- ---------
Cost of sales, including buying and occupancy costs 2,231,811 1,994,819
Selling, general and administrative expenses 187,402 164,165
Preopening expenses 5,094 1,414
Pension termination costs 1,521 -
--------- ---------
Operating income 71,902 66,855
Interest (income) expense, net (456) 8,500
--------- ---------
Income before income taxes and cumulative effect
of accounting principle changes 72,358 58,355
Provision for income taxes 28,220 22,525
--------- ---------
Income before cumulative effect of accounting
principle changes 44,138 35,830
Cumulative effect of accounting principle changes (19,326) -
--------- ---------
Net income $ 24,812 $ 35,830
========= =========
Net income per common share:
Basic earnings per share:
Income before cumulative effect of accounting
principle changes $ 1.18 $ 0.96
Cumulative effect of accounting principle changes (0.52) -
--------- ---------
Net income $ 0.66 $ 0.96
========= =========
Diluted earnings per share:
Income before cumulative effect of accounting
principle changes $ 1.16 $ 0.95
Cumulative effect of accounting principle changes (0.51) -
--------- ---------
Net income $ 0.65 $ 0.95
========= =========
Number of common shares for earnings per
share computations:
Basic 37,553,788 37,478,842
Diluted 38,188,435 37,653,113
Pro forma amounts assuming accounting
principle changes are applied retroactively:
Net income $ 44,138 $ 36,139
======== ========
Earnings per common share - basic $ 1.18 $ 0.96
======== ========
Earnings per common share - diluted $ 1.16 $ 0.96
======== ========
The accompanying notes are an integral part of the financial statements.
BJ'S WHOLESALE CLUB, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 31, January 31, October 25,
1998 1998 1997
----------- ----------- -----------
(Dollars in Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 7,675 $ 12,713 $ 8,330
Marketable securities 98 - -
Accounts receivable 41,582 38,322 30,901
Merchandise inventories 430,373 332,274 401,291
Current deferred income taxes 7,492 6,826 6,827
Prepaid expenses 10,126 14,050 7,260
--------- --------- ---------
Total current assets 497,346 404,185 454,609
--------- --------- ---------
Property at cost:
Land and buildings 307,569 282,619 277,503
Leasehold costs and improvements 43,745 42,541 40,992
Furniture, fixtures and equipment 221,657 207,127 203,668
--------- --------- ---------
572,971 532,287 522,163
Less accumulated depreciation
and amortization 160,858 140,216 137,265
--------- --------- ---------
412,113 392,071 384,898
--------- --------- ---------
Property under capital leases 6,219 6,219 6,219
Less accumulated amortization 1,908 1,784 1,742
--------- --------- ---------
4,311 4,435 4,477
--------- --------- ---------
Other assets 10,603 10,945 10,776
--------- --------- ---------
Total assets $ 924,373 $ 811,636 $ 854,760
========= ========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 265,373 $ 200,386 $ 245,338
Accrued expenses and other
current liabilities 100,998 71,648 64,269
Accrued federal and state
income taxes (4,279) 7,009 8,792
Obligations under capital leases
due within one year 197 185 181
--------- --------- ---------
Total current liabilities 362,289 279,228 318,580
--------- --------- ---------
Long-term debt 64,500 42,500 84,700
Obligations under capital leases,
less portion due within one year 2,297 2,430 2,473
Other noncurrent liabilities 38,409 36,396 33,848
Deferred income taxes 5,547 4,825 1,947
STOCKHOLDERS' EQUITY
Common stock, par value $.01,
authorized 180,000,000 shares,
issued 37,706,138, 37,504,214
and 37,476,264 shares 377 375 375
Additional paid-in capital 108,338 102,408 101,775
Retained earnings 368,286 343,474 311,062
Treasury stock, at cost, 710,384
shares (25,670) - -
--------- --------- ---------
Total stockholders' equity 451,331 446,257 413,212
--------- --------- ---------
Total liabilities and
stockholders' equity $ 924,373 $ 811,636 $ 854,760
========= ========= =========
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 31, October 25,
1998 1997
---------- ----------
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,812 $ 35,830
Adjustments to reconcile net income
to net cash provided by operating
activities:
Cumulative effect of accounting principle
changes 19,326 -
Depreciation and amortization of property 30,310 27,829
Loss on property disposals 174 398
Other noncash items (net) 131 39
Deferred income taxes 56 (1,876)
Increase (decrease) in cash
due to changes in:
Accounts receivable (3,260) 3,105
Merchandise inventories (98,099) (106,075)
Prepaid expenses 2,484 (1,169)
Other assets 307 (649)
Accounts payable 64,987 45,314
Accrued expenses 3,883 1,577
Accrued income taxes 1,068 (3,639)
Other noncurrent liabilities 2,013 5,382
-------- --------
Net cash provided by operating activities 48,192 6,066
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (95) -
Property additions (55,390) (36,302)
Property disposals 214 301
-------- --------
Net cash used in investing activities (55,271) (36,001)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations (121) (101)
Borrowing of long-term debt 22,000 84,700
Purchase of treasury stock (26,173) -
Proceeds from sale and issuance of common stock 5,147 328
Contribution to capital by Waban Inc. 1,188 -
Decrease in loans and advances from Waban Inc. - (46,662)
-------- --------
Net cash provided by financing activities 2,041 38,265
-------- --------
Net increase (decrease) in cash and cash
equivalents (5,038) 8,330
Cash and cash equivalents at beginning of year 12,713 -
-------- --------
Cash and cash equivalents at end of period $ 7,675 $ 8,330
======== ========
Supplemental cash flow information:
Interest paid $ 196 $ 8,268
Income taxes paid 27,096 28,040
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)
(Dollars in Thousands except Per Share Amounts)
-----------------------------------------------------
Common
Stock Additional Total
Par Value Paid-In Retained Treasury Stockholders'
$.01 Capital Earnings Stock Equity
--------- --------- -------- -------- ------------
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
===== ======== ======== ======== ========
Balance, January 31, 1998 $ 375 $102,408 $343,474 $ - $446,257
Net income - - 24,812 - 24,812
Sale and issuance of
common stock 2 4,742 - 503 5,247
Purchase of treasury stock - - - (26,173) (26,173)
Contribution to capital
by Waban Inc. - 1,188 - - 1,188
----- -------- -------- -------- --------
Balance, October 31, 1998 $ 377 $108,338 $368,286 $(25,670) $451,331
===== ======== ======== ======== ========
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 and
independent public 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 "spin-off"). The financial statements of the Company include the
financial statements of those subsidiaries of Waban which, prior to the
spin-off, 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 approximately $101 million to the Company's
equity.
The historical capitalization of the Company was 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.
2. The results for the quarter and nine months ended October 31, 1998 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
consolidated financial statements and related notes in the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 1998.
5. During the quarter ended October 31, 1998, the Company adopted changes in
methods of accounting for membership fee revenues and preopening expenses.
The Company had previously recognized membership fee revenues when received.
Under its new accounting method, the Company now recognizes membership fee
revenues as income over the life of the membership, which is typically twelve
months. The Company has recorded a noncash charge of $18.2 million (after
reduction for income taxes of $11.6 million) as of the beginning of the current
fiscal year to reflect the cumulative effect of this change on prior years.
The effect of this change on the thirteen weeks ended October 31, 1998 was to
decrease net income by $1.9 million, or $.05 per diluted share; the effect of
this change on the thirty-nine weeks ended October 31, 1998 was to increase
income before the cumulative effect of accounting principle changes by $43
thousand and to decrease net income (including the cumulative effect of the
accounting change) by $18.2 million, or $.48 per diluted share.
Previously, preopening expenses were charged ratably to operations between the
date a new club opened and the end of the fiscal year. In implementing early
adoption of the provisions of the American Institute of CPA's Statement of
Position ("AICPA SOP") 98-5, "Reporting on the Costs of Start-up Activities,"
the Company now recognizes club preopening expenses when incurred. The Company
has recorded a noncash charge of $1.1 million (after reduction for income taxes
of $.7 million) as of the beginning of the current fiscal year to reflect the
cumulative effect of this change on prior years. The effect of this change on
the thirteen weeks ended October 31, 1998 was to decrease net income by $.5
million, or $.01 per diluted share; the effect of this change on the thirty-
nine weeks ended October 31, 1998 was to decrease income before the cumulative
effect of accounting principle changes by $1.4 million, or $.04 per diluted
share, and to decrease net income (including the cumulative effect of the
accounting change) by $2.5 million, or $.06 per diluted share.
Although last year's results were not restated, the pro forma amounts at the
bottom of the consolidated statements of income reflect the post-tax effect of
retroactive application on membership fee revenues and preopening expenses that
would have been made had the newly adopted accounting principles been in effect
during all periods presented.
The Company has restated the first two quarters of the current fiscal year to
reflect the accounting principle changes. The effect of the changes is as
follows (dollars in thousands except per share amounts):
Thirteen Weeks Ended
-----------------------
May 2, Aug. 1,
1998 1998
---------- ----------
Net income as originally reported $ 10,182 $ 18,425
Effect of changes in:
Membership fee revenues (771) 2,702
Preopening expenses (564) (264)
-------- --------
Income before cumulative effect of accounting
principle changes 8,847 20,863
Cumulative effect of accounting principle changes (19,326) -
-------- --------
Net income (loss) as restated $(10,479) $ 20,863
======== ========
Diluted per share amounts:
Net income as originally reported $ 0.27 $ 0.48
Effect of changes in:
Membership fee revenues (0.02) 0.07
Preopening expenses (0.02) (0.01)
-------- --------
Income before cumulative effect of accounting
principle changes 0.23 0.54
Cumulative effect of accounting principle changes (0.50) -
-------- --------
Net income as restated $ (0.27) $ 0.54
======== ========
6. Effective July 26, 1997, Waban's Board of Directors approved the
termination of the Waban Inc. Retirement Plan, in which certain of the
Company's employees participated. In accordance with generally accepted
accounting principles, the costs to terminate the Plan were not recognized
until the Plan was settled, which occurred in this year's first quarter.
Accordingly, during the nine months ended October 31, 1998, the Company
recorded a pre-tax charge of $1.5 million in connection with the settlement of
the Plan. On a post-tax basis, this charge amounted to $.9 million, or $.02
per diluted share.
7. Interest (income) expense, net in the nine months ended October 25, 1997
included interest on intercompany indebtedness to Waban of $7.6 million (all of
which was incurred in the first half of the year).
Selling, general and administrative ("SG&A") expenses in the nine months ended
October 25, 1997 included certain allocations of overhead incurred by Waban
that supported the Company's business prior to the spin-off. These allocated
expenses totaled $2.2 million (all of which was incurred in the first half of
last year).
8. The following details the calculation of earnings per share for the periods
presented below (amounts in thousands except per share amounts):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
Oct. 31, Oct. 25, Oct. 31, Oct. 25,
1998 1997 1998 1997
------- ------- ------- -------
Income before cumulative
effect of accounting
principle changes $14,428 $13,818 $44,138 $35,830
======= ======= ======= =======
Weighted-average number
of common shares out-
standing, used for
basic computation 37,397 37,466 37,554 37,479
Plus: Incremental shares
from assumed conversion
of stock options 584 523 634 174
------- ------- ------ ------
Weighted-average number
of common and dilutive
potential common shares
outstanding 37,981 37,989 38,188 37,653
======= ======= ======= ======
Income per share before
cumulative effect of
accounting principle
changes:
Basic $0.39 $0.37 $1.18 $0.96
===== ===== ===== =====
Diluted $0.38 $0.36 $1.16 $0.95
===== ===== ===== =====
9. Certain amounts in the prior year's financial statements have been
reclassified for comparative purposes.
10. The Company operated 90 clubs on October 31, 1998 versus 84 clubs on
October 25, 1997.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Thirteen Weeks (Third Quarter) and Thirty-Nine Weeks (Nine Months) Ended
October 31, 1998 versus Thirteen and Thirty-Nine Weeks Ended October 25, 1997.
Accounting Principle Changes
- ----------------------------
During the quarter ended October 31, 1998, the Company adopted changes in
methods of accounting for membership fee revenues and preopening expenses. The
Company had previously recognized membership fee revenues when received. Under
its new accounting method, the Company now recognizes membership fee revenues
as income over the life of the membership, which is typically twelve months.
Previously, preopening expenses were charged ratably to operations between the
date a new club opened and the end of the fiscal year. In implementing early
adoption of AICPA SOP 98-5, "Reporting on the Costs of Start-up Activities,"
the Company now recognizes club preopening expenses when incurred.
The Company has reflected the effect of these accounting changes in its
financial statements for the quarterly and year-to-date periods ended October
31, 1998. The cumulative effect of these accounting changes on prior years was
recorded as of the beginning of the current fiscal year and is included in net
income of the year-to-date period. The Company has restated the first two
quarters to reflect these accounting changes. Last year's results have not
been restated. For additional information on the accounting principle changes
adopted in the third quarter, see Note 5 of Notes to Consolidated Financial
Statements.
The following pro forma data gives effect to the retroactive application of the
newly adopted accounting changes for all periods presented (dollars in millions
except per share amounts):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
Oct. 31, Oct. 25, Oct. 31, Oct. 25,
Pro forma information 1998 1997 1998 1997
- --------------------- ------- ------- ------- -------
Net sales $828.5 $744.0 $2,442.8 $2,182.0
Membership fees and other 19.3 16.2 54.9 47.9
------ ------ -------- --------
Total revenues 847.8 760.2 2,497.7 2,229.9
Cost of sales, including
buying and occupancy costs 756.6 679.4 2,231.8 1,994.8
Selling, general and
administrative expenses 65.3 58.6 187.4 164.1
Preopening expenses 2.5 1.0 5.1 3.6
Pension termination costs - - 1.5 -
------ ------ -------- --------
Operating income 23.4 21.2 71.9 67.4
Interest (income) expense,
net (.2) 1.0 (.5) 8.5
------ ------ -------- --------
Income before income taxes 23.6 20.2 72.4 58.9
Provision for income taxes 9.2 7.8 28.3 22.8
------ ------ -------- --------
Net income $ 14.4 $ 12.4 $ 44.1 $ 36.1
====== ====== ======== ========
Diluted net income per share $ 0.38 $0.33 $ 1.16 $ 0.96
====== ====== ======== ========
Results of Operations
- ---------------------
Net sales for the third quarter ended October 31, 1998 rose 11.4% to $828
million from $744 million reported in last year's third quarter. Net sales for
the first nine months of the year totaled $2.4 billion, 12.0% higher than last
year's comparable period. These increases were due to the opening of new
stores and to comparable store sales increases of 5.8% in the third quarter and
5.6% year-to-date.
Total revenues in the third quarter included membership fees of $16.6 million
versus pro forma membership fees of $13.8 million in last year's third quarter,
an increase of 20.3%. Year-to-date membership fees were $48.0 million versus
pro forma membership fees of $42.0 million last year, an increase of 14.3%.
This year's results benefited from an increase in the membership fee for "Inner
Circle" members from $30.00 to $35.00, effective February 1, 1998. The
business membership fee was not changed.
Cost of sales (including buying and occupancy costs) was 91.3% of net sales in
both this year's and last year's third quarter. For the first nine months, the
cost of sales percentage was 91.4% both this year and last year.
Selling, general and administrative ("SG&A") expenses were 7.9% of net sales in
both this year's and last year's third quarter. Year-to-date SG&A expenses
were 7.7% of net sales this year versus 7.5% last year. The year-to-date
increase was attributable mainly to higher credit and marketing costs, as well
as increased expenses incurred as a result of the Company's operating as a
separate, publicly owned entity. Increased credit expenses in the third
quarter were offset by effective control of payroll related expenses. This
year's higher credit expenses were due both to the increased level of credit
card sales resulting from the Company's acceptance of VISA and to increased
costs for the Company's co-branded MasterCard. Increased marketing costs,
particularly in the first half of the year, were incurred to support the
Company's entry into the Cleveland, Ohio, market.
This year's higher preopening expenses resulted primarily from opening more new
clubs than in the previous year. The Company opened six new clubs in the first
nine months of this year, including two in the third quarter. In addition,
four new clubs were opened in the first five weeks of this year's fourth
quarter. Last year the Company opened four new clubs in the first nine months,
including two in the third quarter. No new clubs were opened in last year's
fourth quarter.
Effective July 26, 1997, Waban Inc.'s Board of Directors approved the
termination of the Waban Inc. Retirement Plan, in which certain of the
Company's employees participated. In accordance with generally accepted
accounting principles, the costs to terminate the Plan were not recognized
until the Plan was settled, which occurred in this year's first quarter.
Accordingly, during the nine months ended October 31, 1998, the Company
recorded a pre-tax charge of $1.5 million in connection with the settlement of
the Plan. On a post-tax basis, this charge amounted to $.9 million, or $.02
per share.
The components of net interest (income) expense were as follows (in thousands):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
Oct. 31, Oct. 25, Oct. 31, Oct. 25,
1998 1997 1998 1997
---- ---- ---- ----
Interest expense on debt $ (67) $ 997 $ 63 $8,355
Interest income (236) (49) (719) (67)
----- ------ ------ ------
Interest (income) expense
on debt, net (303) 948 (656) 8,288
Interest on capital leases 67 70 200 212
----- ------ ------ ------
Interest (income) expense,
net $(236) $1,018 $(456) $8,500
===== ====== ====== ======
Interest expense on debt was net of capitalized interest of $218,000 in this
year's third quarter and $537,000 year-to-date. Last year's capitalized
interest was $77,000 in the third quarter and $361,000 year-to-date. As
described in more detail below, the decrease in interest expense this year as
compared to last year is due to significantly lower borrowing levels and
interest rates applied to those borrowings.
The Company's year-to-date provision for income taxes was 39.0% of pre-tax
income this year versus 38.6% in last year's comparable period.
Net income for the third quarter rose to $14.4 million, or $.38 per diluted
share, from $13.8 million, or $.36 per diluted share, in last year's third
quarter. For the first nine months, income before the cumulative effect of
accounting principle changes was $44.1 million, or $1.16 per diluted share,
versus last year's $35.8 million, or $.95 per diluted share. Including a post-
tax charge of $19.3 million to reflect the cumulative effect of accounting
principle changes, year-to-date net income for the current year was $24.8
million, or $.65 per diluted share.
BJ's Wholesale Club, Inc. commenced operations as a separate entity immediately
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
incurring corporate overhead costs approximately $.5 million per quarter higher
than the amounts included in the historical financial statements for periods
preceding the spin-off. However, interest on intercompany borrowings at an
annual rate of 10% prior to the spin-off has been replaced by interest on bank
borrowings at an assumed rate of approximately 6.5% per year, and the level of
debt has been reduced substantially by the contribution to capital of
approximately $101 million of BJ's intercompany debt in connection with the
spin-off.
The following table 1) restates last year's historical results for the effects
of the spin-off noted in the preceding paragraph; 2) presents data on a pro
forma basis, as if the newly adopted accounting principles for membership fees
and preopening expenses had been in effect for all periods shown; and 3)
excludes the pension termination charge from this year's results (dollars in
millions except per share amounts):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
Oct. 31, Oct. 25, % Oct. 31, Oct. 25, %
1998 1997 Incr. 1998 1997 Incr.
---- ---- ---- ---- ---- ----
Operating income $23.4 $21.2 10.4% $73.4 $66.4 10.6%
Net income $14.4 $12.4 16.2% $45.0 $38.5 17.1%
Diluted earnings per share $0.38 $0.33 15.2% $1.18 $1.01 16.8%
Over the remainder of the year, the Company expects to continue to benefit from
the $5.00 increase in the Inner Circle membership fee. However, this benefit
is expected to be largely offset by the same factors that affected the first
nine months, namely higher preopening costs (resulting from a significant
increase over last year in the number of new club openings), increased credit
expenses and a higher-than-usual level of marketing expenses to support the
Company's entry into the Ohio market. Additionally, the Company will not
benefit from the impact of the 53-week fiscal year, as it did in the fourteen-
week fourth quarter of 1997. Fourth quarter increases in credit costs are
expected to be somewhat less pronounced than those in the first three quarters
as the Company will have cycled its first anniversary of accepting the VISA
payment card.
Year 2000 Compliance
- --------------------
The Company has worked for several years to prepare its financial,
merchandising and other information technology ("IT") systems for the Year
2000. The Company estimates that its Year 2000 assessment, remediation and
testing efforts with regard to IT systems was approximately 85% complete as of
October 31, 1998 and, except for the testing noted below, will be
substantially complete by the end of the first quarter of fiscal 1999
without any material adverse effect on the Company's results of operations,
financial position or cash flows. All major IT systems have been assessed
for Year 2000 compliance. The Company expects that currently known Year
2000 issues (none of which is considered to be significant) will be remedied
by the end of the first fiscal quarter of 1999. The Company intends to
retest systems which are modified or upgraded before January 1, 2000 for
Year 2000 compliance, regardless of whether the modification is related to
the Year 2000 issue. The Company also plans to conduct a series of monthly
production simulation tests of cyclical data over a ten-month period in 1999
to help ensure existing systems will be Year 2000 compliant. Since August
1998, the Company has conducted two disaster recovery tests simulating dates
beyond Year 2000 and plans to conduct a series of three additional disaster
recovery tests between April 1999 and the end of 1999. All of the Company's
Year 2000 testing is performed in tandem with the Company's third party data
processing center.
The Company is also in the process of reviewing its major non-IT systems for
Year 2000 issues, including refrigeration, security and utilities systems.
BJ's estimates that its Year 2000 assessment, remediation and testing efforts
with regard to non-IT systems is more than 90% complete as of October 31, 1998
and will be substantially complete by the end of fiscal 1998. The Company does
not believe that Year 2000 issues related to non-IT systems will have a
material adverse effect on the Company's results of operations, financial
position or cash flows.
BJ's is working with key vendors and other third parties with whom it does
business to minimize the potential adverse impact on the Company if they fail
to address the Year 2000 issue successfully. The Company has formed a
committee, with representatives from various departments in the Company, to
examine the Year 2000 readiness of the Company's business partners. The
Company plans to send a questionnaire regarding Year 2000 issues by the end
of fiscal 1998 to its 200 highest volume merchandise vendors, all active
freight vendors and 100 of its highest volume non-merchandise vendors, as
well as a random sample of more than 300 other vendors. If necessary, the
Company will seek alternate sources to replace vendors who may not be
Year 2000 compliant. The Year 2000 committee will also attempt to evaluate
the Year 2000 readiness of key third parties or vendors who share data with
the Company, including banks and mail houses. Although some of the Company's
agreements with manufacturers and other parties from whom it purchases
products for resale contain provisions requiring third parties to indemnify
the Company under some circumstances, there can be no assurance that such
indemnification arrangements will cover all of the Company's liabilities and
costs related to claims by third parties related to the Year 2000 issue.
BJ's estimates that its total historical and estimated costs of Year 2000
assessment, remediation and testing will be approximately $1.3 million.
The Company believes that its most likely worst case Year 2000 scenario would
probably result from a large number of key third parties with whom the Company
does business not being Year 2000 compliant. Among the factors that would tend
to mitigate the consequences of this scenario are that the Company sells a
broad assortment of products and is not dependent on any particular class of
merchandise; the Company is not dependent on a small number of vendors; the
Company purchases most of its inventory from well-established, brand name
vendors; and there are expected to be alternate sources of supply to vendors
who encounter Year 2000 problems. However, there can be no assurance that the
third parties with whom the Company does business will be successful in
addressing the Year 2000 issue or that their failure to successfully address
the issue will not have an adverse effect on the Company's financial condition
and results of operations. The Company has not yet formally developed
contingency plans to address this or other scenarios. As the Company completes
its systems testing and performs its inquiries of third parties with whom it
does business, it will evaluate the need to develop contingency plans.
The foregoing discussion of the Company's Year 2000 readiness contains forward-
looking statements, including estimates of the costs of the Company's Year 2000
implementation efforts, the percentage of completion of those efforts and the
dates on which the Company believes it will complete those efforts. Such
statements are based upon management's current estimates, using numerous
assumptions regarding future events, including the continued availability of
certain resources, third-party remediation plans, and other factors. There
can be no assurance that these forward-looking statements will prove to be
accurate, and actual results could differ materially from those currently
anticipated. Specific factors that could cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in Year 2000 issues, the ability to assess, remedy and test all relevant
computer code and embedded technology, the success of third parties with whom
the Company has business relationships (including its third party data
processing center) to successfully address their Year 2000 issues and similar
uncertainties.
The foregoing information is intended to qualify as "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act to the maximum amount permitted by such Act.
Seasonality
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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.
Recent Accounting Standards
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During this year's second quarter, the Company adopted AICPA SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which provides guidance as to whether certain internal use
software costs should be capitalized as a long-lived asset or expensed when
incurred. The effect of adopting this standard was not material.
Since June 1997, Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," SFAS No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits," and SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," were issued.
Each of these statements becomes effective in the Company's current fiscal year
ending January 30, 1999, except for SFAS No. 133, which becomes effective in
the third quarter of the fiscal year ending January 29, 2000. The adoption of
these statements is not expected to have a material impact on the Company's
results of operations, financial position or cash flows or to produce any major
changes in current disclosures.
Liquidity and Capital Resources
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Net cash provided by operating activities was $48.2 million in the first nine
months of 1998 versus $6.1 million in last year's comparable period. The
increase in cash provided by operating activities was attributable primarily to
a lower accounts payable-to-inventory ratio at the beginning of this year, as
compared to the beginning of last year.
Cash expended for property additions was $55.4 million in the first nine months
of 1998 versus $36.3 million in the same period in 1997. The Company opened
six new clubs in this year's first nine months, including the Company's first
two clubs in the Cleveland market. Four new clubs were opened in last year's
first nine months.
The Company's capital expenditures are expected to total approximately $90
million in 1998, based on opening a total of approximately twelve new clubs for
the year, including the opening of a third club in the Cleveland market and the
planned opening of the Company's first club in the Columbus, Ohio, market. 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.
During the third quarter, the Company's Board of Directors authorized the
repurchase of up to $50 million of the Company's common stock in open market or
privately negotiated transactions. Through October 31, 1998, the Company has
repurchased 724,300 shares of common stock for $26.2 million, or an average
price of $36.14 per share.
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, which was amended in December 1997,
includes a $50 million sub-facility for letters of credit, of which $6.8
million was outstanding at October 31, 1998. The Company is required to pay an
annual facility fee which is currently 0.10% 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 0.25%, (b) the agent bank's prime rate or
(c) 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, prohibit the payment of cash dividends on
the Company's common stock, and generally limit the repurchase of the Company's
common stock to $50 million.
The Company also maintains a separate line in the amount of $30 million for
letters of credit, primarily to support the purchase of inventories, of which
$12.0 million was outstanding at October 31, 1998, 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 and accounts payable from the end of last
year's third quarter were due to new stores. As a result of the change in
method of accounting for membership fees adopted in this year's third quarter,
a total of $31.0 million of deferred membership fee income was included in
accrued expenses and other current liabilities at October 31, 1998.
Cash and cash equivalents totaled $7.7 million as of October 31, 1998.
Borrowings at October 31, 1998 consisted of $45.0 million under the Company's
bank credit agreement and $19.5 million under the Company's uncommitted credit
line. The Company expects that its current resources, together with
anticipated cash flow from operations, will be sufficient to finance its
operations through January 29, 2000. However, the Company may from time to
time seek to obtain additional financing.
Factors Which Could Affect Future Operating Results
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This report contains a number of "forward-looking statements," including
statements regarding expenses expected to be incurred by BJ's as a stand-alone
entity, expected increases in membership fee revenues and credit, marketing and
preopening expenses, planned capital expenditures, planned store openings 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, including, without limitation, economic and weather conditions and
state and local regulation in the Company's markets; competitive conditions;
the ability of the Company to continue its transition to being a stand-alone
entity; contingent liabilities under the Company's indemnification agreement
with The TJX Companies, Inc.; and events which might cause the Company's spin-
off from Waban not to qualify for tax-free treatment. Each of these factors is
discussed in more detail in the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1998.
Other factors which could affect future operating results of the Company
include, without limitation, the successful implementation of the Company's
Year 2000 remediation plans, the success of the Company's key vendors and other
third parties in achieving Year 2000 compliance and new club opening plans
discussed above.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
Not applicable.
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
18.0 Letter re: Change in Accounting Principle
27.0 Financial Data Schedules
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K with the
Securities and Exchange Commission during the quarter ended
October 31, 1998.
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 14, 1998 /S/ JOHN J. NUGENT
----------------- ----------------------------
John J. Nugent
President and Chief
Executive Officer
(Principal Executive Officer)
Date: December 14, 1998 /S/ FRANK D. FORWARD
----------------- ----------------------------
Frank D. Forward
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)