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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 August 3, 2002
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 August
31, 2002: 70,060,605
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BJ'S WHOLESALE CLUB, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Thirteen Weeks Ended
--------------------------------
August 3, August 4,
2002 2001
------------ -------------
(Dollars in Thousands except Per Share Amounts)
Net sales $ 1,453,483 $ 1,277,176
Membership fees and other 32,526 28,534
------------ -------------
Total revenues 1,486,009 1,305,710
------------ -------------
Cost of sales, including buying and occupancy costs 1,324,418 1,160,842
Selling, general and administrative expenses 98,761 84,461
Preopening expenses 3,515 2,194
------------ -------------
Operating income 59,315 58,213
Interest income, net 166 1,132
Loss on contingent lease obligations (1,335) -
------------ -------------
Income before income taxes 58,146 59,345
Provision for income taxes 22,247 22,848
------------ -------------
Net income $ 35,899 $ 36,497
============ =============
Net income per common share:
Basic $ 0.51 $ 0.50
============ =============
Diluted $ 0.50 $ 0.49
============ =============
Number of common shares for earnings per share computations:
Basic 70,898,498 72,982,364
Diluted 71,907,531 74,499,694
The accompanying notes are an integral part of the financial statements.
-2-
BJ'S WHOLESALE CLUB, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Twenty-Six Weeks Ended
----------------------------------
August 3, August 4,
2002 2001
------------ ------------
(Dollars in Thousands except Per Share Amounts)
Net sales $ 2,713,591 $ 2,411,348
Membership fees and other 64,223 56,395
------------ ------------
Total revenues 2,777,814 2,467,743
------------ ------------
Cost of sales, including buying and occupancy costs 2,482,574 2,202,003
Selling, general and administrative expenses 190,620 169,141
Preopening expenses 6,813 2,472
------------ ------------
Operating income 97,807 94,127
Interest income, net 417 2,556
Loss on contingent lease obligations (2,752) -
------------ ------------
Income before income taxes 95,472 96,683
Provision for income taxes 36,519 37,223
------------ ------------
Net income $ 58,953 $ 59,460
============ ============
Net income per common share:
Basic $ 0.83 $ 0.82
============ ============
Diluted $ 0.82 $ 0.80
============ ============
Number of common shares for earnings per share computations:
Basic 71,122,845 72,802,887
Diluted 72,218,903 74,398,794
The accompanying notes are an integral part of the financial statements.
-3-
BJ'S WHOLESALE CLUB, INC.
CONSOLIDATED BALANCE SHEETS
August 3, February 2, August 4,
2002 2002 2001
----------- ----------- -----------
(Unaudited) (Unaudited)
(Dollars In Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 29,087 $ 87,158 $ 136,022
Accounts receivable 55,355 61,027 49,445
Merchandise inventories 632,165 560,001 517,123
Current deferred income taxes 28,920 27,226 7,952
Prepaid expenses 14,933 17,406 14,261
----------- ----------- -----------
Total current assets 760,460 752,818 724,803
----------- ----------- -----------
Property at cost:
Land and buildings 462,325 449,619 406,218
Leasehold costs and improvements 81,209 74,647 70,906
Furniture, fixtures and equipment 402,642 369,671 351,254
----------- ----------- -----------
946,176 893,937 828,378
Less: accumulated depreciation and amortization 292,217 259,562 262,670
----------- ----------- -----------
653,959 634,375 565,708
----------- ----------- -----------
Property under capital leases 3,319 3,319 3,319
Less: accumulated amortization 2,530 2,447 2,364
----------- ----------- -----------
789 872 955
----------- ----------- -----------
Deferred income taxes 6,105 12,571 --
Other assets 22,057 21,248 19,668
----------- ----------- -----------
Total assets $ 1,443,370 $ 1,421,884 $ 1,311,134
=========== =========== ===========
LIABILITIES
Current liabilities:
Short-term debt $ 15,000 $ -- $ --
Accounts payable 414,418 381,112 358,973
Accrued expenses and other current liabilities 147,352 166,183 137,743
Accrued federal and state income taxes 26,650 33,352 22,508
Obligations under capital leases due within one year 306 285 258
Contingent lease obligations due within one year 45,904 44,068 --
----------- ----------- -----------
Total current liabilities 649,630 625,000 519,482
----------- ----------- -----------
Obligations under capital leases, less portion due
within one year 1,410 1,558 1,701
Contingent lease obligations, less portion
due within one year 51,468 62,142 --
Other noncurrent liabilities 52,471 46,617 45,805
Deferred income taxes -- -- 7,704
Commitments and contingencies -- -- --
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01, authorized 20,000,000 shares,
no shares issued -- -- --
Common stock, par value $.01, authorized 180,000,000
shares, issued 74,410,190 shares 744 744 744
Additional paid-in capital 65,839 68,574 70,180
Retained earnings 789,804 730,851 707,988
Treasury stock, at cost, 4,220,685, 2,816,753 and
1,264,673 shares (167,996) (113,602) (42,470)
----------- ----------- -----------
Total stockholders' equity 688,391 686,567 736,442
----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,443,370 $ 1,421,884 $ 1,311,134
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
-4-
BJ'S WHOLESALE CLUB, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-Six Weeks Ended
-------------------------------------
August 3, August 4,
2002 2001
-------------- --------------
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 58,953 $ 59,460
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on contingent lease obligations 2,752 -
Depreciation and amortization of property 35,213 29,740
Loss on property disposals 135 122
Other noncash items (net) 123 63
Deferred income taxes 4,772 (466)
Tax benefit from exercise of stock options 2,113 15,121
Increase (decrease) in cash due to changes in:
Accounts receivable 5,672 5,805
Merchandise inventories (72,164) (21,838)
Prepaid expenses 2,473 1,706
Other assets (896) (5,503)
Accounts payable 33,306 23,913
Accrued expenses (1,942) (1,662)
Accrued income taxes (6,702) (9,299)
Contingent lease obligations (11,590) -
Other noncurrent liabilities 5,854 1,352
------------- -------------
Net cash provided by operating activities 58,072 98,514
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions (71,796) (79,706)
Proceeds from property disposals 58 2
------------- -------------
Net cash used in investing activities (71,738) (79,704)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing of short-term debt 15,000 -
Repayment of capital lease obligations (127) (109)
Proceeds from sale and issuance of common stock 2,539 12,598
Purchase of treasury stock (61,817) (15,669)
------------- -------------
Net cash used in financing activities (44,405) (3,180)
------------- -------------
Net increase (decrease) in cash and cash equivalents (58,071) 15,630
Cash and cash equivalents at beginning of year 87,158 120,392
------------- -------------
Cash and cash equivalents at end of period $ 29,087 $ 136,022
============= =============
Noncash financing and investing activities:
Treasury stock issued for compensation plans $ 7,423 $ 33,139
The accompanying notes are an integral part of the financial statements.
-5-
BJ'S WHOLESALE CLUB, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Additional Treasury Stock Total
------------------------ Paid-in Retained -------------------------- Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
----------- ----------- ------------ ------------- ----------- ------------- -------------
(In Thousands)
Balance, February 3, 2001 74,410 $ 744 $ 75,583 $ 648,528 (1,947) $ (59,940) $ 664,915
Net income - - - 59,460 - - 59,460
Issuance of common stock - - (5,403) - 1,042 33,139 27,736
Purchase of treasury stock - - - - (360) (15,669) (15,669)
---------- ----------- ----------- ------------ ---------- ------------- -----------
Balance, August 4, 2001 74,410 $ 744 $ 70,180 $ 707,988 (1,265) $ (42,470) $ 736,442
========== =========== =========== ============ ========== ============= ===========
Balance, February 2, 2002 74,410 $ 744 $ 68,574 $ 730,851 (2,817) $ (113,602) $ 686,567
Net income - - - 58,953 - - 58,953
Issuance of common stock - - (2,735) - 183 7,423 4,688
Purchase of treasury stock - - - - (1,587) (61,817) (61,817)
---------- ----------- ----------- ------------ ---------- ------------- -----------
Balance, August 3, 2002 74,410 $ 744 $ 65,839 $ 789,804 (4,221) $ (167,996) $ 688,391
========== =========== =========== ============ ========== ============= ===========
The accompanying notes are an integral part of the financial statements.
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The results for the quarter ended August 3, 2002 are not necessarily
indicative of the results for the full fiscal year or any future period 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 historically been strongest in the fourth quarter holiday
season and lowest in the first quarter of each fiscal year.
2. 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.
3. 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 February 2, 2002.
4. The components of interest income, net were as follows (amounts in
thousands):
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------- --------------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
---------- -------- ---------- ---------
Interest income $ 218 $ 1,132 $ 469 $ 2,556
Capitalized interest 137 128 300 256
Interest expense on debt (143) (76) (259) (151)
Interest expense on capital leases (46) (52) (93) (105)
-------- -------- -------- --------
Interest income, net $ 166 $ 1,132 $ 417 $ 2,556
======== ======== ======== ========
5. The following details the calculation of earnings per share for the periods
presented below (amounts in thousands except per share amounts):
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------- --------------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
---------- -------- ---------- ---------
Net income $ 35,899 $36,497 $ 58,953 $ 59,460
======== ======= ======== =========
Weighted-average number of common
shares outstanding, used for basic
computation 70,898 72,982 71,123 72,803
Plus: Incremental shares from assumed
exercise of stock options 1,010 1,518 1,096 1,596
-------- -------- -------- ---------
Weighted-average number of common
and dilutive potential common shares
outstanding 71,908 74,500 72,219 74,399
======== ======== ======== =========
Basic earnings per share $ 0.51 $ 0.50 $ 0.83 $ 0.82
======== ======== ======== =========
Diluted earnings per share $ 0.50 $ 0.49 $ 0.82 $ 0.80
======== ======== ======== =========
-7-
Options to purchase the following shares were outstanding at August 3, 2002, but
were not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the common
shares for the periods as indicated:
Number Weighted-Average
of Shares Exercise Price
--------- --------------
Thirteen weeks ended August 3, 2002 764,250 $45.30
Twenty-six weeks ended August 3, 2002 759,250 $45.33
The average market price of common shares exceeded the exercise price of all
options for the quarter and six months ended August 4, 2001.
6. During the first half of 2002, the Company repurchased 1,586,500 shares of
its common stock for $61.8 million, or an average price of $38.96 per share. On
August 19, 2002, the Board of Directors authorized the repurchase of an
additional $100 million of the Company's stock. From the inception of its
repurchase activities in August 1998 through August 3, 2002, the Company has
repurchased a total of $287.9 million of its common stock at an average price of
$33.07 per share. Including the new authorization, the Company's remaining
repurchase authorization was $112.1 million as of August 19, 2002.
7. The following table summarizes year-to-date activity relating to the
Company's obligations for House2Home, Inc. ("House2Home") leases (dollars in
thousands):
Contingent lease obligations, beginning of year $106,210
Interest accretion charges 2,752
Cash payments (11,590)
--------
Contingent lease obligations, end of period $ 97,372
========
The payments above included lump-sum settlements for six leases. Four additional
House2Home properties (for which BJ's remains contingently liable) were assigned
to third parties. As of August 3, 2002, the Company has reserved a total of
$97,372,000 associated with its obligations for the remaining House2Home leases.
The Company believes that the liabilities recorded in the financial statements
adequately provide for its indemnification obligations. However, there can be no
assurance that the Company's actual liability under the TJX indemnification
agreement will not differ materially from amounts recorded in the financial
statements due to a number of factors, including future economic factors which
may affect the ability to successfully sublease or assign the House2Home
properties.
Both BJ's and House2Home (formerly HomeBase, Inc.) were part of Waban Inc.
("Waban") prior to 1997 and were part of The TJX Companies, Inc. ("TJX") prior
to 1989. In connection with the spin-off of Waban from TJX in 1989, Waban agreed
to indemnify TJX against any liabilities TJX might incur with respect to these
leases. Pursuant to a subsequent agreement, BJ's agreed to indemnify TJX for
100% of House2Home's lease liabilities guaranteed by TJX through January 31,
2003 and for 50% of any such liabilities thereafter. House2Home filed for
bankruptcy under Chapter 11 of the United States Bankruptcy Code on November 7,
2001. For additional information, refer to BJ's filing on Form 10-K for the
fiscal year ended February 2, 2002.
-8-
8. On June 12, 2002, the Company entered into a new $200 million unsecured
credit agreement with a group of banks which expires June 13, 2005. The
agreement includes a $50 million sub-facility for letters of credit, of which
$2.3 million was outstanding as of August 3, 2002. The Company is required to
pay an annual facility fee which is currently 0.175% 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 0.575% or (b) a rate equal to
the higher of the sum of the Federal Funds Effective Rate plus 0.50% or the
agent bank's prime rate. The Company is also required to pay a usage fee in any
calendar quarter during which the average daily amount of loans and undrawn or
unreimbursed letters of credit outstanding exceeds 33% of the total commitment.
The usage fee, if applicable, would currently be at an annual rate of 0.125% of
the average daily amount of credit used under the facility during the calendar
quarter. The facility fee, Eurodollar margin and usage fee are 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. The
Company is required to comply with these covenants on a quarterly basis. Under
the credit agreement, the Company may pay dividends or repurchase its own stock
in any amount so long as the Company remains in compliance with all other
covenants. On August 13, 2002, the agreement was amended to change the minimum
net worth requirement, thereby providing the Company additional capacity to
repurchase its common stock. The Company was in compliance with the covenants
and other requirements set forth in its credit agreement at August 3, 2002.
In addition to the credit agreement, the Company maintains a separate $50
million facility for letters of credit, primarily to support the purchase of
inventories, of which $26.9 million was outstanding at August 3, 2002, and an
additional $25 million uncommitted credit line for short-term borrowings, of
which $15.0 million was outstanding for short-term working capital uses at
August 3, 2002.
9. Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company is in the process of evaluating
the requirements of SFAS No. 143, which becomes effective in 2003.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
became effective at the beginning of 2002. The adoption of this standard did not
have a material impact on the Company's results of operations, financial
position or cash flows, or produce any major changes in current disclosures.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in June 2002. This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities,
including club closing activities. The Company is in the process of evaluating
the requirements of SFAS No. 146, which becomes effective for exit or disposal
activities that are initiated after December 31, 2002.
-9-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Thirteen Weeks (Second Quarter) and Twenty-Six Weeks Ended August 3, 2002 versus
Thirteen and Twenty-Six Weeks Ended August 4, 2001.
Results of Operations
Net sales for the second quarter ended August 3, 2002 rose 13.8% to $1.45
billion from $1.28 billion reported in last year's second quarter. Net sales for
the first half of the current year totaled $2.71 billion, 12.5% higher than last
year's comparable period. These increases were due to the opening of new stores
and gasoline stations and comparable store sales increases of 3.1% for the
second quarter and 3.5% year-to-date. Total revenues in the second quarter
included membership fees of $29.7 million versus $25.9 million in last year's
second quarter. Year-to-date membership fees were $58.7 million versus $51.1
million last year. This year's results benefited from increases in the
membership fee for Business and Inner Circle(R) members from $35 to $40,
effective January 1,2001.
Cost of sales (including buying and occupancy costs) was 91.12% of net sales in
this year's second quarter versus 90.89% in the comparable period last year. For
the first six months, the cost of sales percentage was 91.49% versus 91.32% last
year. These increases in percentage were attributable mainly to increased
occupancy costs as a percentage of sales, resulting in part from opening 20 new
clubs in the last twelve months. Because new clubs typically start out with
lower sales levels than mature clubs, but still carry certain fixed costs, their
occupancy costs as a percentage of sales are generally higher than average.
Occupancy costs, as a percentage of net sales, increased by .12% in this year's
second quarter over last year's second quarter. Merchandise gross margins were
slightly lower than last year both in the second quarter and year-to-date due to
an unfavorable mix of sales. Gasoline margins were also lower than last year,
particularly in the second quarter. In last year's second quarter the Company
realized a temporary benefit in gas margins that resulted from declining costs.
Selling, general and administrative ("SG&A") expenses were 6.79% of net sales in
the second quarter versus 6.61% in last year's comparable period. Year-to-date
SG&A expenses were 7.02% of net sales this year versus 7.01% last year. The
percentage increase in the second quarter was attributable mainly to the timing
of certain advertising costs and increased costs associated with credit and
debit card payments. Taken together, these costs, as a percentage of sales,
increased by .15% in this year's second quarter over last year's comparable
period. SG&A costs in general were impacted by the large number of recent
openings of new clubs, which typically have a higher than average ratio of SG&A
expenses to net sales.
Preopening expenses were $3.5 million in the second quarter this year compared
with $2.2 million in last year's second quarter. Year-to-date preopening
expenses totaled $6.8 million this year versus $2.5 million last year. The
Company opened eight new clubs in this year's first half, including four clubs
in the second quarter. No new clubs were opened in last year's first half.
Operating income in the second quarter rose to $59.3 million, an increase of
1.9% over last year's second quarter operating income of $58.2 million.
Year-to-date operating income was $97.8 million, 3.9% higher than last year's
$94.1 million.
Interest income, net was $0.2 million in this year's second quarter versus $1.1
million in the comparable period last year. For the first six months, interest
income, net was $0.4 million compared with last year's $2.6 million. These
decreases were due to significantly lower interest rates, as well as lower
invested cash balances, resulting in part from the Company's share repurchase
activities.
-10-
During the second quarter, the Company recorded a pretax interest accretion
charge of $1.3 million ($0.8 million after tax, or $.01 per diluted share)
associated with its obligations for House2Home, Inc. leases. Year-to-date
accretion charges were $2.8 million ($1.7 million after tax, or $.02 per diluted
share). These charges are recorded on the "Loss on contingent lease obligations"
line in the statement of income. Both BJ's and House2Home (formerly HomeBase,
Inc.) were part of Waban Inc. ("Waban") prior to 1997 and were part of the TJX
Companies, Inc. ("TJX") prior to 1989. In connection with the spin-off of Waban
from TJX in 1989, Waban agreed to indemnify TJX against any liabilities TJX
might incur with respect to these leases. Pursuant to a subsequent agreement,
BJ's agreed to indemnify TJX for 100% of House2Home's lease liabilities
guaranteed by TJX through January 31, 2003, and for 50% of any such liabilities
thereafter. House2Home filed for bankruptcy under Chapter 11 of the United
States Bankruptcy Code on November 7, 2001.
The Company's year-to-date provision for income taxes was 38.3% of pretax income
this year versus 38.5% last year. Excluding the loss on contingent lease
obligations, this year's rate is the same rate used for the full fiscal year
last year.
Net income in this year's second quarter was $35.9 million, or $.50 per diluted
share, versus $36.5 million, or $.49 per diluted share, in last year's second
quarter. Net income in this year's first six months totaled $59.0 million, or
$.82 per diluted share, versus $59.5 million, or $.80 per diluted share, in last
year's first half.
Certain factors have contributed to lower operating margins through the first
half of the year:
.. The Company has opened 20 new clubs in the last twelve months. Sales levels
are typically lower in new clubs, which carry many of the same fixed costs as
mature clubs.
.. Sales in the group of twelve new clubs which opened in the back half of last
year are running below their plans.
.. Most of the new clubs are located in the Southeast, where freight costs are
higher because the clubs are serviced out of the Company's cross-dock
facility in Burlington, New Jersey. The Company believes that freight costs
for clubs in the Southeast will be favorably impacted in the long run after
it opens its new cross-dock facility in Jacksonville, Florida, next spring.
.. Comparable club sales have been impacted by increased competition (including
new BJ's clubs), which is expected to continue in the second half of the
year.
The Company expects to continue to benefit from the membership fee increases
noted above, although that benefit should diminish over the course of the year
as the Company cycles through the accounting impact of the fee increases.
Because members renew throughout the year and because membership fee income is
recognized over the life of the membership, the benefit of the fee increases is
spread over a two-year period. The Company expects that this benefit will be
partially offset by increases in the costs of employee medical benefits and
property insurance over the remainder of the year. Lower levels of interest
income, net are projected to continue in the second half of the year.
In 2001, all new clubs were opened in the second half of the year. A more evenly
distributed schedule of new club openings in 2002 is expected to continue to
create uneven quarterly comparisons in preopening and advertising expenses
throughout the year. These costs, taken together, are projected to be lower than
last year in the third and fourth quarters.
The Company has begun testing pharmacies in the four new Atlanta clubs which
opened this year and in one existing Massachusetts club, which was retrofitted
for this business. Plans are in place to expand this test to three additional
existing clubs before the end of the year. Because Atlanta is a
-11-
new market where BJ's has no other clubs, very limited name recognition and two
entrenched competitors, the Company is also testing a program of free first-year
memberships during the preopening and initial opening periods of the new Atlanta
clubs.
During the second quarter, the Company rolled out a new BJ's co-branded
MasterCard(R) underwritten by a major financial institution on a non-recourse
basis. Purchases made at BJ's with the co-branded MasterCard will earn a 1.5%
rebate. All other purchases with the BJ's MasterCard will earn rebates of 0.5%
or 1.0%, based on certain factors. Rebates up to $500 per year will be issued in
the form of BJ's Bucks(R) certificates redeemable for merchandise at any BJ's
club.
The Company operated 138 clubs on August 3, 2002 versus 118 clubs on August 4,
2001.
Seasonality
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
historically been strongest in the fourth quarter holiday season and lowest in
the first quarter of each fiscal year.
Recent Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company is in the process of evaluating
the requirements of SFAS No. 143, which becomes effective in 2003.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
became effective at the beginning of 2002. The adoption of this standard did not
have a material impact on the Company's results of operations, financial
position or cash flows, or produce any major changes in current disclosures.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in June 2002. This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities,
including club closing activities. The Company is in the process of evaluating
the requirements of SFAS No. 146, which becomes effective for exit or disposal
activities that are initiated after December 31, 2002.
Liquidity and Capital Resources
Net cash provided by operating activities was $58.1 million in the first half of
2002 versus $98.5 million in last year's comparable period. Cash provided by net
income before depreciation and amortization and before the post-tax loss on
contingent lease obligations was $95.8 million in the first half of 2002 versus
$89.2 million in last year's comparable period. Merchandise inventories, net of
accounts payable, increased by $38.9 million in the first half of the year
versus a decrease of $2.1 million last year. As of August 3, 2002, inventories
on a per-club basis were 4.5% higher than they were one year earlier, due mainly
to slow sales at the end of July 2002, particularly in some food categories. The
Company did experience a strong sell-through of summer seasonal merchandise
throughout the second quarter.
-12-
Cash expended for property additions was $71.8 million in the first half of 2002
versus $79.7 million in the first half of 2001. The Company opened seven new
leased clubs and one new owned club, and purchased one existing club, which was
previously leased, in this year's first half. No new clubs were opened in last
year's first half; however, all twelve of last year's new clubs (including five
owned clubs) were under construction and the relocation of the Company's
cross-dock facility to Burlington, New Jersey, was completed during last year's
first half. Seven new gas stations were opened in the first half of this year
versus nine in last year's comparable period.
The Company's full-year capital expenditures are expected to total approximately
$160 million in 2002, based on plans to open approximately 13 new clubs and 18
to 20 gas stations. The Company expects to own two of the new club locations
opening in 2002 and also plans to spend approximately $15 to $20 million in 2002
for clubs that will open in 2003, as well as some initial capital for a third
cross-dock facility scheduled to open in Jacksonville, Florida, in the spring of
2003. 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 first half of 2002, the Company repurchased 1,586,500 shares of its
common stock for $61.8 million, or an average price of $38.96 per share. On
August 19, 2002, the Board of Directors authorized the repurchase of an
additional $100 million of the Company's stock. From the inception of its
repurchase activities in August 1998 through August 3, 2002, the Company has
repurchased a total of $287.9 million of its common stock at an average price of
$33.07 per share. Including the new authorization, the Company's remaining
repurchase authorization was $112.1 million as of August 19, 2002.
On June 12, 2002, the Company entered into a new $200 million unsecured credit
agreement with a group of banks which expires June 13, 2005. The agreement
includes a $50 million sub-facility for letters of credit, of which $2.3 million
was outstanding at August 3, 2002. The Company is required to pay an annual
facility fee which is currently 0.175% 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 0.575% or (b) a rate equal to the higher of the
sum of the Federal Funds Effective Rate plus 0.50% or the agent bank's prime
rate. The Company is also required to pay a usage fee in any calendar quarter
during which the average daily amount of loans and undrawn or unreimbursed
letters of credit outstanding exceeds 33% of the total commitment. The usage
fee, if applicable, would currently be at an annual rate of 0.125% of the
average daily amount of credit used under the facility during the calendar
quarter. The facility fee, Eurodollar margin and usage fee are 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. The
Company is required to comply with these covenants on a quarterly basis. Under
the credit agreement, the Company may pay dividends or repurchase its own stock
in any amount so long as the Company remains in compliance with all other
covenants. On August 13, 2002, the agreement was amended to change the minimum
net worth requirement, thereby providing the Company additional capacity to
repurchase its common stock. The Company was in compliance with the covenants
and other requirements set forth in its credit agreement at August 3, 2002. BJ's
has no credit rating triggers that would accelerate the maturity date of debt if
borrowings were outstanding under its credit agreement.
In addition to the credit agreement, the Company maintains a separate $50
million facility for letters of credit, primarily to support the purchase of
inventories, of which $26.9 million was outstanding at August 3, 2002, and an
additional $25 million uncommitted credit line for short-term borrowings, of
which $15.0 million was outstanding for short-term working capital uses at
August 3, 2002.
-13-
Increases in inventories and accounts payable from August 4, 2001 to August 3,
2002 were due mainly to the addition of new clubs and a 4.5% increase in
inventories per club. Increases in inventories and accounts payable since
February 2, 2002 were due primarily to normal seasonal requirements and the
addition of new clubs. Increases in deferred tax assets since August 4, 2001
were attributable primarily to the recording of related liabilities for lease
indemnification obligations in the third quarter of last year.
Payments that the Company makes to settle its lease indemnification obligations
will reduce operating cash flows in varying amounts over the remaining terms of
the House2Home leases, which expire at various times up to 2016. During this
year's first half the Company made payments totaling $11.6 million in connection
with these obligations. The payments included lump-sum settlements for six
leases. During the year-to-date period four additional House2Home properties
(for which BJ's remains contingently liable) were assigned to third parties. As
of August 3, 2002, the present value of the Company's obligations for the
remaining House2Home leases totaled $97.4 million, including $45.9 million
classified as current liabilities. This reflects the fact that BJ's is
responsible for 100% of House2Home's lease liabilities through January 31, 2003
and the assumption of a certain average time period before sublease income
begins to be realized. BJ's and TJX share equal responsibility for House2Home's
leases after January 31, 2003. The Company may satisfy its obligations through
additional lump-sum settlements, which could accelerate the timing of cash
outflows. The Company believes that these payments will not have a material
impact on its future financial condition or cash flows and that the liabilities
recorded in the financial statements adequately provide for its indemnification
obligations. However, there can be no assurance that the Company's actual
liability under the TJX indemnification agreement will not differ materially
from amounts recorded in the financial statements due to a number of factors,
including future economic factors which may affect the ability to successfully
sublease or assign the House2Home properties.
The following summarizes the Company's contractual cash obligations as of August
3, 2002 and the effect these obligations are expected to have on its liquidity
and cash flows in future periods (in thousands):
Short- Contingent
Term Capital Operating Lease
Payments Due by Period Total Debt Leases Leases Obligations
---------------------- ------- ------ ------ ------- -----------
August 2002 to July 2003 $ 156,488 $15,000 $ 453 $ 95,131 $ 45,904
August 2003 to July 2005 225,893 - 912 200,967 24,014
After July 2005 1,282,747 - 798 1,254,495 27,454
---------- ------- ------ ---------- --------
$1,665,128 $15,000 $2,163 $1,550,593 $ 97,372
========== ======= ====== ========== ========
Cash and cash equivalents totaled $29.1 million as of August 3, 2002 and
borrowings of $15.0 million were outstanding on that date. The Company believes
that its current resources, together with anticipated cash flow from operations,
will be sufficient to finance its operations through the term of its credit
agreement, which expires June 13, 2005. However, the Company may from time to
time seek to obtain additional financing.
-14-
Factors Which Could Affect Future Operating Results
This report contains a number of "forward-looking statements," including
statements regarding membership fee income, employee medical benefit costs,
property insurance costs, interest income, and preopening and advertising
expenses, planned capital expenditures, planned club, gas station and cross-dock
facility openings, freight costs, competition, lease obligations under the
Company's indemnification agreement with TJX, 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," "estimates," "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 Company's success in settling
lease obligations under the Company's indemnification agreement with The TJX
Companies, Inc.; and events which might cause the Company's 1997 spin-off from
Waban Inc. not to qualify for tax-free treatment. Each of these and other
factors are discussed in more detail in the Company's Annual Report on Form 10-K
for the fiscal year ended February 2, 2002.
Any forward-looking statements represent the Company's estimates only as of the
day this quarterly report was first filed with the Securities and Exchange
Commission and should not be relied upon as representing the Company's estimates
as of any subsequent date. While the Company may elect to update forward-looking
statements at some point in the future, the Company specifically disclaims any
obligation to do so, even if its estimates change.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company believes that its potential exposure to market risk as of August 3,
2002 is not material because of the short contractual maturities of its cash and
cash equivalents and bank debt on that date. The Company has not used derivative
financial instruments.
Item 4. Controls and Procedures
Not applicable.
-15-
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment No. 1, dated as of August 13, 2002, to Credit
Agreement, dated June 12, 2002 among the Company and
certain banks.
(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 August
3, 2002.
-16-
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: September 17, 2002 /S/ MICHAEL T. WEDGE
---------------------------------- --------------------
Michael T. Wedge
President and Chief
Executive Officer
(Principal Executive Officer)
Date: September 17, 2002 /S/ FRANK D. FORWARD
--------------------------------- --------------------
Frank D. Forward
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-17-
CERTIFICATIONS
I, Michael T. Wedge, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BJ's Wholesale
Club, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report.
Date: September 17, 2002 /S/ MICHAEL T. WEDGE
------------------ --------------------
Michael T. Wedge
President and Chief
Executive Officer
(Principal Executive Officer)
I, Frank D. Forward, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BJ's Wholesale
Club, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report.
Date: September 17, 2002 /S/ FRANK D. FORWARD
------------------ --------------------
Frank D. Forward
Chief Executive Officer
(Principal Financial Officer)
-18-