S-1 1 d494927ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on May 17, 2018

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

BJ’s Wholesale Club Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5331   45-2936287

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

25 Research Drive

Westborough, Massachusetts 01581

(774) 512-7400

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Christopher J. Baldwin

Chairman, President & Chief Executive Officer

25 Research Drive

Westborough, Massachusetts 01581

(774) 512-7400

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Howard A. Sobel

Gregory P. Rodgers

Ryan K. deFord

Latham & Watkins LLP

885 Third Avenue

New York, New York 10022

Telephone: (212) 906-1200

Fax: (212) 751-4864

 

Graham Luce

Brigitte Eichner

25 Research Drive

Westborough, Massachusetts 01581

Telephone: (774) 512-7400

Fax: (508) 986-7153

 

Colin J. Diamond

F. Holt Goddard

White & Case LLP

1221 Avenue of the Americas

New York, New York 10020

Telephone: (212) 819-8200

Fax: (212) 354-8113

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Proposed

maximum

aggregate
offering price(1)(2)

 

Amount of

registration fee

Common stock, par value $0.01 per share

  $100,000,000   $12,450

 

 

 

(1)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

(2)

Includes the offering price of shares of common stock that may be sold if the underwriters fully exercise their option to purchase additional shares of common stock from the selling stockholders.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION. DATED MAY 17, 2018.

                Shares

 

LOGO

BJ’s Wholesale Club Holdings, Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of BJ’s Wholesale Club Holdings, Inc. We are selling all of the shares to be sold in the offering, except as set forth below.

Prior to this offering, there has been no public market for the common stock. The initial public offering price is expected to be between $        and $        per share. We have applied to list our common stock on the New York Stock Exchange (“NYSE”) under the symbol “BJ.”

The underwriters have an option for a period of 30 days to purchase up to a maximum of                additional shares of our common stock from the selling stockholders. We will not receive any of the proceeds from any sale of shares being sold by the selling stockholders.

After the consummation of this offering, we expect to be a “controlled company” within the meaning of the corporate governance standards of the NYSE.

Investing in our common stock involves risk. See “Risk Factors” beginning on page 18 to read about factors you should consider before buying shares of our common stock.

 

     Price to
Public
     Underwriting Discounts(1)      Proceeds to BJ’s
Wholesale Club

Holdings, Inc.
 

Per Share

   $                   $                   $               

Total

   $      $      $  

 

(1)

See “Underwriting” for additional information regarding underwriting compensation.

Delivery of the shares of common stock will be made on or about                 , 2018.

Neither the Securities and Exchange Commission (“SEC”) nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

BofA Merrill Lynch   Deutsche Bank Securities   Goldman Sachs & Co. LLC   J.P. Morgan

The date of this prospectus is                 , 2018.


Table of Contents

TABLE OF CONTENTS

 

     Page  

About This Prospectus

     ii  

Market and Industry Data

     ii  

Basis of Presentation

     iii  

Certain Trademarks

     iv  

Non-GAAP Financial Measures

     iv  

Prospectus Summary

     1  

Risk Factors

     18  

Cautionary Note Regarding Forward-Looking Statements

     41  

Use of Proceeds

     43  

Dividend Policy

     44  

Capitalization

     45  

Dilution

     47  

Selected Consolidated Financial Data

     50  

Unaudited Pro Forma Consolidated Financial Statements

     54  

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

     59  

Letter from our Chief Executive Officer and Chief Financial & Administrative Officer

     80  

Business

     83  

Management

     97  

Executive Compensation

     104  

Principal and Selling Stockholders

     132  

Certain Relationships and Related Party Transactions

     134  

Description of Capital Stock

     137  

Description of Certain Indebtedness

     142  

Shares Eligible for Future Sale

     147  

Material U.S. Federal Tax Considerations for Non-U.S. Holders of Our Common Stock

     149  

Underwriting

     153  

Reserved Share Program

     159  

Legal Matters

     160  

Experts

     160  

Where You Can Find More Information

     160  

Index to Consolidated Financial Statements

     F-1  

 

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ABOUT THIS PROSPECTUS

You should rely only on the information included elsewhere in this prospectus and any free writing prospectus prepared by or on behalf of us that we have referred to you. Neither we, the selling stockholders nor the underwriters have authorized anyone to provide you with additional information or information different from that included elsewhere in this prospectus or in any free writing prospectus prepared by or on behalf of us that we have referred to you. If anyone provides you with additional, different or inconsistent information, you should not rely on it. Offers to sell, and solicitations of offers to buy, shares of our common stock are being made only in jurisdictions where offers and sales are permitted.

No action is being taken in any jurisdiction outside the United States to permit a public offering of common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restriction as to this offering and the distribution of this prospectus applicable to those jurisdictions.

MARKET AND INDUSTRY DATA

This prospectus includes estimates regarding market and industry data that we prepared based on our management’s knowledge and experience in the markets in which we operate, together with information obtained from various sources, including publicly available information, industry reports and publications, surveys, our customers, distributors, suppliers, trade and business organizations and other contacts in the markets in which we operate.

In this prospectus, we make reference to consistently offering 25% or more savings on a representative basket of manufacturer-branded groceries compared to typical supermarket competitors. The following is how we verify that we provide our members this value:

 

   

We periodically identify the four supermarket chains (or banners) most prevalent in our clubs’ primary trade areas (the “Supermarket Competitors”).

 

   

We create a “basket” of 100 popular manufacturer-branded grocery food and non-food items, each of which was among our top-selling national brand items in its category and was also carried, in varying pack sizes, in supermarkets. We believe this basket is representative of manufacturer-branded grocery items because of their popular appeal and recognition—as evidenced by both presence and sales volume—in our clubs and at the Supermarket Competitors.

 

   

We hire an independent third-party company to visit multiple (a minimum of six) sites for each of the Supermarket Competitors, which are located in the trade areas of one or more of our clubs, no less frequently than once every two weeks. The third-party comparison shoppers record the prices of each item in the basket carried by the Supermarket Competitor, in the closest pack size to the size BJ’s carries, and then they calculate the price on a unit-price basis. We compare unit prices to ensure a common denominator for price comparisons. We direct the measurement company to ignore coupons and exclude items that were on promotion by us or by a Supermarket Competitor, as promotional prices do not represent everyday values in our view.

 

   

To calculate the Supermarket Competitors’ average price for the items in the basket, we average the measured prices of the items at each Supermarket Competitor store sampled, create an average measured unit price for each item at each Supermarket Competitor, compare those to our chain average unit price, and arrive at a relative percentage difference for each Supermarket Competitor. We then average these percentage differences for the four Supermarket Competitors. The average difference is consistently more than 25%.

 

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We will only include an item in the basket if it is carried by at least two of the four Supermarket Competitors. This means that over time we may replace items in the basket with different comparable items, if we are consistently unable to get prices for comparison on an item, to be sure we continue to offer the same relative savings.

We also use a rolling average of measured prices. At a minimum, we will use an average of two consecutive periodic or monthly measurements of prices at both BJ’s (using our chain average price) and the Supermarket Competitors. We may use up to 52 consecutive weeks, or 12 consecutive months, of price data for comparison. We make our savings claim using price data that are not more than 60 days old, as to the most recent price measurement in the data set.

The Supermarket Competitors do not include non-traditional sellers of groceries, such as drugstores, online sellers, superstores, convenience stores, other membership clubs and mass market retailers.

In presenting this information, we have made certain assumptions that we believe to be reasonable based on such data and other similar sources and on our knowledge of, and our experience to date in, the markets for the products we distribute. Market share data is subject to change and may be limited by the availability of raw data, the voluntary nature of the data gathering process and other limitations inherent in any statistical survey of market shares. In addition, customer preferences are subject to change. Accordingly, you are cautioned not to place undue reliance on such market share data. References herein to the markets in which we conduct our business refer to the geographic metropolitan areas in which our clubs are located.

BASIS OF PRESENTATION

We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to the last day of January. Accordingly, references herein to “fiscal year 2012” relate to the 53 weeks ended February 2, 2013, references herein to “fiscal year 2013” relate to the 52 weeks ended February 1, 2014, references herein to “fiscal year 2014” relate to the 52 weeks ended January 31, 2015, references herein to “fiscal year 2015” relate to the 52 weeks ended January 30, 2016, references herein to “fiscal year 2016” relate to the 52 weeks ended January 28, 2017, and references herein to “fiscal year 2017” relate to the 53 weeks ended February 3, 2018.

As used in this prospectus, unless the context otherwise requires, references to:

 

   

“ABL Facility” means our $1,000.0 million senior secured asset based revolving credit facility and term loan;

 

   

“the Company,” “BJ’s,” “we,” “us” and “our” mean BJ’s Wholesale Club Holdings, Inc. and, unless the context otherwise requires, its consolidated subsidiaries;

 

   

“GAAP” means U.S. generally accepted accounting principles;

 

   

“First Lien Facility” means our $1,925.0 million senior secured first lien term loan facility entered into on February 3, 2017;

 

   

“Prior ABL Facility” means our $1,000.0 million senior secured asset based revolving credit facility and term loan prior to its amendment on February 3, 2017;

 

   

“Prior First Lien Facility” means our $1,500.0 million senior secured first lien term loan facility that was refinanced by the First Lien Facility on February 3, 2017;

 

   

“Prior Second Lien Facility” means our $600.0 million senior secured second lien term loan facility that was refinanced by the Second Lien Facility on February 3, 2017;

 

   

“Prior Term Loan Facilities” means our Prior First Lien Facility and our Prior Second Lien Facility;

 

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“Second Lien Facility” means our $625.0 million senior secured second lien term loan facility entered into on February 3, 2017;

 

   

“selling stockholders” means the entities named herein (other than the Company) that intend to sell shares in this offering;

 

   

“Sponsors” means investment funds affiliated with or advised by CVC Capital Partners (“CVC”) and Leonard Green & Partners, L.P. (“Leonard Green”), which collectively own a controlling interest in us;

 

   

“Stockholders Agreement” means the stockholders agreement dated September 30, 2011, among CVC Beacon LP (f/k/a CVC Beacon LLC), Green Equity Investors V, L.P., Green Equity Investors Side V, L.P., Beacon Coinvest LLC and the Company that was executed in connection with the acquisition of the Company by the Sponsors; and

 

   

“Term Loan Facilities” means our First Lien Facility and our Second Lien Facility, together.

CERTAIN TRADEMARKS

This prospectus includes trademarks and service marks owned by us, including BJ’s Wholesale Club®, BJ’s®, Wellsley Farms®, Berkley Jensen®, My BJ’s Perks®, BJ’s Easy Renewal®, BJ’s Gas®, BJ’s Perks Elite®, BJ’s Perks Plus®, Inner Circle® and BJ’s Perks Rewards®. This prospectus also contains trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this prospectus may appear without the ®, ™ or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

NON-GAAP FINANCIAL MEASURES

Certain financial measures presented in this prospectus, such as Adjusted EBITDA and free cash flow, are not recognized under GAAP. We define “Adjusted EBITDA” as income from continuing operations before interest expense, net, provision (benefit) for income taxes and depreciation and amortization, adjusted for the impact of certain other items, including compensatory payments related to options, stock-based compensation expense, pre-opening expenses, management fees, noncash rent, strategic consulting expenses, severance, asset retirement obligations and other adjustments. We define “free cash flow” as net cash provided by operating activities net of capital expenditure.

Adjusted EBITDA

We present Adjusted EBITDA, which is not a recognized financial measure under GAAP, because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA following this offering, and any such modification may be material. In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.

 

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Management believes Adjusted EBITDA is helpful in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also use Adjusted EBITDA in connection with establishing discretionary annual incentive compensation; to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies; to make budgeting decisions; and to compare our performance against that of other peer companies using similar measures.

Adjusted EBITDA has its limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:

 

   

Adjusted EBITDA does not reflect every expenditure, future requirements for capital expenditures or contractual commitments;

 

   

Adjusted EBITDA does not reflect changes in our working capital needs;

 

   

Adjusted EBITDA does not reflect the significant interest expense, or the amounts necessary to service interest or principal payments, on our outstanding debt;

 

   

Adjusted EBITDA does not reflect income tax expense, and because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and ability to operate;

 

   

Adjusted EBITDA does not reflect expenditures associated with new club openings;

 

   

although depreciation and amortization are eliminated in the calculation of Adjusted EBITDA, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any costs of such replacements;

 

   

non-cash compensation is and will remain a key element of our overall equity based compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; and

 

   

Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations.

We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information. See “Summary Consolidated Financial and Operating Data” for a reconciliation of income from continuing operations to Adjusted EBITDA.

Free Cash Flow

We present free cash flow because we use it to report to our board of directors and we believe it assists investors and analysts in evaluating our liquidity. Free cash flow should not be considered as an alternative to cash flows from operations as a liquidity measure. Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures. For example, free cash flow does not incorporate payments made on capital lease obligations or cash payments for business acquisitions. Free cash flow is not a measurement of financial performance under GAAP, may have limitations as an analytical tool and should not be considered in isolation from, or as an alternative to, net income, cash flow provided by operations or any other measure of performance derived in accordance with GAAP. Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows. See “Summary Consolidated Financial and Operating Data” for a reconciliation of net cash from operating activities to free cash flow.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all the information that may be important to you. You should read the entire prospectus carefully, especially “Risk Factors” beginning on page 18 of this prospectus, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 59 of this prospectus, and our consolidated financial statements and related notes included elsewhere in this prospectus, before deciding to invest in our common stock.

Our Company

BJ’s Wholesale Club is a leading warehouse club operator on the East Coast of the United States. We deliver significant value to our members, consistently offering 25% or more savings on a representative basket of manufacturer-branded groceries compared to traditional supermarket competitors. We provide a curated assortment focused on perishable products, continuously refreshed general merchandise, gas and other ancillary services to deliver a differentiated shopping experience that is further enhanced by our omnichannel capabilities.

Over the last two years, we have hired Chris Baldwin as President and Chief Executive Officer and have made multiple senior management hires and changes, adding consumer packaged goods, digital and consulting experience to our leadership team. This new leadership team has implemented significant cultural and operational changes to our business, including transforming how we use data to improve member experience, instilling a culture of cost discipline, adopting a more proactive approach to growing our membership base and building an omnichannel offering oriented towards making shopping at BJ’s more convenient. These changes have delivered results rapidly, evidenced by positive and accelerating comparable club sales over the last two quarters and net income growth of over 109% and Adjusted EBITDA growth of 31% in aggregate over the last two fiscal years. We believe that these changes will continue to impact sales, profit margins and free cash flow performance favorably in the future. In fiscal year 2017, we generated total revenues, net income and Adjusted EBITDA of $12.8 billion, $50 million and $534 million, respectively.

Since pioneering the warehouse club model in New England in 1984, we have grown our footprint to 215 large-format, high volume warehouse clubs spanning 16 states. In our core New England markets, which have high population density and generate a disproportionate part of U.S. GDP, we operate almost three times the number of clubs compared to the next largest warehouse club competitor. In addition to shopping in our clubs, members are able to shop when and how they want through our website, bjs.com; our highly-rated mobile app and our integrated Instacart same-day delivery offering.

Our goal is to offer our members significant value and a meaningful return, in savings, on their annual membership fee. We have more than five million members paying annual fees to gain access to savings on groceries, consumables, general merchandise, gas and ancillary services. The annual membership fee for our base Inner Circle® Membership is $55 per year, and our BJ’s Perks Rewards® Membership, which offers additional value-enhancing features, costs $110 annually. We believe that members can save over ten times their $55 Inner Circle membership fee versus what they would have paid at traditional supermarket competitors when they spend $2,500 or more per year at BJ’s on manufacturer-branded groceries. In addition to providing significant savings on a representative basket of manufacturer-branded groceries, we accept all manufacturer coupons and rebates and also carry our own exclusive brands that enable members to save on price without compromising on quality. Our two private label brands, Wellsley Farms® and Berkley Jensen®, represent over $2 billion in sales, and are the largest brands we sell. Our customers recognize the relevance of our value proposition across economic environments, as demonstrated by over 20 consecutive years of membership fee income growth. Our membership fee income was $259 million for fiscal year 2017, and represents approximately half of our Adjusted EBITDA.



 

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LOGO

Our approach to merchandising positions us between other warehouse clubs and grocery retailers. We sell a wide range of products, combining the bulk savings of a warehouse club with a broader assortment and selectively smaller pack sizes in perishable and grocery products than our club competitors. We have more stock keeping units (“SKUs”) than other warehouse retailers (around 7,200 versus around 4,500), which allows us to offer a greater selection while still enabling us to manage our inventory more efficiently than supermarket and mass-market competitors (which can carry 40,000 or upwards of 100,000 SKUs, respectively). We also offer a “treasure-hunt” experience with exciting finds in apparel, electronics, home goods and seasonal merchandise, as well as ancillary services such as tire installation, vision care, travel and insurance at attractive values. Our 134 gas stations provide members with additional savings and convenience, which we believe drive more trips and reinforce our strong value proposition. We believe our continuously refreshed assortment, expanded perishable offerings and differentiated value proposition drive strong member loyalty and our warehouse club industry-leading average shopping frequency of 22 trips to BJ’s annually. Our membership renewal rate for members with two or more years of tenure, a key indicator of member satisfaction and loyalty, was at an all-time high of 86% during fiscal year 2017.

Our target members care about value, quality and convenience and shop at warehouse clubs for their family needs. Our target members are a price sensitive demographic with large household sizes, representing nine million households in our trade areas. While we believe that we appeal to households with a wide range of incomes, we target households with an average annual income of approximately $75,000. We believe this group represents a historically underserved demographic in our core markets. Our membership offerings include our core Inner Circle® Membership and three enhanced levels of membership and affiliation through our BJ’s Perks Rewards® Membership and our My BJ’s Perks® Mastercard® offerings, which offer benefits such as cash back on purchases and discounted gasoline prices. These value-added membership tiers and affiliations further consolidate our members’ spend and improve customer loyalty and renewal rates, which ultimately increase the lifetime value of the member. The membership model allows us to capture more comprehensive data about our members, which we proactively use to optimize price, promotion and assortment to evolve with changing consumer demands.

Recent Strategic Initiatives

Led by Chris Baldwin, who became our CEO in February 2016 and Chairman in 2018, we have implemented significant changes to corporate culture and business operations over the last two fiscal years, modernizing the tools we use to compete in a rapidly evolving retail environment, including:

 

   

Next Generation Leadership Team and Reinvigorated Culture: Our leadership team is led by Chris Baldwin, who we hired as President and Chief Operating Officer in 2015 and became our Chief Executive Officer in 2016 and Chairman in 2018, and Bob Eddy, who has been our Executive Vice President and Chief Financial Officer since January 2011 and took on the expanded responsibility of



 

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Chief Financial and Administrative Officer in February 2018. Our leadership team comprises management talent from diverse disciplines and backgrounds across all aspects of our business. We have newly hired, promoted or added responsibility for all 12 of our executive officers. The diverse backgrounds of our management team reflect experience in retail, consumer packaged goods (CPG), digital, audit and consulting, at leading companies such as Hess, Procter & Gamble, Nabisco, Bain & Company, PricewaterhouseCoopers, eBay and Dick’s, among others. The diversity of backgrounds supports various aspects of strategic initiatives across our company. For example, our leadership team’s experience in the CPG industry provides well-informed insight that helps position BJ’s as a key partner with suppliers and drive value for our customers while growing volume and margins. Our new leadership team has instilled a more proactive culture and approach to many facets of corporate decision making, which has rapidly delivered results.

 

   

Relentless Focus on Our Consumer: Our membership program provides us access to comprehensive data on consumer behavior and purchasing patterns. To capitalize on these data, we have used rich, data-driven analytics to drive improved decision-making in all aspects of our business, including procurement, merchandising, product positioning, club openings, marketing and promotion campaigns, among others. As a result, we have been able to implement a range of assortment initiatives such as supplier renegotiations, competitive contract options, SKU optimization and brand switching. We are also using our data to better target member acquisition and retention efforts for existing and new clubs. While we have made substantial progress, we believe there are opportunities to further develop our data analytics capabilities.

 

   

Enterprise-Wide Cost Discipline and Improved Profitability: We have created a culture of cost discipline across both member- and non-member facing functions. In 2015, we launched our category profitability improvement (“CPI”) program to address our procurement spending, and during fiscal years 2016 and 2017 we negotiated over $260 million in expected annual procurement savings. We drove these savings by improving dialogue with our national brand and private label suppliers to educate them on the value proposition we offer to our members and by implementing competitive bidding throughout our buying process. In partnership with our suppliers, we are now using our data to maximize marketing campaigns, creating a symbiotic relationship that provides benefits to both parties. We further lowered our cost of goods sold by recalibrating and streamlining our portfolio of private label brands from 13 to two focused brands and by emphasizing our value proposition versus national brand equivalents, which increased our private label penetration from 10% of total merchandise sales in fiscal year 2012 to 19% in fiscal year 2017. We have also focused on staying disciplined in our overhead cost structure and have been able to hold addressable SG&A expenses relatively flat, allowing topline growth and gross profit expansion to translate into Adjusted EBITDA growth. We believe these cost savings will allow us to drive our next wave of growth through thoughtful investments in our business.

 

   

Technology-Driven Improvements to Customer Experience and Convenience: We have invested in omnichannel initiatives to boost convenience for our members. Powered by substantial back-end IT investments, we now offer, alongside in-store shopping, the enhanced convenience of an omnichannel shopping experience. We have launched mobile apps with Add-to-Card Coupons and Express Scan capabilities, have added Shop BJs.com — Pick Up in–Club capability, and recently rolled out same-day delivery of certain grocery items with no mark-up to item pricing which is available at most of our clubs, providing our members convenient ways to shop when and how they feel most comfortable.



 

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These strategic initiatives have delivered results rapidly, as evidenced by several key operating metrics:

 

LOGO

BJ’s Wholesale Club is a leading player in the large and growing U.S. warehouse club channel, a retail channel characterized by highly discounted prices and a curated selection of SKUs and services offered in a warehouse format. According to the Warehouse Club Intelligence Center, our channel generated $167 billion of sales in 2017 and has grown at a compound annual growth rate (CAGR) of 4.5% since 2007. This pace of growth exceeded that of the grocery and GAFO (General Merchandise, Apparel and Accessories, Furniture and Other Sales) retail channels, which experienced CAGRs of 2.7% and 1.1%, respectively, during this period, according to the U.S. Census.

 

LOGO

Source: Warehouse Club Intelligence Center-2017 Warehouse Club Guide

The warehouse club model maintains several structural advantages over other retail formats that enable operators to provide significant value and a differentiated experience for the customer while also achieving an attractive return on invested capital. These advantages include:

 

   

membership fee subscriptions that provide stable cash flows while driving consolidation of customer spend and encouraging “buy more, save more” behavior;

 

   

comprehensive customer purchasing data, enabling operators to analyze customer spend more effectively and meet consumer demand;

 

   

low operating costs per square foot due to high inventory turnover, low club labor requirements and efficient distribution networks; and

 

   

limited and bulk-sized SKUs, and a “no-frills” warehouse environment, which deliver a clear value proposition to consumers who are increasingly focusing on savings and price transparency.



 

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According to the Warehouse Club Intelligence Center, the U.S. warehouse club channel is projected to grow at a five year CAGR of 4.0% from 2017 through 2022. Our channel is well-positioned to continue taking market share from a variety of other retail channels, including supermarkets, mass, convenience, department, specialty and variety stores. In recent years, fundamental changes in consumer shopping behavior have contributed to significant disruptions in the retail industry. Among these key changes is a growing consumer focus on value, driven by multiple factors including the growth of ecommerce, an increase in price transparency and demographic trends such as household-forming millennials and retiring baby boomers. Together, these factors favor retailers that offer strong value propositions, including warehouse clubs, where value is a fundamental part of the consumer perception. Additional tailwinds for the channel include recent retail store closures and bankruptcies that, we believe, provide an opportunity to take incremental market share. Warehouse clubs are also well-positioned against e-commerce retailers due to competitive pricing, an emphasis on fresh food, differentiated service offerings including gasoline, and the “treasure hunt” experience of the warehouse club trip. We believe that warehouse club customers view online retail and club visits as complementary for their shopping needs, with club visits providing great value in essential needs and online retail filling in for one-off purchases not available at warehouse clubs.

Our Competitive Strengths

 

   

Differentiated Shopping Experience: We believe our business model enables us to provide significant value to our members versus non-warehouse club competitors. We define providing value in multiple ways. First, BJ’s consistently offers prices that are 25% lower on a representative basket of manufacturer-branded groceries compared to traditional supermarket competitors. Second, we offer a continuously refreshed assortment of on-trend general merchandise, competitively-priced gas and a variety of ancillary services that our non-warehouse club competitors generally do not provide. We believe that members can save over ten times their $55 Inner Circle membership fee compared to what they would have paid at traditional supermarket competitors when they spend $2,500 or more per year at BJ’s on manufacturer-branded groceries. Our clubs also carry 950 fresh food SKUs in selectively smaller pack sizes, whereas other warehouse club competitors offer significantly fewer SKUs in predominantly larger pack sizes. Together, we believe our significant value proposition and broader offering drive increased customer loyalty and higher trip frequency, positioning us to compete more effectively for weekly shopping market share.

 

•  Well-Positioned Footprint and Flexible New Club Model: We are a leading warehouse club operator on the East Coast of the United States, where our 215 clubs and 134 gas stations are well-positioned in some of the most attractive markets in the United States. In our core New England markets, we operate almost three times the number of clubs when compared to the next largest warehouse club competitor. Nearly all of our clubs generate positive club-level EBITDA. Many of our clubs are located in densely populated, high traffic locations that are difficult to replicate due to expensive and limited real estate. In 2016, the markets in which we operate delivered GDP contribution, population growth and

  

LOGO

household incomes above the respective U.S. averages. Our club sizes range from 63,000 sq. ft. to 150,000 sq. ft., with newer clubs primarily made up of our 85,000 sq. ft. model. We have also recently implemented a more data-driven model for new club site selection and member acquisition. This model, combined with our wide range of warehouse club sizes, allows for a flexible real estate



 

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expansion strategy that can be customized for infill or adjacent markets. We operate or contract for six distribution centers that serve our existing club base and have capacity to support up to 100 additional clubs along the East Coast of the United States.

 

   

Large and Loyal Membership Base: Our business model creates a virtuous cycle of member spending, savings and loyalty, which drives our large and loyal membership base. We have over five million paid memberships, made up of more than 10 million total members, as of fiscal year 2017. Due to our wider assortment and their more frequent visits, our members provide us with more comprehensive purchasing data compared to other warehouse club operators. This member data allows us to better execute supplier renegotiations, competitive contract options, SKU optimization and brand switching. Our target member represents the largest segment of warehouse club shoppers in BJ’s trade areas with 9 million households and $7 billion of annual club channel grocery spend. The strong loyalty of our membership base is reflected in our all-time high renewal rate of 86% during fiscal year 2017. Additionally, as our membership base is price sensitive, our value proposition resonates even more during economic downturns, as evidenced by our stronger comparable club sales results versus other warehouse clubs during these historical periods.

 

   

Attractive Strong Free Cash Flow across Economic Cycles: Our membership model, low operating cost structure and disciplined capital spending allow us to generate predictable, strong free cash flow. Membership fees provide us with a stable stream of high margin revenue that is independent of merchandise sales, accounting for approximately half of Adjusted EBITDA in 2017, and positions us advantageously versus non-warehouse competitors. This income stream has grown every year over the past two decades. Additionally, our low club labor requirements and efficient distribution network result in low operating costs per square foot. We maintain a disciplined working capital strategy focused on sustaining low receivable levels and inventory turnover that matches or exceeds payment terms. Our clubs typically require a limited amount of maintenance capital expenditures to operate. Our business model enabled cash flow from operating activities to grow by 32%, from $159 million to $210 million, and free cash flow to grow by 55%, from $47 million to $73 million, from fiscal 2015 to fiscal 2017. Our strong and steady free cash flow allows us to invest growth-focused capital in new clubs and initiatives, which we believe will generate positive returns on investment.

 

   

Experienced Management Team with a Proven Track Record: Our management team is led by Chairman, President and Chief Executive Officer Chris Baldwin, who we appointed Chief Executive Officer in February 2016 and Chairman in 2018. Chris has over 30 years of experience in retail and consumer products and, given his significant experience in the consumer products industry, brings a differentiated, “consumer-oriented” approach to retail. Chris also serves as the Chairman of the National Retail Federation, where he gains valuable insight into the broader retail industry. Chris collaborates closely with Bob Eddy, our Executive Vice President and Chief Financial and Administrative Officer. Bob is among the longest serving members of the BJ’s executive team, joining BJ’s in 2007, becoming Executive Vice President and Chief Financial Officer in 2011, and taking on the expanded responsibility of Chief Financial and Administrative Officer in February 2018. We also recently bolstered our team by appointing Lee Delaney as Chief Growth Officer in May 2016. Lee took on the expanded responsibility of Chief Commercial Officer in May 2018. Prior to joining BJ’s, Lee was a Partner in the Consumer Products practice at Bain & Company, where he gained a deep understanding of retailer-supplier dynamics. Other members of the BJ’s management team include recent outside hires and internal promotions. Our current management team has driven BJ’s recent performance momentum and is implementing a culture of operational discipline with processes and procedures focused on long-term, profitable growth.



 

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Our Growth Strategies

We believe we can drive sustainable sales and profit growth by executing on the following strategies:

 

   

Grow Our Member Base: We benefit from access to comprehensive data on our members’ shopping behaviors that, we believe, is instrumental in implementing targeted, data-driven marketing and merchandising initiatives that improve the in-club shopping experience, grow wallet share and increase new member acquisition. We have invested significantly in augmenting our member acquisition and retention strategies, including investments in member segmentation and marketing, with the aim of driving a shift towards greater member engagement and membership renewals. For example, by recently upgrading our prospecting strategy from rigid, analog, semiannual mass campaigns to personalized, digital, “always on” campaigns, we believe we can continue to grow our member base.

We have been successful in driving members into higher tiers of membership and affiliation, growing by 316% the number of members holding one of our My BJ’s Perks Mastercard offerings from fiscal year 2014 through fiscal year 2017. We are continually investing in our membership program to increase new member acquisition rates and drive renewals through value added membership and affiliation tiers. We believe we have the potential to significantly increase the penetration levels of our value-added membership and affiliation tiers. We are developing models to predict our members’ likelihood to renew so that we can proactively market to at-risk members, highlighting the value of their membership while encouraging breadth of shop and trip frequency with targeted promotions. We recently launched checkout lane prompting of premium membership awards and are piloting checkout lane credit card approvals to expedite the application process.

Our ongoing efforts also include increasing our use of social media, optimizing direct mail, converting promotional offer members into paid memberships, engaging young families and facilitating ease of membership renewals. We grew our BJ’s Easy Renewal® penetration from 18% in fiscal year 2015 to 37% in fiscal year 2017. We believe we can grow our Easy Renewal penetration further. We expect to leverage our membership data and deep analytics to dynamically optimize offers, providing a platform that, we believe, enables us to more effectively engage our members, transition them into value added membership and affiliation tiers and deliver greater share of wallet.

 

   

Relentlessly Focus on the Consumer to Drive Sales: We intend to continue our efforts to optimize our product assortment and positioning and plan to expand our current product offerings into new and adjacent categories, including a broader apparel assortment, enhanced perishable offerings, tools and new family-oriented categories. We also have ongoing initiatives to enhance our private label offerings, deliver novel in-club experiences by continuously refreshing our assortment, improve workforce training and management through scheduling algorithms and provide services that enhance the overall member experience. We intend to continue initiatives aimed at growing comparable club sales through advancing member engagement, tailoring promotional offerings, improving the convenience of accessing our offering and allowing our members to complete their shopping in less time. We utilize social media, including via personalized outreach, to enhance our understanding both of member engagement and of the implications for shopping at our clubs and online. We are leveraging our learning to deliver greater value to our members and drive improved engagement. We also plan to expand our gas penetration and have identified opportunities to expand on-site and near-site gas stations at existing clubs and optimize pricing and loyalty programs. We focus our efforts on supporting the ease and consistency of each member’s experience, increasing trips to our clubs and enhancing the appeal of our clubs as a shopping destination.

 

   

Improve Trip Convenience and Differentiate Omnichannel Offering: During the Sponsors’ tenure as our owners, we have invested over $230 million in IT initiatives, including the implementation of SAP, which we believe is a key enabler in our ability to collect and utilize our data and further build our



 

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omnichannel capabilities. We are currently expanding several technology initiatives to enhance our omnichannel capabilities over the next two years. These initiatives include:

 

   

mobile apps with “Add-to-Card” (which allows users to add digital coupons to their membership card) and “Express Scan” functionalities (which allows members to use smart phones or hand-held devices to scan bar codes as they shop the club to facilitate quick checkout);

 

   

“Shop BJs.com—Pick Up in-Club” (which allows members to buy products online and pick-up in club within two hours); and

 

   

a same-day delivery offering, which allows members to shop our clubs from the convenience of BJs.com, and have orders delivered in as quickly as one hour for a nominal delivery fee.

We are also aggressively advancing our digital capabilities to enhance personal outreach to our members. We have already added experienced and accomplished omnichannel and IT leadership talent to our team to facilitate these efforts and will continue to invest in our omnichannel capabilities and data analytics. We believe these initiatives will result in a more seamless, convenient shopping experience for our members and will drive financial results.

 

   

Expand Our Strategic Footprint: We believe the six existing Company-operated and contracted distribution centers that serve our clubs are sufficient to support the opening of about 100 additional clubs along the East Coast of the United States, and we plan to open a total of 15-20 new clubs over the next five years. We will focus this expansion on infill and markets adjacent to our existing locations. We also expect to benefit from recent club and department store closures in several of our markets and adjacent markets. In fiscal years 2016 and 2017, we implemented a data-driven approach to club openings with results in our latest pilot clubs that included new membership at club opening that was 240% greater than our average new club opening in fiscal year 2015.

 

   

Continue to Enhance Profitability: Over the last three years, our management team led a number of operational improvements at BJ’s and delivered significant savings. For example, under our CPI program, which we launched in fiscal year 2015 to address procurement spend across 70 product categories, we implemented initiatives such as supplier renegotiations, SKU optimization and brand switching. During fiscal years 2016 and 2017, we negotiated over $260 million in expected annual procurement savings, with over $200 million of those savings impacting our cost of sales during those fiscal years and another $60 million scheduled to impact our cost of sales during fiscal year 2018. We are continuing to review additional product categories through our CPI program, which we believe can deliver significant incremental procurement savings.

In January 2018, we increased our membership fees by 10%, consistent with our historical practice of raising membership fees every five years. Additionally, we have been focused on controlling our Selling, General and Administrative spend, and we will continue to invest in technologies to drive efficiencies in the club.

We believe we have opportunities to drive further productivity savings in the near- to medium-term through additional procurement savings, greater private label penetration and continued cost discipline. We believe our Adjusted EBITDA and free cash flow will improve further as we capture additional benefits from initiatives both already undertaken and to come.

Summary Risk Factors

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or that may adversely affect our business, financial condition, results of operations, cash flows and



 

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prospects. You should carefully consider the risks discussed in the section entitled “Risk Factors,” including the following risks, before investing in our common stock:

 

   

our business being affected by issues that affect consumer spending;

 

   

our business depending on having a large and loyal membership, and how any harm to our relationship with our members could have a material adverse effect on our business, net sales and results of operations;

 

   

our business plan and operating results depending on our ability to procure the merchandise we sell at the best possible prices;

 

   

competition adversely affecting our profitability;

 

   

our dependence on vendors to supply us with quality merchandise at the right time and at the right price;

 

   

disruptions in our merchandise distribution, including disruption through a third-party perishable consolidator, adversely affecting sales and member satisfaction;

 

   

our failure to identify timely or respond effectively to consumer trends, which could negatively affect our relationship with our members, the demand for our products and services and our market share;

 

   

our being subject to payment-related risks including risks to the security of payment and information;

 

   

changes in laws related to the Supplemental Nutrition Assistance Program (“SNAP”), to the governmental administration of SNAP or to SNAP’s electronic benefit transfer (“EBT”) systems adversely impacting our results of operations;

 

   

our success depending on our ability to attract and retain a qualified management team and other team members while controlling our labor costs;

 

   

union attempts to organize our team members disrupting our business;

 

   

our substantial leverage adversely affecting our ability to raise additional capital to fund our operations, limiting our ability to react to changes in the economy or our industry, or exposing us to interest rate risk;

 

   

there will be immediate and substantial dilution in the pro forma net tangible book value of the common stock purchased in this offering; and

 

   

our status as a “controlled company,” meaning the Sponsors will control us and have, among other things, the ability to approve or disapprove substantially all transactions and other matters requiring approval by shareholders, including the election of directors.

Our business also faces a number of other challenges and risks discussed throughout this prospectus. You should read the entire prospectus carefully, especially “Risk Factors” beginning on page 18 of this prospectus, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 59 of this prospectus, and our consolidated financial statements and related notes included elsewhere in this prospectus, before deciding to invest in our common stock.

Our Sponsors

Following the consummation of this offering, the Sponsors will continue to control a majority of the voting power of our outstanding common stock. Accordingly, the Sponsors will control us and have, among other things, the ability to approve or disapprove substantially all transactions and other matters requiring approval by shareholders, including the election of directors. You should consider that the interests of the Sponsors may



 

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differ from your interests in material respects and they may vote in a way with which you disagree and that may be adverse to your interests. See “Risk Factors—Because the Sponsors control a significant percentage of our common stock, they may control all major corporate decisions and their interests may conflict with your interests as an owner of our common stock and those of the Company” for more information. In connection with the acquisition of the Company by the Sponsors, the Company and the Sponsors entered into the Stockholders Agreement. At the consummation of this offering, the provisions of the Stockholders Agreement will terminate. However, the Stockholders Agreement contains certain registration rights provisions that survive the consummation of this offering. See “Certain Relationships and Related Party Transactions—Stockholders Agreement” for more information.

2017 Dividend

On February 3, 2017, we made (i) a $735.5 million dividend payment to our stockholders, including funds affiliated with the Sponsors, (ii) a $67.5 million payment to certain holders of our outstanding stock options and (iii) a $5.4 million payment to certain of our employees under retention bonus arrangements. We made these payments in part to return to the Sponsors a portion of their equity investment in us. To fund these payments, we amended the ABL Facility and entered into the First Lien Facility and the Second Lien Facility. We intend to use the proceeds of this offering, together with cash and borrowings under the ABL Facility, to repay approximately $         million of indebtedness plus $         million of accrued and unpaid interest and prepayment premium under the Second Lien Facility. To the extent any proceeds from this offering remain after the repayment in full of our Second Lien Facility, including any accrued and unpaid interest and prepayment premium thereon, we intend to use such remaining proceeds for general corporate purposes. See “Use of Proceeds” for more information.

Our Corporate Information

BJ’s Wholesale Club Holdings, Inc. is the issuer in this offering and changed its name from Beacon Holding Inc. on February 23, 2018. Our principal operating subsidiary is BJ’s Wholesale Club, Inc., which was previously an independent publicly traded corporation until its acquisition on September 30, 2011, by a subsidiary of Beacon Holding Inc., a company incorporated on June 24, 2011 by our Sponsors for the purpose of the acquisition. Upon consummation of this offering, our Sponsors will collectively own approximately     % of our shares of common stock. See “Principal and Selling Stockholders.”

Our principal executive office is located at 25 Research Dr., Westborough, MA 01581 and our telephone number at that address is (774) 512-7400. We maintain a website on the Internet at www.bjs.com. We have included our website address in this prospectus as an inactive textual reference only. The information contained on, or that can be accessed through, our website is not a part of, and should not be considered as being incorporated by reference into, this prospectus.



 

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The Offering

 

Common stock offered by us

            shares.

 

Common stock offered by the selling stockholders

Up to                  shares pursuant to the underwriters’ option to purchase additional shares.

 

Common stock to be outstanding after this offering

            shares.

 

Option to purchase additional shares

The underwriters have an option to purchase up to an aggregate of                 additional shares of common stock from the selling stockholders. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $        million, assuming an initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus). We intend to use the net proceeds from this offering, together with cash and borrowings under the ABL Facility, to repay approximately $        million of indebtedness plus $        million of accrued and unpaid interest and prepayment premium under the Second Lien Facility. To the extent any proceeds from this offering remain after the repayment in full of our Second Lien Facility, including any accrued and unpaid interest and prepayment premium thereon, we intend to use such remaining proceeds for general corporate purposes. See “Use of Proceeds.” We will not receive any of the proceeds from any sale of shares of common stock by the selling stockholders.

 

 

Reserved Share Program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares offered by this prospectus for sale to some of our directors, officers, employees, distributors, dealers, business associates and related persons. If these persons purchase reserved shares it will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

 

Dividend policy

We do not expect to pay any dividends on our common stock for the foreseeable future. See “Dividend Policy.”

 

NYSE symbol

“BJ.”

 

Controlled company

Following this offering, we will be a “controlled company” within the meaning of the corporate governance rules of the NYSE. After the



 

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consummation of this offering, the Sponsors will control us and have, among other things, the ability to approve or disapprove substantially all transactions and other matters requiring approval by shareholders, including the election of directors.

 

Risk factors

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 18 of this prospectus for a discussion of factors you should carefully consider before investing in our common stock.

The number of shares of common stock to be outstanding after this offering excludes:

 

   

                 shares of common stock issuable upon the exercise of options outstanding under our equity incentive plans as of February 3, 2018 at a weighted average exercise price of $        per share;

 

   

                 additional shares of common stock reserved for future issuance under our new omnibus incentive plan; and

 

   

                 shares reserved for issuance under our new employee stock purchase plan.

Unless otherwise indicated, all information contained in this prospectus:

 

   

assumes the reclassification of our contingently redeemable common stock to stockholders’ equity resulting from the automatic termination of non-Sponsor stockholders’ put rights upon the consummation of this offering;

 

   

assumes an initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus;

 

   

assumes the underwriters’ option to purchase additional shares from the selling stockholders will not be exercised;

 

   

gives effect to a                 -for-                 stock split effected on                , 2018; and

 

   

gives effect to our amended and restated certificate of incorporation and our amended and restated by-laws.



 

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Summary Consolidated Financial and Operating Data

We present below our summary consolidated statements of operations and of cash flow data for the fiscal years ended January 30, 2016, January 28, 2017 and February 3, 2018, and our consolidated balance sheet data as of February 3, 2018. We have derived this information from our audited consolidated financial statements included elsewhere in this prospectus.

The historical results presented below are not necessarily indicative of the results to be expected for any future period. You should read the summary consolidated financial and operating data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

The following tables also set forth certain summary unaudited pro forma consolidated financial information for the fiscal year ended February 3, 2018 giving effect to (i) the reclassification of our contingently redeemable common stock to stockholders’ equity resulting from the automatic termination of the non-Sponsor stockholders’ put rights upon the consummation of this offering, (ii) our issuance and sale of              shares of our common stock in this offering at an assumed initial public offering price of $     per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and estimated offering expenses payable by us, (iii) the application of the net proceeds from our initial public offering together with cash and borrowings under the ABL Facility, to repay approximately $     million of indebtedness plus $     million of accrued and unpaid interest and prepayment premium under the Second Lien Facility and (iv) the termination of the annual fee for our management services agreement with our Sponsors upon the consummation of this offering as set forth under the section “Unaudited Pro Forma Consolidated Financial Statements.” The summary pro forma consolidated financial information is presented for informational purposes only and does not purport to represent what our financial condition or results of operations actually would have been had the referenced events occurred on the dates indicated or to project our financial condition or results of operations as of any future date or for any future period. For additional information, see “Unaudited Pro Forma Consolidated Financial Statements.”

 

     Fiscal Year Ended  
     January 30,
2016
    January 28,
2017
    February 3,
2018
 
     (dollars in thousands)  

Statement of Operations Data:

      

Net sales

   $ 12,220,215     $ 12,095,302     $ 12,495,995  

Membership fee income

     247,338       255,235       258,594  
  

 

 

   

 

 

   

 

 

 

Total revenues

     12,467,553       12,350,537       12,754,589  

Cost of sales

     10,476,519       10,223,017       10,513,492  

Selling, general and administrative expenses

     1,797,780       1,908,752       2,017,821  

Preopening expenses

     6,458       2,749       3,004  
  

 

 

   

 

 

   

 

 

 

Operating income

     186,796       216,019       220,272  

Interest expense, net

     150,093       143,351       196,724  
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     36,703       72,668       23,548  

Provision (benefit) for income taxes

     12,049       27,968       (28,427
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     24,654       44,700       51,975  

Loss from discontinued operations, net of income taxes

     (550     (476     (1,674
  

 

 

   

 

 

   

 

 

 

Net income

   $ 24,104     $ 44,224     $ 50,301  
  

 

 

   

 

 

   

 

 

 


 

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     Fiscal Year Ended  
     January 30,
2016
     January 28,
2017
     February 3,
2018
 
     (dollars in thousands, except per share data)  

Per Share Data:

        

Income from continuing operations per share attributable to common stockholders — basic(1)

   $ 1.96      $ 3.55      $ 4.12  

Income from continuing operations per share attributable to common stockholders — diluted(1)

   $ 1.91      $ 3.45      $ 3.94  

Weighted average number of common shares outstanding(1):

        

Basic

     12,553        12,595        12,627  

Diluted

     12,892        12,962        13,181  

Pro forma income from continuing operations per share attributable to common stockholders — basic(2)

        

Pro forma income from continuing operations per share attributable to common stockholders — diluted(2)

        

Pro forma weighted average number of common shares outstanding(2):

        

Basic

        

Diluted

        

Cash dividends per share

   $ —        $ —        $ 58.15  

 

     Fiscal Year Ended  
     January 30,
2016
    January 28,
2017
    February 3,
2018
 
     (in thousands)  

Statement of Cash Flow Data:

      

Net cash provided by operating activities(3)

   $ 159,361     $ 297,428     $ 210,085  

Net cash (used in) investing activities

     (112,363     (114,756     (137,466

Net cash (used in) financing activities

     (46,236     (188,118     (69,629
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 762     $ (5,446   $ 2,990  
  

 

 

   

 

 

   

 

 

 

 

     As of February 3, 2018  
     Actual     Pro Forma(4)
(Reclassification
Only)
    Pro Forma(5)  
     (in thousands)  

Balance Sheet Data:

      

Cash and cash equivalents

   $ 34,954     $ 34,954     $               

Merchandise inventories

     1,019,138       1,019,138    

Property and equipment, net

     758,750       758,750    

Net working capital(6)

     51,813       51,813    

Total assets

     3,273,856       3,273,856    

Total debt(7)

     2,748,112       2,748,112    

Contingently redeemable common stock

     10,438       —      

Total stockholders’ deficit

     (1,029,857     (1,019,419  


 

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     Fiscal Year Ended  
     January 30,
2016
     January 28,
2017
     February 3,
2018
 

Other Financial and Operating Data:

        

Total clubs at end of period

     213        214        215  

Comparable club sales(8)

     (4.2)%        (2.6)%        0.8%  

Comparable club sales excluding gasoline sales

     (0.5)%        (2.3)%        (0.9)%  

Adjusted EBITDA (in thousands)(9)

   $ 405,992      $ 457,326      $ 533,507  

Free cash flow (in thousands)(10)

   $ 46,998      $ 182,672      $ 72,619  

Membership renewal rate

     84%        85%        86%  

Capital expenditures (in thousands)

   $ 112,363      $ 114,756      $ 137,466  

 

(1)

See Note 21 to our consolidated financial statements included elsewhere in this prospectus for additional information regarding the calculation of basic and diluted income per share attributable to common stockholders.

(2)

See Note 2 to our unaudited pro forma consolidated financial statements included elsewhere in this prospectus for additional information regarding the calculation of pro forma basic and diluted income from continuing operations per share attributable to common stockholders.

(3)

Includes charges for discontinued operations.

(4)

The pro forma (reclassification only) balance sheet data as of February 3, 2018 gives effect to the reclassification of our contingently redeemable common stock to stockholders’ equity resulting from the automatic termination of non-Sponsor stockholders’ put rights upon the consummation of this offering.

(5)

The pro forma balance sheet data as of February 3, 2018 additionally gives effect to (i) the filing and effectiveness of our amended and restated certificate of incorporation and amended and restated by-laws; (ii) our issuance and sale of shares of our common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus after deducting underwriting discounts and estimated offering expenses payable by us; and (iii) the application of the net proceeds from this offering, together with cash and borrowings under the ABL Facility, to repay in full all obligations under the Second Lien Facility, as described in “Use of Proceeds.” Each $1.00 increase (decrease) in the assumed initial public offering price of $                 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma amount of each of cash and cash equivalents, additional paid-in-capital, total stockholders’ equity and total capitalization by $                 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares sold in this offering, as set forth on the cover page of this prospectus, would increase (decrease) the pro forma amount of each of cash and cash equivalents, additional paid-in-capital, total stockholders’ equity and total capitalization by $                 million, assuming the assumed initial public offering price of $                 per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and estimated offering expenses payable by us.

(6)

Net working capital is defined as total current assets (excluding cash and cash equivalents) less total current liabilities (excluding current portion of long-term debt).

(7)

Total debt includes current and non-current portion of long-term debt, net of discount and debt issuance costs and our obligations under capital leases and financing obligations.

(8)

Represents the change in net sales among all clubs open in both the given period and the prior period. In determining comparable club sales, we include all clubs that had been open for at least 13 months at the beginning of the relevant period and were in operation during all of both periods being compared, including relocated clubs and expansions. If a club is in the process of closing, it is excluded from the determination of comparable club sales. In addition, when applicable, we adjust for the effect of an additional week in a fiscal year or quarter. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding our calculation of comparable club sales.



 

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(9)

The following is a reconciliation of our income from continuing operations to Adjusted EBITDA for the periods presented:

 

     Fiscal Year Ended  
     January 30,
2016
     January 28,
2017
     February 3,
2018
 
     (in thousands)  

Income from continuing operations

   $ 24,654      $ 44,700      $ 51,975  

Interest expense, net

     150,093        143,351        196,724  

Provision (benefit) for income taxes

     12,049        27,968        (28,427

Depreciation and amortization

     177,483        178,325        164,061  

Compensatory payments related to options(a)

     1,497        6,143        77,953  

Stock-based compensation expense(b)

     2,265        11,828        9,102  

Preopening expenses(c)

     6,458        2,749        3,004  

Management fees(d)

     8,139        8,053        8,038  

Noncash rent(e)

     8,976        7,138        5,391  

Strategic consulting(f)

     14,619        26,157        30,316  

Severance(g)

     7,488        2,320        9,065  

Asset retirement obligations(h)

     (7,044      —          —    
        

Other adjustments(i)

     (685      (1,406      6,305  
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 405,992      $ 457,326      $ 533,507  
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA as a percentage of net sales

     3.3%        3.8%        4.3%  
  

 

 

    

 

 

    

 

 

 

 

  (a)

Represents payments to holders of our stock options made pursuant to antidilution provisions in connection with dividends paid to our Sponsors.

  (b)

Represents non-cash stock-based compensation expense.

  (c)

Represents direct incremental costs of opening or relocating a facility that are charged to operations as incurred.

  (d)

Represents management fees paid to our Sponsors (or advisory affiliates thereof) in accordance with our management services agreement, which will terminate on the consummation of this offering. See “Certain Relationships and Related Party Transactions—Management Services Agreement.”

  (e)

Consists of an adjustment to remove the non-cash portion of rent expense, which has been recorded on a straight-line basis in accordance with GAAP.

  (f)

Represents fees paid to external consultants for two strategic initiatives of limited duration.

  (g)

Represents termination costs associated with voluntary and involuntary workforce reductions that occurred in January 2016, incremental severance expense to former executives and voluntary workforce reductions that occurred in February 2018.

  (h)

Represents non-cash gain related to a change in the estimated removal costs of our tanks and other infrastructure at our gasoline stations that has been accounted for as an asset retirement obligation.

  (i)

Other non-cash or discrete items as determined by management, including amortization of a deferred gain from sale lease back transactions in 2013, non-cash accretion expense on asset retirement obligations, obligations associated with our post-retirement medical plan and incremental expense to former executives. Fiscal year 2017 includes corporate related transaction costs.

See “Non-GAAP Financial Measures” for more information on our use of Adjusted EBITDA.



 

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(10)

The following is a reconciliation of our net cash from operating activities to free cash flow for the periods presented:

 

     Fiscal Year Ended  
     January 30,
2016
     January 28,
2017
     February 3,
2018
 
     (in thousands)  

Net cash from operating activities

   $ 159,361      $ 297,428      $ 210,085  

Less: Capital expenditures

     112,363        114,756        137,466  
  

 

 

    

 

 

    

 

 

 

Free cash flow

   $ 46,998      $ 182,672      $ 72,619  
  

 

 

    

 

 

    

 

 

 

See “Non-GAAP Financial Measures” for more information on our use of free cash flow.



 

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RISK FACTORS

You should carefully consider the risks described below, together with all of the other information included in this prospectus, before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks or uncertainties. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Relating to Our Business

Our business may be affected by issues that affect consumer spending.

Our results of operations are affected by the level of consumer spending and, therefore, by changes in the economic factors that impact consumer spending. Certain economic conditions or events, such as a contraction in the financial markets; high rates of inflation or deflation; high unemployment levels; decreases in consumer disposable income; unavailability of consumer credit; higher consumer debt levels; higher tax rates and other changes in tax laws; higher interest rates; higher fuel, energy and other commodity costs; weakness in the housing market; higher insurance and health care costs; and product cost increases resulting from an increase in commodity prices, could reduce consumer spending generally, which could cause our customers to spend less or to shift their spending to our competitors. Reduced consumer spending may result in reduced demand for our items and may also require increased selling and promotional expenses. A reduction or shift in consumer spending could negatively impact our business, results of operations and financial condition.

We depend on having a large and loyal membership, and any harm to our relationship with our members could have a material adverse effect on our business, net sales and results of operations.

We depend on having a large and loyal membership. Our membership fee income is a substantial source of profit for us, contributing approximately half of our Adjusted EBITDA during fiscal year 2017. Further, our net sales are directly affected by the number of our members, the number of BJ’s Perks Rewards members and holders of our BJ’s Mastercard, how frequently our members shop at our clubs and the amount they spend on those trips, which means the loyalty and enthusiasm of our members directly impacts our net sales and operating income. Accordingly, anything that would harm our relationship with our members and lead to lower membership renewal rates or lower spending by members in our clubs could materially adversely affect our net sales, membership fee income and results of operations.

Things that could adversely affect our relationship with our members include:

 

   

our failure to remain competitive in our pricing relative to our competitors;

 

   

our failure to provide the expected quality of merchandise;

 

   

our failure to offer the mix of products that our members want;

 

   

events that harm our reputation or the reputation of our private brands;

 

   

our failure to provide the convenience that our members may expect over time;

 

   

increases to our membership fees; and

 

   

increased competition from stores or clubs that have a more attractive mix of price and quality.

In addition, we constantly need to attract new members to replace our members who fail to renew and to grow our membership base. If we fail to attract new members, our membership fee income and net sales could suffer.

 

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Our business plan and operating results depend on our ability to procure the merchandise we sell at the best possible prices.

Our business plan depends on our ability to procure the merchandise we sell at the best possible prices. Because we price our merchandise aggressively, the difference between the price at which we sell a given item and the cost at which we purchase it is often much smaller than it would be for our non-club competitors. Further, it is often not possible for us to reflect increases in our cost of goods by increasing our prices to members. Accordingly, small changes in the prices at which we purchase our goods can have a substantial impact on our operating profits. In fiscal year 2016, we began an initiative to obtain lower cost of goods on the merchandise we sell. If we fail in our efforts to reduce the prices we pay for goods, our growth could suffer. If the prices we pay for goods increase, our operating profit and results of operations could suffer, and if we are forced to increase our prices to our members, our member loyalty could suffer.

Competition may adversely affect our profitability.

The retail business is highly competitive. We compete primarily against other warehouse club operators and grocery and general merchandise retailers, including supermarkets and supercenters, and gasoline stations. Given the value and bulk purchasing orientation of our customer base, we compete to a lesser extent with internet retailers, hard discounters, department and specialty stores and operators selling a narrow range of merchandise. Some of these competitors, including two major warehouse club operators—Sam’s Club (a division of Wal-Mart Stores, Inc.) and Costco Wholesale Corporation—that operate on a multi-national basis and have significantly greater financial and marketing resources than BJ’s. These retailers and wholesalers compete in a variety of ways, including price, services offered to customers, distribution strategy, merchandise selection and availability, location, convenience, store hours and the attractiveness and ease of use of websites and mobile applications. The evolution of retailing through online and mobile channels has also improved the ability of customers to comparison shop with digital devices, which has enhanced competition. We cannot assure you that we will be able to compete successfully with existing or future competitors. Our inability to respond effectively to competitive factors may have an adverse effect on our profitability as a result of lost market share, lower sales or increased operating costs, among other things.

We depend on vendors to supply us with quality merchandise at the right time and at the right price.

We depend heavily on our ability to purchase merchandise in sufficient quantities at competitive prices. We source our merchandise from a wide variety of domestic and international vendors. Finding qualified vendors who meet our standards and accessing merchandise in a timely and efficient manner are significant challenges, especially with respect to vendors located and merchandise sourced outside the United States. We have no assurances of continued supply, pricing or access to new products, and, in general, any vendor could at any time change the terms upon which it sells to us or may discontinue selling to us. In addition, member demand may lead to insufficient in-stock positions of our merchandise.

Disruptions in our merchandise distribution, including disruption through a third-party perishables consolidator, could adversely affect sales and member satisfaction.

We depend on the orderly operation of our merchandise receiving and distribution process, primarily through our Company-operated and contracted distribution centers. Although we believe that our receiving and distribution process is efficient, unforeseen disruptions in operations due to fires, tornadoes, hurricanes, earthquakes or other catastrophic events, labor issues or other shipping problems (which may include, but are not limited to, strikes, slowdowns or work stoppages at the ports of entry for the merchandise that we import) may result in delays in the delivery of merchandise to our clubs, which could adversely affect sales and the satisfaction of our members.

One third-party distributor currently consolidates a substantial majority of our perishables for shipment to our clubs. While we believe that such a consolidation is in our best interest overall, any disruption in the

 

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operations of this distributor could materially impact our sales and profitability. In addition, a prolonged disruption in the operations of this distributor could require us to seek alternative perishables distribution arrangements, which may not be on attractive terms and could lead to delays in distribution of this merchandise, either of which could have a significant and material adverse effect on our business, results of operations and financial condition.

We may not identify timely or respond effectively to consumer trends, which could negatively affect our relationship with our members, the demand for our products and services and our market share.

It is difficult to predict consistently and successfully the products and services our members will demand over time. Our success depends, in part, on our ability to identify and respond to evolving trends in demographics and member preferences. Failure to identify timely or respond effectively to changing consumer tastes, preferences (including those relating to sustainability of product sources) and spending patterns could lead us to offer our members a mix of products or a level of pricing that they do not find attractive. This could negatively affect our relationship with our members, leading them to reduce their visits to our clubs and the amount they spend and potentially their decision to renew their membership. This would adversely affect the demand for our products and services and our market share. If we are not successful at predicting our sales trends and adjusting accordingly, we may also have excess inventory, which could result in additional markdowns and reduce our operating performance. This could have an adverse effect on margins and operating income.

We are subject to payment-related risks, including risks to the security of payment card information.

We accept payments using an increasing variety of methods, including cash and checks, a variety of credit and debit cards and our co-branded credit cards, as well as Apple Pay®, Masterpass, Google Pay and EBT. Our efficient operation, like that of most retailers, requires the transmission of information permitting cashless payments. As we offer new payment options to our members, we may be subject to additional rules, regulations and compliance requirements, along with higher fraud losses. For certain payment methods, we pay interchange and other related card acceptance fees, along with additional transaction processing fees. We rely on third parties to provide secure and reliable payment transaction processing services, including the processing of credit and debit cards, and our co-branded credit card, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association and network operating rules, including data security rules, certification requirements and rules governing electronic funds transfers, which could change over time. For example, we are subject to Payment Card Industry Data Security Standards (“PCI DSS”), which contain compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. We are also subject to a consent decree entered by the Federal Trade Commission (the “FTC”) in 2005 in connection with a complaint alleging that we had failed to adequately safeguard members’ personal data. Under the consent decree, we are required to maintain a comprehensive information security program that is reasonably designed to protect the security, confidentiality and integrity of personal information collected from or about our members. In addition, if our third party processor systems are breached or compromised, we may be subject to substantial fines, remediation costs, litigation and higher transaction fees and lose our ability to accept credit or debit card payments from our members, and our reputation, business and operating results could also be materially adversely affected.

Our security measures have been breached in the past and may in the future be undermined due to the actions of outside parties, including nation-state sponsored actors, employee error, internal or external malfeasance, or otherwise, and, as a result an unauthorized party may obtain access to our data systems and misappropriate, alter, or destroy business and personal information, including payment card information. Such information may also be placed at risk through our use of outside vendors, which may have data security systems that differ from those that we maintain or are more vulnerable to breach. For example, in March 2018, our travel vendor informed us that the personal data of several hundred of our members had been compromised because of a data breach at Orbitz, which that vendor used as a platform for making online travel bookings. Because the

 

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techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may not immediately produce signs of intrusion, we may be unable to anticipate these techniques, discover or counter them in a timely fashion, or implement adequate preventative measures. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation and harm to our relationship with our members, any of which could have an adverse effect on our business.

Changes in laws related to the Supplemental Nutrition Assistance Program (“SNAP”), to the governmental administration of SNAP or to SNAP’s electronic benefit transfer (“EBT”) systems could adversely impact our results of operations.

Under SNAP, we are currently authorized to accept EBT payments, or food stamps, at our clubs as tender for eligible items, and payments via EBT accounted for approximately 5% of our net sales for fiscal years 2015-2017. Changes in state and federal laws governing the SNAP program, including rules on where and for what EBT cards may be used, could reduce sales at our clubs. For example, in February 2018, the federal government proposed reductions in food stamp program spending and changes in the program’s administration, including the provision of benefits to recipients in the form of government-purchased food items instead of electronic credits and disbursements that can be used to purchase food items (including at our clubs). Any such spending reductions or changes could therefore decrease sales at our clubs and thereby materially and adversely affect our business, financial condition and results of operations.

Our success depends on our ability to attract and retain a qualified management team and other team members while controlling our labor costs.

We are dependent upon a number of key management and other team members. If we were to lose the services of one or more of our key team members, this could have a material adverse effect on our operations. Our continued success also depends upon our ability to attract and retain highly qualified team members to meet our future growth needs, while controlling related labor costs. Our ability to control labor costs is subject to numerous external factors, including healthcare costs and prevailing wage rates, which may be affected by, among other factors, competitive wage pressure, minimum wage laws and general economic conditions. If we experience tight labor markets, either regionally or in general, we may have to increase our wages, which could increase our selling, general and administrative expenses and adversely affect our operating income. We compete with other retail and non-retail businesses for these employees and invest significant resources in training them. There is no assurance that we will be able to attract or retain highly qualified team members to operate our business.

Union attempts to organize our team members could disrupt our business.

In the past, unions have attempted to organize our team members at certain of our clubs and distribution centers. Our management and team members may be required to devote their time to respond to union activities, which could be distracting to our operations. Future union activities, including organizing efforts, slow-downs or work stoppages could negatively impact our business and results of operations. Changes in labor laws or regulations in this area could also adversely impact our business if such changes promote union activity.

We rely extensively on information technology to process transactions, compile results and manage our businesses. Failure or disruption of our primary and back-up systems could adversely affect our businesses.

Given the very high volume of transactions we process each year, it is important that we maintain uninterrupted operation of our business-critical computer systems. Our systems, including our back-up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, catastrophic events such as fires, earthquakes, tornadoes and hurricanes and errors by our employees. If our systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer serious interruptions in our operations

 

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in the interim. Any material interruption in these systems could have a material adverse effect on our business and results of operations. In addition, the cost of securing our systems against failure or attack is considerable, and increases in these costs, particularly in the wake of a breach or failure, could be material.

Our comparable club sales and quarterly operating results may fluctuate significantly.

Our comparable club sales may be adversely affected for many reasons, including new club openings by our competitors and the opening of our own new clubs that may cannibalize existing club sales. Comparable club sales may also be affected by cycling against strong sales in the prior year, by new clubs entering into our comparable club base and by price reductions in response to competition.

Our quarterly operating results may be adversely affected by a number of factors including losses in new clubs, price changes in response to competitors’ prices, increases in operating costs, volatility in gasoline, energy and commodity prices, increasing penetration of sales of our private label brands (Wellsley Farms® and Berkley Jensen®), federal budgetary and tax policy, weather conditions, natural disasters, local economic conditions and the timing of new club openings and related start-up costs.

Changes in our product mix or in our revenues from gasoline sales could negatively impact our revenue and results of operations.

Certain of our key performance indicators, including net sales, operating income and comparable club sales, could be negatively impacted by changes to our product mix or in the price of gasoline. For example, we continue to add private label products to our assortment of product offerings at our clubs, sold under our Wellsley Farms and Berkley Jensen private labels. We generally price these private label products lower than the manufacturer branded products of comparable quality that we also offer. Accordingly, a shift in our sales mix in which we sell more units of our private label products and fewer units of our manufacturer branded products would have an adverse impact on our overall net sales. Also, as we continue to add gas stations to our club base, and increase our sales of gasoline, this could adversely affect our profit margins. Since gasoline generates lower profit margins than the remainder of our business, we could expect to see our overall gross profit margin rates decline as sales of gasoline increase. In addition, gasoline prices have been historically volatile and may fluctuate widely due to changes in domestic and international supply and demand. Accordingly, significant changes in gasoline prices may substantially affect our net sales notwithstanding that the profit margin and unit sales for gasoline are largely unchanged, and this effect may increase as gasoline sales make up a larger portion of our revenue.

Research analysts and investors may recognize and react to the foregoing changes to our key performance indicators and believe that they indicate a decline in our performance, and this could occur regardless of whether the underlying cause has an adverse impact on our profitability. If we suffer an adverse change to our key performance indicators, this could adversely affect the trading price of our common stock.

Product recalls could adversely affect our sales and results of operations.

If our merchandise offerings, including food and general merchandise products, do not meet applicable safety standards or our members’ expectations regarding safety, we could experience lost sales and increased costs and be exposed to legal and reputational risk. The sale of these items involves the risk of health-related illness or injury to our members. Such illnesses or injuries could result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, manufacturing, storage, handling and transportation phases or faulty design. We are dependent on our vendors, including vendors located outside the United States, to ensure that the products we buy comply with all safety standards. While all of our vendors must comply with applicable product safety laws, it is possible that a vendor will fail to comply with these laws or otherwise fail to ensure the safety of its products. Further, while our vendors generally must agree to indemnify us in the case of loss, it is possible that a vendor will fail to fulfill that obligation.

 

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If a recall does occur, we have procedures in place to notify our clubs and, if appropriate, the members who have purchased the goods in question. We determine the appropriateness on a case-by-case basis, based, in part, on the size of the recall, the severity of the potential impact to the member and our ability to contact the purchasers of the products in question. While we are subject to governmental inspection and regulations and work to comply in all material respects with applicable laws and regulations, it is possible that consumption or use of our products could cause a health-related illness or injury in the future and that we will be subject to claims, lawsuits or government investigations relating to such matters. This could result in costly product recalls and other liabilities that could adversely affect our business and results of operations. Even if a product liability claim is unsuccessful or is not fully pursued, negative publicity could adversely affect our reputation with existing and potential members and our corporate and brand image, including that of our Wellsley Farms and Berkley Jensen private labels, and could have long-term adverse effects on our business.

If we do not successfully maintain a relevant omnichannel experience for our members, our results of operations could be adversely impacted.

Omnichannel retailing is rapidly evolving, and we must keep pace with changing member expectations and new developments by our competitors. Our members are increasingly using mobile phones, tablets and other devices to shop and to interact with us through social media. We continue to make technology investments in our website and mobile application. If we are unable to make, improve or develop relevant member-facing technology in a timely manner, our ability to compete and our results of operations could be adversely affected.

We depend on the financial performance of our operations in the New York metropolitan area.

Our financial and operational performance is dependent on our operations in the New York metropolitan area, which accounted for 25% of net sales in fiscal year 2017. We consider 39 of our clubs to be located in the New York metropolitan area. Any substantial slowing or sustained decline in these operations could materially adversely affect our business and financial results. Declines in financial performance of our operations in the New York metropolitan area could arise from, among other things, slower growth or declines in our comparable club sales; negative trends in operating expenses, including increased labor, healthcare and energy costs; failing to meet targets for club openings; cannibalization of existing locations by new clubs; shifts in sales mix toward lower gross margin products; changes or uncertainties in economic conditions in this market, including higher levels of unemployment, depressed home values and natural disasters; regional economic problems; changes in local regulations; terrorist attacks; and failure to consistently provide a high quality and well-assorted mix of products to retain our existing member base and attract new members.

Our growth strategy to open new clubs involves risks.

Our long-term sales and income growth is dependent to a certain degree on our ability to open new clubs and gasoline stations in both existing markets and new markets. Opening new clubs is expensive and involves substantial risks that may prevent us from receiving an appropriate return on that investment. We may not be successful in opening new clubs and gasoline stations on the schedule we have planned or at all, and the clubs and gasoline stations we open may not be successful. Our expansion is dependent on finding suitable locations, which may be affected by local regulations, political opposition, construction and development costs and competition from other retailers for particular sites. If prospective landlords find it difficult to obtain credit, we may need to own more new clubs rather than lease them. Owned locations require more initial capital and therefore, the need to own new locations could constrain our growth. If we are able to secure new sites and open new locations, these locations may not be profitable for many reasons. For example, we may not be able to hire, train and retain a suitable work force to staff these locations or to integrate new clubs successfully into our existing infrastructure, either of which could prevent us from operating the clubs in a profitable manner. In addition, entry into new markets may bring us into competition with new competitors or with existing competitors with a stronger, more well-established market presence. We may also improperly judge the suitability of a particular site. Any of these factors could cause a site to lose money or otherwise fail to provide a

 

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proper return on investment. If we fail to open new clubs as quickly as we have planned, our growth will suffer. If we open sites that we do not or cannot operate profitably, then our financial condition and results from operations could suffer.

Because we compete to a substantial degree on price, changes affecting the market prices of the goods we sell could adversely affect our net sales and operating profit.

It is an important part of our business plan that we offer value to our members, including offering prices that are substantially below certain of our competitors. Accordingly, we carefully monitor the market prices of the goods we sell in order to maintain our pricing advantage. If our competitors substantially lower their prices, we would be forced to lower our prices, which could adversely impact our margins and results of operations. In addition, the market price of the goods we sell can be influenced by general economic conditions. For example, if we experience a general deflation in the prices of the goods we sell, this would reduce our net sales and potentially adversely affect our operating income.

Any harm to the reputation of our private label brands could have a material adverse effect on our results of operations.

We sell many products under our private label brands, Wellsley Farms and Berkley Jensen. Maintaining consistent product quality, competitive pricing and availability of these products is essential to developing and maintaining member loyalty to these brands. These products generally carry higher margins than manufacturer branded products of comparable quality carried in our clubs and represent a growing portion of our overall sales. If our private label brands experience a loss of member acceptance or confidence, our net sales and operating results could be adversely affected.

We may not be able to protect our intellectual property adequately, which, in turn, could harm the value of our brand and adversely affect our business.

We rely on our proprietary intellectual property, including trademarks, to market, promote and sell our products in our clubs. Our ability to implement our business plan successfully depends in part on our ability to build further brand recognition using our trademarks, service marks, proprietary products and other intellectual property, including our name and logos and the unique character and atmosphere of our clubs. We monitor and protect against activities that might infringe, dilute or otherwise violate our trademarks and other intellectual property and rely on the trademark and other laws of the United States.

We may be unable to prevent third parties from using our intellectual property without our authorization. To the extent we cannot protect our intellectual property, unauthorized use and misuse of our intellectual property could harm our competitive position and have a material adverse effect on our financial condition, cash flows or results of operations. Additionally, adequate remedies may not be available in the event of an unauthorized use or disclosure of our trade secrets or other intellectual property.

Additionally, we cannot be certain that we do not or will not in the future infringe on the intellectual property rights of third parties. From time to time, we have been subject to claims from third parties that we have infringed upon their intellectual property rights and we face the risk of such claims in the future. Even if we are successful in these proceedings, any intellectual property infringement claims against us could be costly, time-consuming, harmful to our reputation, divert the time and attention of our management and other personnel, or result in injunctive or other equitable relief that may require us to make changes to our business, any of which could have a material adverse effect on our financial condition, cash flows or results of operations. With respect to any third party intellectual property that we use or wish to use in our business (whether or not asserted against us in litigation), we may not be able to enter into licensing or other arrangements with the owner of such intellectual property at a reasonable cost or on reasonable terms.

 

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Our business is moderately seasonal and weak performance during one of our historically strong seasonal periods could have a material adverse effect on our operating results for the entire fiscal year.

Our business is moderately seasonal, with a meaningful portion of our sales dedicated to seasonal and holiday merchandise, resulting in the realization of higher portions of net sales and operating income in the second and fourth fiscal quarters. Due to the importance of our peak sales periods, which include the spring and year-end holiday seasons, the second and fourth fiscal quarters have historically contributed, and are expected to continue to contribute, significantly to our operating results for the entire fiscal year. In anticipation of seasonal increases in sales activity during these periods, we incur significant additional expense prior to and during our peak seasonal periods, which we may finance with additional short-term borrowings. These expenses may include the acquisition of additional inventory, seasonal staffing needs and other similar items. As a result, any factors negatively affecting us during these periods, including adverse weather and unfavorable economic conditions, could have a material adverse effect on our results of operations for the entire fiscal year.

Implementation of technology initiatives could disrupt our operations in the near team and fail to provide the anticipated benefits.

As our business grows, we continue to make significant technology investments both in our operations and in our administrative functions. The costs, potential problems and interruptions associated with the implementation of technology initiatives could disrupt or reduce the efficiency of our operations in the near term. They may also require us to divert resources from our core business to ensure that implementation is successful. In addition, new or upgraded technology might not provide the anticipated benefits; it might take longer than expected to realize the anticipated benefits; and the technology might fail or cost more than anticipated.

Insurance claims could adversely impact our results of operations.

We use a combination of insurance and self-insurance plans to provide for potential liability for workers’ compensation, general liability, property, fiduciary liability and employee and retiree health care. Liabilities associated with the risk retained by the Company are estimated based on historical claims experience and other actuarial assumptions believed to be reasonable under the circumstances. Our results of operations could be adversely impacted if actual future occurrences and claims differ from our assumptions and historical trends.

Natural disasters or other catastrophes could negatively affect our business, financial condition and results of operations.

Natural disasters, such as hurricanes, typhoons or earthquakes, particularly in locations where our centralized operating systems and administrative personnel are located, could negatively affect our operations and financial performance. For example, our operations are concentrated primarily on the east coast of the United States, and any adverse weather event or natural disaster, such as a hurricane or heavy snow storm, could have a material adverse effect on a substantial portion of our operations. Such events could result in physical damage to one or more of our properties, the temporary closure of one or more clubs, one or more of our Company-operated or contracted distribution centers or our home office facility, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products, the temporary disruption in the transport of goods to or from overseas, delays in the delivery of goods to our clubs or distribution centers and the temporary reduction in the availability of products in our clubs. Public health issues, whether occurring in the U.S. or abroad, or terrorist attacks could also disrupt our operations, disrupt the operations of suppliers or members or have an adverse impact on consumer spending and confidence levels. These events could also reduce demand for our products or make it difficult or impossible to procure products. We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.

 

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Inventory shrinkage could have a material adverse effect on our business, financial condition and results of operations.

We are subject to the risk of inventory loss and theft. Our inventory shrinkage rates have not been material, or fluctuated significantly in recent years, although it is possible that rates of inventory loss and theft in the future will exceed our estimates and that our measures will be ineffective in reducing our inventory shrinkage. Although some level of inventory shrinkage is an unavoidable cost of doing business, if we were to experience higher rates of inventory shrinkage or incur increased security costs to combat inventory theft, for example as a result of increased use of self-checkout technologies, it could have a material adverse effect on our business, results of operations and financial condition.

We are subject to risks associated with leasing substantial amounts of space.

We lease the substantial majority of our retail properties, each of our three company-operated distribution centers and our corporate office. The profitability of our business is dependent on operating our current club base with favorable margins, opening and operating new clubs at a reasonable profit, renewing leases for clubs in desirable locations and, if necessary, identifying and closing underperforming clubs. We enter into leases for a significant number of our club locations for varying terms. Typically, a large portion of a club’s operating expense is the cost associated with leasing the location.

We are typically responsible for taxes, utilities, insurance, repairs and maintenance for our leased retail properties. Our rent expense for fiscal years 2015, 2016 and 2017 totaled $287.5 million, $298.1 million and $301.9 million, respectively. Our future minimum rental commitments for all operating leases in existence as of February 3, 2018 is $302.6 million for fiscal year 2018 and total $3,122.8 million in aggregate for fiscal years 2019 through 2040. We expect that many of the new clubs we open will also be leased to us under operating leases, which will further increase our operating lease expenditures and require significant capital expenditures. We depend on cash flows from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities, and sufficient funds are not otherwise available to us from borrowings under our ABL Facility or other sources, we may not be able to service our lease expenses or fund our other liquidity and capital needs, which would materially affect our business.

The operating leases for our retail properties, distribution centers and corporate office expire at various dates through 2040. A number of the leases have renewal options for various periods of time at our discretion. One of our retail property leases and none of our distribution center leases expire prior to 2027. When leases for our clubs with ongoing operations expire, we may be unable to negotiate renewals, either on commercially acceptable terms, or at all. Further, if we attempt to relocate a club for which the lease has expired, we may be unable to find a new location for that club on commercially acceptable terms or at all, and the relocation of a club might not be successful for other reasons. Any of these factors could cause us to close clubs in desirable locations, which could have an adverse impact on our results of operations.

Over time, current club locations may not continue to be desirable because of changes in demographics within the surrounding area or a decline in shopping traffic, including traffic generated by other nearby clubs. We may not be able to terminate a particular lease if or when we would like to do so. If we decide to close clubs, we are generally required to continue to pay rent and operating expenses for the balance of the lease term, which could be expensive. Even if we are able to assign or sublease vacated locations where our lease cannot be terminated, we may remain liable on the lease obligations if the assignee or sublessee does not perform.

Non-compliance with privacy and information security laws, especially as it relates to maintaining the security of member-related personal information, may damage our business and reputation with members, or result in our incurring substantial additional costs and becoming subject to litigation.

The use of individually identifiable data by our business is regulated at the federal and state levels. Privacy and information security laws and regulations change, and compliance with them may result in cost increases due

 

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to necessary systems changes and the development of new administrative processes. If we fail to comply with these laws and regulations or experience a data security breach, our reputation could be damaged, possibly resulting in lost future business, and we could be subjected to additional legal or financial risk as a result of non-compliance.

For example, as do most retailers and wholesale club operators, we and certain of our service providers receive certain personal information about our members. In addition, our online operations at www.bjs.com depend upon the secure transmission of confidential information over public networks. A compromise of our security systems or those of some of our business partners that results in our members’ personal information being obtained by unauthorized persons could adversely affect our reputation with our members and others, as well as our operations, results of operations, financial condition and liquidity, and could result in litigation against us or the imposition of penalties. In addition, a security breach could require that we expend significant additional resources related to the security of information systems and could result in a disruption of our operations.

Federal, state, regional and local laws and regulations relating to the cleanup, investigation, use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters could adversely impact our business, financial condition and results of operations.

We are subject to a wide variety of federal, state, regional and local laws and regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters. Failure to comply with these laws could result in harm to our members, employees or others, significant costs to satisfy environmental compliance, remediation or compensatory requirements, private party claims, or the imposition of severe penalties or restrictions on operations by governmental agencies or courts that could adversely affect our business, financial condition, cash flows and results of operations. In addition, risks of substantial costs and liabilities, including for the investigation and remediation of past or present contamination at our current or former properties (whether or not caused by us), are inherent in our operations, particularly with respect to our gasoline stations. There can be no assurance that substantial costs and liabilities for the investigation and remediation of contamination will not be incurred.

Our e-commerce business faces distinct risks, and our failure to successfully manage it could have a negative impact on our profitability.

As our e-commerce business grows, we increasingly encounter the risks and difficulties that internet-based businesses face. The successful operation of our e-commerce business, and our ability to provide a positive shopping experience that will generate orders and drive subsequent visits depend on efficient and uninterrupted operation of our order-taking and fulfillment operations. Risks associated with our e-commerce business include:

 

   

uncertainties associated with our website, including changes in required technology interfaces, website downtime and other technical failures, costs and technical issues as we upgrade our website software, inadequate system capacity, computer viruses, human error, security breaches and legal claims related to our website operations and e-commerce fulfillment;

 

   

disruptions in telecommunications service or power outages;

 

   

reliance on third parties for computer hardware and software and delivery of merchandise to our customers;

 

   

rapid changes in technology;

 

   

credit or debit card fraud and other payment processing related issues;

 

   

changes in applicable federal and state regulations;

 

   

liability for online content;

 

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cybersecurity and consumer privacy concerns and regulation; and

 

   

natural disasters.

Problems in any of these areas could result in a reduction in sales; increased costs; sanctions or penalties; and damage to our reputation and brands. Personal information from our members may also be placed at risk through our use of outside vendors, which may have data security systems that differ from those that we maintain or are more vulnerable to breach. For example, in March 2018, our travel vendor informed us that the personal data of several hundred of our members had been compromised because of a data breach at Orbitz, which that vendor used as a platform for making online travel bookings. Further, if we invest substantial amounts in developing our e-commerce capabilities, these factors or others could prevent those investments from being effective.

In addition, we must keep up to date with competitive technology trends, including the use of new or improved technology, creative user interfaces and other e-commerce marketing tools (such as paid search and mobile applications, among others), which may increase our costs and which may not increase sales or attract customers. If we are unable to allow real-time and accurate visibility into product availability when customers are ready to purchase, fulfill our customers’ orders quickly and efficiently using the fulfillment and payment methods they demand, provide a convenient and consistent experience for our customers regardless of the ultimate sales channel or manage our online sales effectively, our ability to compete and our results of operations could be adversely affected.

Furthermore, if our e-commerce business successfully grows, it may do so in part by attracting existing customers, rather than new customers, who choose to purchase products from us online rather than from our physical locations, thereby detracting from the financial performance of our clubs.

We are subject to a number of risks because we import some of our merchandise.

We imported approximately 4% of our merchandise directly from foreign countries such as China, Vietnam, Bangladesh and India during fiscal year 2017. In addition, many of our domestic vendors purchase a portion of their products from foreign sources.

Foreign sourcing subjects us to a number of risks generally associated with doing business abroad including lead times, labor issues, shipping and freight constraints, product and raw material issues, political and economic conditions, government policies, tariffs and restrictions, epidemics and natural disasters.

If any of these or other factors were to cause supply disruptions or delays, our inventory levels may be reduced or the cost of our products may increase unless and until alternative supply arrangements could be made. Merchandise purchased from alternative sources may be of lesser quality or more expensive than the merchandise we currently purchase abroad. Any shortages of merchandise (especially seasonal and holiday merchandise), even if temporary, could result in missed opportunities, reducing our sales and profitability. It could also result in our customers seeking and obtaining the products in question from our competitors.

In addition, reductions in the value of the U.S. dollar or increases in the value of foreign currencies could ultimately increase the prices that we pay for our products. We have not hedged our currency risk in the past and do not currently anticipate doing so in the future. All of our products manufactured overseas and imported into the United States are subject to duties collected by U.S. Customs and Border Protection. Increases in these duties would increase the prices we pay for these products, and we may not be able fully to recapture these costs in our pricing to customers. Further, we may be subjected to additional tariffs or penalties if we or our suppliers are found to be in violation of U.S. laws and regulations applicable to the importation of our products (including, but not limited to, prohibitions against entering merchandise by means of materially negligently made false statements or omissions). To the extent that any foreign manufacturers from whom we purchase products directly or indirectly employ business practices that vary from those commonly accepted in the United States, we could be hurt by any resulting negative publicity or, in some cases, potential claims of liability.

 

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Because of our international sourcing, we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery and anti-kickback laws.

We source approximately 4% of our merchandise abroad. The U.S. Foreign Corrupt Practices Act and other similar laws and regulations generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. While our policies mandate compliance with these anti-bribery laws, we cannot assure you that we will be successful in preventing our employees or other agents from taking actions in violation of these laws or regulations. Such violations, or allegations of such violations, could disrupt our business and result in a material adverse effect on our financial condition, cash flows and results of operations.

Certain legal proceedings could adversely impact our results of operations.

We are involved in a number of legal proceedings involving employment issues, personal injury, product liability, consumer matters, intellectual property claims and other litigation. Certain of these lawsuits, if decided adversely to us or settled by us, may result in material liability. See the notes to our audited financial statements included elsewhere in this prospectus for additional information. Further, we are unable to predict whether unknown claims may be brought against us that could become material.

Factors associated with climate change could adversely affect our business.

We use natural gas, diesel fuel, gasoline and electricity in our distribution and sale operations. Increased government regulations to limit carbon dioxide and other greenhouse gas emissions may result in increased compliance costs and legislation or regulation affecting energy inputs could materially affect our profitability. Climate change could affect our ability to procure needed commodities at costs and in quantities we currently experience. Climate change may be associated with extreme weather conditions, such as more intense hurricanes, thunderstorms, tornadoes and snow or ice storms, as well as rising sea levels. We also sell a substantial amount of gasoline, the demand for which could be impacted by concerns about climate change and which could face increased regulation.

Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial condition and results of operations.

Accounting principles and related pronouncements, implementation guidelines and interpretations we apply to a wide range of matters that are relevant to our business, including, but not limited to, revenue recognition, vendor rebates and allowances; inventory; impairment of goodwill, indefinite-lived and long-lived assets; self-insurance reserves income taxes; and stock-based compensation are highly complex and involve subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance.

Provisions for losses related to self-insured risks are generally based upon independent actuarially determined estimates. The assumptions underlying the ultimate costs of existing claim losses can be highly unpredictable, which can affect the liability recorded for such claims. For example, variability in health care cost inflation rates inherent in these claims can affect the amounts recognized. Similarly, changes in legal trends and interpretations, as well as changes in the nature and method of how claims are settled can impact ultimate costs. Although our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, any changes could have a considerable effect upon future claim costs and currently recorded liabilities and could materially impact our consolidated financial statements.

 

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Changes in lease accounting standards may materially and adversely affect us.

The Financial Accounting Standards Board, or FASB, recently adopted new accounting rules, to be effective for our fiscal year beginning after December 2018, that will require companies to capitalize most leases on their balance sheets by recognizing a lessee’s rights and obligations. When the rules are effective, we will be required to account for the leases for our clubs, headquarters and distribution centers as assets and liabilities on our balance sheet, while previously we accounted for such leases on an “off balance sheet” basis. As a result, a significant amount of lease related assets and liabilities will be recorded on our balance sheet, and we may be required to make other changes to the recording and classification of our lease related expenses. Though these changes will not have any direct impact on our overall financial condition, these changes will cause the total amount of assets and liabilities we report to increase substantially. This could cause investors or others to believe that we are highly leveraged and could change the calculations of financial metrics and covenants under our debt facilities, and under third-party financial models regarding our financial condition.

Goodwill and identifiable intangible assets represent a significant portion of our total assets, and any impairment of these assets could adversely affect our results of operations.

Our goodwill and indefinite-lived intangible assets, which consist of goodwill and our trade name, represented a significant portion of our total assets as of February 3, 2018. Accounting rules require the evaluation of our goodwill and indefinite-lived intangible assets for impairment at least annually, or more frequently when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Such indicators are based on market conditions and the operational performance of our business.

To test goodwill for impairment, we may initially use a qualitative approach to determine whether conditions exist to indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. If our management concludes, based on its assessment of relevant events, facts and circumstances, that it is more likely than not that a reporting unit’s carrying value is greater than its fair value, then a quantitative analysis will be performed to determine if there is any impairment. We may initially also elect to perform a quantitative analysis, which is a two-step assessment. In step one we estimate the reporting unit’s fair value by estimating the future cash flows of the reporting units to which the goodwill relates, and then we discount the future cash flows at a market-participant-derived weighted average cost of capital. The estimates of fair value of the reporting unit is based on the best information available as of the date of the assessment. If the carrying value of the reporting unit exceeds its estimated fair value in the first step, a second step is performed; in step two, we compare the implied fair value of goodwill to the carrying amount of goodwill. The implied fair value of goodwill is determined by a hypothetical purchase price allocation using the reporting unit’s fair value as the purchase price. If the implied fair value of the goodwill is less than the reporting unit’s carrying amount, then goodwill is impaired and is written down to the implied fair value amount.

To test our other indefinite-lived asset, our trade name, for impairment we determine the fair value of our trade name using the relief-from-royalty method, which estimates the present value of royalty income that could be hypothetically earned by licensing the brand name to a third party over the remaining useful life. If, in conducting an impairment evaluation, we determine that the carrying value of an asset exceeded its fair value, we would be required to record a non-cash impairment charge for the difference between the carrying value and the fair value of the asset.

If a significant amount of our goodwill and identifiable intangible assets were deemed to be impaired, our business, financial condition and results of operations could be materially adversely affected.

Recent U.S. tax legislation may adversely affect our future cash flows.

The Tax Cuts and Jobs Act (“TCJA”), which was enacted into law on December 22, 2017, significantly changed the U.S. federal income taxation of U.S. corporations, including by reducing the U.S. corporate income

 

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tax rate, limiting interest deductions, permitting immediate expensing of certain capital expenditures, revising the rules governing net operating losses and repealing the deduction of certain performance-based compensation paid to an expanded group of executive officers. Many of these changes are effective immediately, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and Internal Revenue Service (“IRS”), any of which could lessen or increase certain adverse impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, since taxing authorities often use federal taxable income as a starting point for computing state and local tax liabilities.

Our analysis and interpretation of the TCJA is preliminary and ongoing. While the new rules limiting interest deductibility to 30% of our “adjusted taxable income” are not currently expected to materially increase our tax burden on a permanent basis, such an increase could occur if our income were to materially decrease or our interest burden were to materially increase. Further, the TCJA may result in material adverse effects that we have not yet identified. While some of the changes made by the tax legislation may adversely affect the Company, we believe that other changes, such as the reduction in the U.S. corporate income tax rate, will be beneficial. We continue to work with our tax advisors and auditors to determine the full impact that the TCJA will have on us.

We could be subject to additional income tax liabilities.

We compute our income tax provision based on enacted federal and state tax rates. As tax rates vary among jurisdictions, a change in earnings attributable to the various jurisdictions in which we operate could result in an unfavorable change in our overall tax provision. Additionally, changes in the enacted tax rates, adverse outcomes in tax audits, including transfer pricing disputes, or any change in the pronouncements relating to accounting for income taxes could have a material adverse effect on our financial condition and results of operations.

We are a holding company with no operations of our own, and we depend on our subsidiaries for cash.

We are a holding company and do not have any material assets or operations other than ownership of equity interests of our subsidiaries. Our operations are conducted almost entirely through our subsidiaries, and our ability to generate cash to meet our obligations or to pay dividends, if any, is highly dependent on the earnings of, and receipt of funds from, our subsidiaries through dividends or intercompany loans. The ability of our subsidiaries to generate sufficient cash flow from operations to allow us and them to make scheduled payments on our debt obligations will depend on their future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control. We cannot assure you that the cash flow and earnings of our operating subsidiaries will be adequate for our subsidiaries to service their debt obligations. If our subsidiaries do not generate sufficient cash flow from operations to satisfy corporate obligations, we may have to undertake alternative financing plans (such as refinancing), restructure debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. We cannot assure you that any such alternative refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, that additional financing could be obtained on acceptable terms, if at all, or that additional financing would be permitted under the terms of our various debt instruments then in effect. Our inability to generate sufficient cash flow to satisfy our obligations, or to refinance our obligations on commercially reasonable terms, could have a material adverse effect on our business, financial condition and results of operations.

Furthermore, we and our subsidiaries may incur substantial additional indebtedness in the future that may severely restrict or prohibit our subsidiaries from making distributions, paying dividends, if any, or making loans to us.

 

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Risks Relating to Our Indebtedness

We face risks related to our substantial indebtedness.

As of                , 2018, after giving effect to the application of proceeds from this offering as set forth under “Use of Proceeds”, including the repayment of indebtedness under the Term Loan Facilities, we would have had total outstanding debt of $                 million. Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk associated with our variable rate debt and prevent us from meeting our obligations under our ABL Facility and Term Loan Facilities. Our substantial indebtedness could have important consequences to us, including:

 

   

making it more difficult for us to satisfy our obligations with respect to our debt, and any failure to comply with the obligations under our debt instruments, including restrictive covenants, could result in an event of default under the agreements governing our indebtedness increasing our vulnerability to general economic and industry conditions;

 

   

requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our debt, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, selling and marketing efforts, product development, future business opportunities and other purposes;

 

   

limiting our ability to deduct interest in the taxable period in which it is incurred in light of the TCJA;

 

   

exposing us to the risk of increased interest rates as substantially all of our borrowings are at variable rates;

 

   

restricting us from making strategic acquisitions;

 

   

limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and

 

   

limiting our ability to plan for, or adjust to, changing market conditions and placing us at a competitive disadvantage compared to our competitors who may be less highly leveraged.

The occurrence of any one of these events could have an adverse effect on our business, financial condition, results of operations and ability to satisfy our obligations under our indebtedness.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future, subject to the restrictions contained in the credit agreements governing our ABL Facility and Term Loan Facilities.

The ABL Facility and Term Loan Facilities impose significant operating and financial restrictions on us and our subsidiaries that may prevent us from pursuing certain business opportunities and restrict our ability to operate our business.

The credit agreements governing our ABL Facility and Term Loan Facilities contain covenants that restrict our and our subsidiaries’ ability to take various actions, such as:

 

   

incur or guarantee additional indebtedness or issue certain disqualified or preferred stock;

 

   

pay dividends or make other distributions on, or redeem or purchase, any equity interests or make other restricted payments;

 

   

make certain acquisitions or investments;

 

   

create or incur liens;

 

   

transfer or sell assets;

 

   

incur restrictions on the payments of dividends or other distributions from our restricted subsidiaries;

 

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alter the business that we conduct;

 

   

enter into transactions with affiliates; and

 

   

consummate a merger or consolidation or sell, assign, transfer, lease or otherwise dispose of all or substantially all of our assets.

The restrictions in the credit agreements governing our ABL Facility and Term Loan Facilities also limit our ability to plan for or react to market conditions, meet capital needs or otherwise restrict our activities or business plans and adversely affect our ability to finance our operations, enter into acquisitions or to engage in other business activities that could be in our interest.

In addition, our ability to borrow under the ABL Facility is limited by the amount of our borrowing base. Any negative impact on the elements of our borrowing base, such as accounts receivable and inventory could reduce our borrowing capacity under the ABL Facility.

We may be unable to generate sufficient cash flow to satisfy our significant debt service obligations, which could have a material adverse effect on our business, financial condition and results of operations.

Our ability to make principal and interest payments on and to refinance our indebtedness will depend on our ability to generate cash in the future and is subject to general economic, financial, competitive, legislative, regulatory, tax and other factors that are beyond our control. If our business does not generate sufficient cash flow from operations, in the amounts projected or at all, or if future borrowings are not available to us in amounts sufficient to fund our other liquidity needs, our business financial condition and results of operations could be materially adversely affected. If we cannot generate sufficient cash flow from operations to make scheduled principal and interest payments in the future, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures or seek additional equity. The terms of our existing or future debt agreements, including the Term Loan Facilities and the ABL Facility, may also restrict us from affecting any of these alternatives. Further, changes in the credit and capital markets, including market disruptions and interest rate fluctuations, may increase the cost of financing, make it more difficult to obtain favorable terms, or restrict our access to these sources of future liquidity. Our ABL Facility is scheduled to mature on February 3, 2022, our First Lien Facility is scheduled to mature on February 3, 2024 and our Second Lien Facility is scheduled to mature on February 3, 2025. See “Description of Certain Indebtedness.” If we are unable to refinance any of our indebtedness on commercially reasonable terms or at all or to effect any other action relating to our indebtedness on satisfactory terms or at all, it could have a material adverse effect on our business, financial condition and results of operations.

Risks Relating to our Common Stock and this Offering

There is no existing market for our common stock and we do not know if one will develop to provide you with adequate liquidity. If our stock price fluctuates after this offering, you could lose a significant part of your investment.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in us will lead to the development of a trading market on the                , or otherwise or how active and liquid that market may come to be. If an active trading market does not develop, you may have difficulty selling any of the common stock that you buy.

Negotiations between us and the underwriters will determine the initial public offering price for our common stock, which may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common stock at prices equal to or greater than the price you paid in this offering. The market price of our common stock may be influenced by many factors including:

 

   

quarterly variations in our operating results compared to market expectations;

 

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changes in the preferences of our customers;

 

   

low comparable club sales growth compared to market expectations;

 

   

delays in the planned openings of new clubs;

 

   

the failure of securities analysts to cover the Company after this offering or changes in financial estimates by the analysts who cover us, our competitors or the grocery or retail industries in general and the wholesale club segment in particular;

 

   

economic, legal and regulatory factors unrelated to our performance;

 

   

changes in consumer spending or the housing market;

 

   

increased competition or stock price performance of our competitors;

 

   

announcements by us or our competitors of new locations, capacity changes, strategic investments or acquisitions;

 

   

actual or anticipated variations in our or our competitors’ operating results, and our competitors’ growth rates;

 

   

future sales of our common stock or the perception that such sales may occur;

 

   

changes in senior management or key personnel;

 

   

investor perceptions of us, our competitors and our industry;

 

   

general or regional economic conditions;

 

   

changes in laws or regulations, or new interpretations or applications of laws and regulations that are applicable to our business; lawsuits, enforcement actions and other claims by third parties or governmental authorities;

 

   

action by institutional stockholders or other large stockholders;

 

   

failure to meet any guidance given by us or any change in any guidance given by us, or changes by us in our guidance practices;

 

   

speculation in the press or investment community;

 

   

events beyond our control, such as war, terrorist attacks, transportation and fuel prices, natural disasters, severe weather and widespread illness; and

 

   

the other factors listed in this “Risk Factors” section.

As a result of these factors, investors in our common stock may not be able to resell their shares at or above the initial offering price. In addition, our stock price may be volatile. The stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like us. Accordingly, these broad market fluctuations, as well as general economic, political and market conditions, such as recessions or interest rate changes, may significantly reduce the market price of the common stock, regardless of our operating performance. In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we were to become involved in securities litigation, it could result in substantial costs and divert resources and our management’s attention from other business concerns, regardless of the outcome of such litigation.

Because the Sponsors control a significant percentage of our common stock, they may control all major corporate decisions and their interests may conflict with your interests as an owner of our common stock and those of the Company.

We are controlled by the Sponsors, which currently indirectly own     % of our common stock and will own approximately    % after the consummation of this offering (    % if the underwriters fully exercise their option to purchase additional shares from the selling stockholders). Accordingly, the Sponsors currently control the

 

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election of the majority of our directors and could exercise a controlling interest over our business, affairs and policies, including the appointment of our management and the entering into of business combinations or dispositions and other corporate transactions. The directors they elect have the authority to incur additional debt, issue or repurchase stock, declare dividends and make other decisions that could be detrimental to stockholders.

The Sponsors may have interests that are different from yours and may vote in a way with which you disagree and that may be adverse to your interests. Further, CVC and Leonard Green may have differing views from each other, neither of which may align with your interests. In addition, the Sponsors’ concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could cause the market price of our common stock to decline or prevent our stockholders from realizing a premium over the market price for their common stock.

Additionally, the Sponsors are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us or supply us with goods and services. The Sponsors may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. Stockholders should consider that the interests of the Sponsors may differ from their interests in material respects.

You will incur immediate and substantial dilution in the pro forma net tangible book value of the common stock you purchase in this offering.

Prior investors have paid substantially less per share for our common stock than the price in this offering. The initial public offering price of our common stock is substantially higher than the pro forma net tangible book value per share of our outstanding common stock upon consummation of the offering. Accordingly, based on an initial public offering price of $                per share (the midpoint of the price range set forth on the cover page of this prospectus), if you purchase our common stock in this offering, you will pay more for your shares than the amounts paid by our existing stockholders for their shares and you will suffer immediate dilution of $                per share in pro forma net tangible book value of our common stock. See “Dilution.”

Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Substantially all of our existing stockholders are subject to lock-up agreements with the underwriters of this offering that restrict the stockholders’ ability to transfer shares of our common stock for 180 days from the date of this prospectus, subject to certain exceptions. The lock-up agreements limit the number of shares of common stock that may be sold immediately following the public offering. After this offering, we will have                outstanding shares of common stock based on the number of shares outstanding as of                , 2018. Subject to limitations,                shares will become eligible for sale upon expiration of the lock-up period, as calculated and described in more detail in the section entitled “Shares Eligible for Future Sale.” In addition, shares issued or issuable upon exercise of options vested as of the expiration of the lock-up period will be eligible for sale at that time. Further, the representative of the underwriters may, in its sole discretion, release all or some portion of the shares subject to the lock-up agreements at any time and for any reason. See “Shares Eligible for Future Sale” for more information. Sales of a substantial number of such shares upon expiration of the lock-up agreements, the perception that such sales may occur, or early release of these agreements, could have a material adverse effect on the trading price of our common stock.

Moreover, after this offering, holders of    % of our outstanding common stock will have rights, subject to certain conditions such as the 180-day lock-up arrangement described above, to require us to file registration

 

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statements for the public sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. Registration of these shares under the Securities Act of 1933, as amended, or the Securities Act, would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

Our ability to raise capital in the future may be limited.

Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. Additional financing may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity securities, existing stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.

If securities or industry analysts do not publish or cease publishing research or reports about us, or if they issue unfavorable commentary about us or our industry or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock will depend in part on the research and reports that third-party securities analysts publish about us and our industry. One or more analysts could downgrade our common stock or issue other negative commentary about us or our industry. In addition, we may be unable or slow to attract research coverage. Alternatively, if one or more of these analysts cease coverage of us, we could lose visibility in the market. As a result of one or more of these factors, the trading price of our common stock could decline.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws, as well as provisions of the Delaware General Corporation Law, or DGCL, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions include:

 

   

establishing a classified board of directors such that not all members of the board are elected at one time;

 

   

allowing the total number of directors to be determined exclusively (subject to the rights of holders of any series of preferred stock to elect additional directors) by resolution of our board of directors and granting to our board the sole power (subject to the rights of holders of any series of preferred stock or rights granted pursuant to the stockholders’ agreement) to fill any vacancy on the board;

 

   

limiting the ability of stockholders to remove directors without cause;

 

   

authorizing the issuance of “blank check” preferred stock by our board of directors, without further stockholder approval, to thwart a takeover attempt;

 

   

prohibiting stockholder action by written consent (and, thus, requiring that all stockholder actions be taken at a meeting of our stockholders), if the Sponsors cease to own, or have the right to direct the vote of, at least    % of the voting power of our common stock;

 

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eliminating the ability of stockholders to call a special meeting of stockholders, except for the Sponsors, so long as the Sponsors own, or have the right to direct the vote of, at least    % of the voting power of our common stock;

 

   

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at annual stockholder meetings; and

 

   

requiring the approval of the holders of at least two-thirds of the voting power of all outstanding stock entitled to vote thereon, voting together as a single class, to amend or repeal our certificate of incorporation or bylaws if the Sponsors cease to own, or have the right to direct the vote of, at least    % of the voting power of our common stock.

In addition, while we have opted out of Section 203 of the DGCL, our amended and restated certificate of incorporation contains similar provisions providing that we may not engage in certain “business combinations” with any “interested stockholder” for a three-year period following the time that the stockholder became an interested stockholder, unless:

 

   

prior to such time, our board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;

 

   

upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding certain shares; or

 

   

at or subsequent to that time, the business combination is approved by our board of directors and by the affirmative vote of holders of at least two-thirds of our outstanding voting stock that is not owned by the interested stockholder.

Generally, a “business combination” includes a merger, asset or stock sale or other transaction provided for or through our Company resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an “interested stockholder” is a person who owns 15% or more of our outstanding voting stock and the affiliates and associates of such person. For purposes of this provision, “voting stock” means any class or series of stock entitled to vote generally in the election of directors. Our amended and restated certificate of incorporation will provide that the Sponsors, their respective affiliates and any of their respective direct or indirect designated transferees (other than in certain market transfers and gifts) and any group of which such persons are a party do not constitute “interested stockholders” for purposes of this provision.

Under certain circumstances, this provision will make it more difficult for a person who qualifies as an “interested stockholder” to effect certain business combinations with our Company for a three-year period. This provision may encourage companies interested in acquiring us to negotiate in advance with our board of directors in order to avoid the stockholder approval requirement if our board of directors approves either the business combination or the transaction that results in the stockholder becoming an interested stockholder. These provisions also may have the effect of preventing changes in our board of directors and may make it more difficult to accomplish transactions that our stockholders may otherwise deem to be in their best interests. See “Description of Capital Stock”.

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our Company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take corporate actions other than those you desire.

We will be exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act.

We are in the process of evaluating our internal controls systems to allow management to report on, and our independent registered public accounting firm to audit, our internal controls over financial reporting. We will be

 

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performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and, if required, the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We will be required to comply with the management certification requirements of Section 404 in our annual report on Form 10-K for our first annual report that is filed with the SEC (subject to any change in applicable SEC rules). We will be required to comply with Section 404 in full (including an auditor attestation on management’s internal controls report) in our annual report on Form 10-K for the year following our first annual report required to be filed with the SEC (subject to any change in applicable SEC rules). Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and PCAOB rules and regulations that remain unremediated. As a public company, we will be required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that, or that are reasonably likely to, materially affect internal controls over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A “significant deficiency” is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting.

To comply with the requirements of being a public company, we have undertaken various actions, and may need to take additional actions, such as implementing and enhancing our internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal controls can divert our management’s attention from other matters that are important to the operation of our business. Additionally, when evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. If we identify any material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, if we are required to make restatements of our financial statements, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy, completeness or reliability of our financial reports and the trading price of our common stock may be adversely affected, and we could become subject to sanctions or investigations by the NYSE, the SEC or other regulatory authorities, which could require additional financial and management resources. In addition, if we fail to remedy any material weakness, our financial statements could be inaccurate and we could face restricted access to the capital markets.

The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act and the NYSE, may strain our resources, increase our costs and divert management’s attention, and we may be unable to comply with these requirements in a timely or cost-effective manner.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the corporate governance standards of the Sarbanes-Oxley Act and the NYSE. These requirements will place a strain on our management, systems and resources and we will incur significant legal, accounting, insurance and other expenses that we have not incurred as a private company. The Exchange Act will require us to file annual, quarterly and current reports with respect to our business and financial condition within specified time periods and to prepare a proxy statement with respect to our annual meeting of stockholders. The Sarbanes-Oxley Act will require that we maintain effective disclosure controls and procedures and internal controls over financial reporting. The NYSE will require that we comply with various corporate governance requirements. To maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting and comply with the Exchange Act and the NYSE’s requirements, significant resources and management oversight will be required. This may divert management’s

 

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attention from other business concerns and lead to significant costs associated with compliance, which could have a material adverse effect on us and the price of our common stock.

The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Advocacy efforts by stockholders and third parties may also prompt even more changes in governance and reporting requirements. We cannot predict or estimate the amount of additional costs we may incur or the timing of these costs. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

We do not currently expect to pay any cash dividends.

The continued operation and expansion of our business will require substantial funding. Accordingly, we do not currently expect to pay any cash dividends on shares of our common stock. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors that our board of directors deems relevant. We are a holding company, and substantially all of our operations are carried out by our operating subsidiaries. Any inability on the part of our subsidiaries to make payments to us could have a material adverse effect on our business, financial condition and results of operations. Under our ABL Facility and Term Loan Facilities, our operating subsidiaries are significantly restricted in their ability to pay dividends or otherwise transfer assets to us, and we expect these limitations to continue in the future. Our ability to pay dividends may also be limited by the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

We are a “controlled company” within the meaning of the NYSE rules and, as a result, will qualify for, and may rely on, exemptions from certain corporate governance requirements.

Following the consummation of this offering, the Sponsors will continue to control a majority of the voting power of our outstanding common stock. As a result, we expect to be a “controlled company” within the meaning of the NYSE’s corporate governance standards. A company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” within the meaning of the NYSE rules and may elect not to comply with certain corporate governance requirements of the NYSE, including:

 

   

the requirement that a majority of our board of directors consist of independent directors;

 

   

the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

Following this offering, we intend to rely on all of the exemptions listed above. If we do utilize the exemptions, we will not have a majority of independent directors and our nominating and corporate governance

 

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and compensation committees will not consist entirely of independent directors. As a result, our board of directors and those committees may have more directors who do not meet the NYSE’s independence standards than they would if those standards were to apply. The independence standards are intended to ensure that directors who meet those standards are free of any conflicting interest that could influence their actions as directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed to us or our stockholders by any of our directors, officers, employees or agents, (iii) any action asserting a claim against us arising under any provisions of the DGCL or our amended and restated certificate of incorporation or our amended and restated bylaws, or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine. By becoming a stockholder in our Company, you will be deemed to have notice of and have consented to the provisions of our amended and restated certificate of incorporation related to choice of forum. The choice of forum provision in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. You can generally identify forward-looking statements by our use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “seek,” “vision,” or “should,” or the negative thereof or other variations thereon or comparable terminology. The statements we make regarding the following matters are forward-looking by their nature:

 

   

our business being affected by issues that affect consumer spending;

 

   

our business depending on having a large and loyal membership, and how any harm to our relationship with our members could have a material adverse effect on our business, net sales and results of operations;

 

   

our business plan and operating results depending on our ability to procure the merchandise we sell at the best possible prices;

 

   

competition adversely affecting our profitability;

 

   

our dependence on vendors to supply us with quality merchandise at the right time and at the right price;

 

   

our failure to timely identify or effectively respond to consumer trends, which could negatively affect our relationship with our members, the demand for our products and services and our market share;

 

   

our success depending on our ability to attract and retain a qualified management team and other team members while controlling our labor costs;

 

   

our comparable club sales and quarterly operating results fluctuating significantly;

 

   

changes in our product mix or in our revenues from gasoline sales negatively impacting our revenue and results of operations;

 

   

our failure to successfully maintain a relevant omnichannel experience for our members, thereby adversely impacting our results of operations;

 

   

our growth strategy to open new clubs involving risks;

 

   

implementation of technology initiatives disrupting our operations in the near team and failing to provide the anticipated benefits; and

 

   

our e-commerce business facing distinct risks, and how our failure to successfully manage it could have a negative impact on our profitability.

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in this prospectus under the headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included elsewhere in this prospectus are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements included elsewhere in this prospectus. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements included elsewhere in this prospectus, they may not be predictive of results or developments in future periods.

 

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Any forward-looking statement that we make in this prospectus speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from our sale of                 shares in this offering will be approximately $                million, based on the assumed initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us. We intend to use the net proceeds from this offering, together with cash and borrowings under the ABL Facility, to repay approximately $                million of indebtedness plus $                million of accrued and unpaid interest and prepayment premium under the Second Lien Facility. To the extent any proceeds from this offering remain after the repayment in full of our Second Lien Facility, including any accrued and unpaid interest and prepayment premium thereon, we intend to use such remaining proceeds for general corporate purposes. We will not receive any of the proceeds from any sale of shares of common stock by the selling stockholders.

The interest rate on borrowings under the Second Lien Facility as of                , 2018 was    % and the maturity date is February 3, 2025. The borrowings under the Second Lien Facility were incurred on February 3, 2017, together with borrowings under the First Lien Facility, to finance (i) a $735.5 million dividend payment to our stockholders, including funds affiliated with the Sponsors and (ii) $72.9 million in payments pursuant to our outstanding stock options and retention bonus arrangements.

Each $1.00 increase (decrease) in the assumed initial public offering price of $                per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $                , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and estimated offering expenses payable by us. Each increase (decrease) of 1 million shares in the number of shares sold in this offering, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $                , assuming an initial public offering price of $                per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and estimated offering expenses payable by us. The information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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DIVIDEND POLICY

We do not currently expect to pay any cash dividends on our common stock for the foreseeable future. Instead, we intend to retain future earnings, if any, for the future operation and expansion of our business and the repayment of debt. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, cash requirements, financial condition, contractual restrictions, restrictions imposed by applicable laws and other factors that our board of directors may deem relevant. Our business is conducted through our subsidiaries. Dividends, distributions and other payments from, and cash generated by, our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations and pay dividends. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries. In addition, the covenants in the agreements governing our existing indebtedness, including the ABL Facility and the Term Loan Facilities, significantly restrict the ability of our subsidiaries to pay dividends or otherwise transfer assets to us. See “Description of Certain Indebtedness,” “Risk Factors—Risks Relating to our Business—We are a holding company with no operations of our own, and we depend on our subsidiaries for cash” and “Risk Factors—Risks Relating to our Common Stock and this Offering—We do not currently expect to pay any cash dividends.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our consolidated capitalization as of February 3, 2018:

 

   

on an actual basis;

 

   

on a pro forma (reclassification only) basis, giving effect to the reclassification of our contingently redeemable common stock to stockholders’ equity resulting from the automatic termination of the non-Sponsor stockholders’ put rights upon the consummation of this offering; and

 

   

on a pro forma basis, to give effect to: (i) the filing and effectiveness of our amended and restated certificate of incorporation and amended and restated by-laws; (ii) our issuance and sale of                 shares of our common stock in this offering at an assumed initial public offering price of $                 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and estimated offering expenses payable by us; and (iii) the application of the net proceeds from this offering, together with cash and borrowings under the ABL Facility, to repay in full all obligations under the Second Lien Facility, as described in “Use of Proceeds.”

The information discussed below is illustrative only, and our cash and cash equivalents and capitalization following the consummation of this offering will adjust based on the actual initial public offering price and other terms of this offering determined at pricing. You should read the data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

    As of February 3, 2018  
    Actual     Pro Forma
(Reclassification
Only)
    Pro
Forma(1)(2)(3)
 
    (dollars in thousands, except per share data)  

Cash and cash equivalents

  $ 34,954     $ 34,954     $                   
 

 

 

   

 

 

   

 

 

 

Long-term debt, including current maturities:

     

ABL Facility

    217,000       217,000    

First Lien Facility

    1,883,930       1,883,930    

Second Lien Facility

    611,480       611,480    

Capital lease and financing obligations

    35,702       35,702    
 

 

 

   

 

 

   

 

 

 

Total debt, net of discount and debt issuance cost

    2,748,112       2,748,112    

Contingently redeemable common stock $0.01 par value; 208,474 shares issued and outstanding actual; no shares issued and outstanding pro forma (reclassification only) and pro forma

    10,438       —      

Stockholders’ deficit:

     

Preferred stock; $0.01 par value; no shares authorized, issued and outstanding, actual and pro forma (reclassification only);              shares authorized and no shares issued or outstanding pro forma

     

Common stock; $0.01 par value; 20,000,000 shares authorized, 12,521,688 shares issued and 12,439,052 shares outstanding actual; 20,000,000 shares authorized, 12,730,162 shares issued and 12,647,526 shares outstanding pro forma (reclassification only);              shares authorized,              shares issued and outstanding, pro forma(4)

    124       126    

Additional paid-in capital

    2,883       13,319    

Accumulated deficit

    (1,035,265     (1,035,265  

Accumulated other comprehensive income

    2,401       2,401    
 

 

 

   

 

 

   

 

 

 

Total stockholders’ deficit

    (1,029,857     (1,019,419  
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 1,728,693     $ 1,728,693     $  
 

 

 

   

 

 

   

 

 

 

 

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(1)

Each $1.00 increase (decrease) in the assumed initial public offering price of $                 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma amount of each of cash and cash equivalents, additional paid-in-capital, total stockholders’ equity and total capitalization by $                 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares sold in this offering, as set forth on the cover page of this prospectus, would increase (decrease) the pro forma amount of each of cash and cash equivalents, additional paid-in-capital, total stockholders’ equity and total capitalization by $                million, assuming the assumed initial public offering price of $                per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and estimated offering expenses payable by us.

(2)

Our estimate of the net proceeds that we will receive from this offering reflects the deduction of an estimated $                 million of expenses relating to the offering; however, as of February 3, 2018, we had already paid approximately $                million of such expenses.

(3)

We intend to use the net proceeds from this offering to repay approximately $                million of indebtedness plus any accrued and unpaid interest and prepayment premium on the outstanding principal amount of the Second Lien Facility. The table above reflects the use of (i) approximately $                million of additional borrowings under the ABL Facility to repay in full the remaining principal amount of the Second Lien Facility and (ii) approximately $                million of cash to pay the 1% prepayment premium applicable to voluntary prepayments of principal on the Second Lien Facility. See “Description of Certain Indebtedness—Term Loan Facilities—Optional and Mandatory Prepayments.” See “Use of Proceeds.”

(4)

Legally outstanding shares include both common stock and contingently redeemable common stock. Shares repurchased from our non-Sponsor stockholders are legally issued shares, but are not issued or outstanding for accounting purposes. See Note 10 to our consolidated financial statements and related notes included elsewhere in this prospectus.

The number of shares of common stock to be outstanding after this offering excludes:

 

   

                 shares of common stock issuable upon the exercise of options outstanding under our equity incentive plans as of February 3, 2018 at a weighted average exercise price of $                per share;

 

   

                 additional shares of common stock reserved for future issuance under our new omnibus incentive plan; and

 

   

                 shares reserved for issuance under our new employee stock purchase plan.

 

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DILUTION

If you purchase any of the shares offered by this prospectus, you will experience dilution to the extent of the difference between the offering price per share that you pay in this offering and our pro forma net tangible book value (deficit) per share of our common stock immediately after this offering.

Our net tangible book value (deficit) as of February 3, 2018 was $(2,178.9) million, or $(175.16) per share of common stock. Net tangible book value (deficit) is total tangible assets less total liabilities and contingently redeemable common stock, which is not included within stockholders’ equity. Tangible assets represent total assets excluding goodwill and other intangible assets. Net tangible book value (deficit) per share is determined by dividing our net tangible book value (deficit) by 12,439,052 shares of common stock outstanding, as of February 3, 2018.

Our pro forma (reclassification only) net tangible book value (deficit) as of February 3, 2018 was $(2,168.4) million, or $(171.45) per share of common stock. Pro forma (reclassification only) net tangible book value (deficit) is the amount of our total tangible assets less our total liabilities, after giving effect to the reclassification of our contingently redeemable common stock to stockholders’ equity resulting from the automatic termination of the non-Sponsor stockholders’ put rights upon the consummation of this offering. Pro forma (reclassification only) net tangible book value (deficit) per share represents our pro forma (reclassification only) net tangible book value (deficit) divided by the aggregate number of shares of common stock outstanding, after giving effect to the adjustment described above.

After giving further effect to (i) our sale of                shares of common stock in this offering at an assumed initial public offering price of $                 per share, the midpoint of the price range set forth on the cover page of this prospectus and (ii) the application of the net proceeds from this offering, together with cash and borrowings under the ABL Facility, to repay in full all obligations under the Second Lien Facility, as described in “Use of Proceeds,” our pro forma net tangible book value as of February 3, 2018 would have been $                million, or $                per share. This represents an immediate increase in pro forma net tangible book value of $                per share to our existing stockholders and an immediate dilution of $                per share to new investors purchasing shares of common stock in this offering. Dilution in pro forma net tangible book value (deficit) represents the difference between the price per share paid by investors in this offering and our net tangible book value per share of immediately after the offering.

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

     $                   

Historical net tangible book value (deficit) per share as of February 3, 2018

   $ (175.16  

Increase per share attributable to the pro forma (reclassification only) adjustments described above

     3.71    
  

 

 

   

Pro forma (reclassification only) net tangible book value (deficit) per share as of February 3, 2018

     (171.45  

Increase in pro forma (reclassification only) net tangible book value per share attributable to new investors purchasing common stock in this offering and the use of proceeds from this offering

   $    
  

 

 

   

Pro forma net tangible book value per share after this offering

    
    

 

 

 

Dilution per share to new investors purchasing common stock in this offering

     $  
    

 

 

 

Each $1.00 increase (decrease) in the assumed initial offering price of $                 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma net tangible book value by $                , or $                 per share, and the dilution per common share to new investors

 

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in this offering by $                 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and estimated offering expenses payable by us. An increase of 1.0 million shares in the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, would increase the pro forma net tangible book value per share by $                and decrease the dilution per share to new investors by $                , assuming no change in the assumed initial public offering price and after deducting estimated underwriting discounts and estimated offering expenses payable by us. A decrease of 1.0 million shares in the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, would decrease the pro forma net tangible book value per share by $                and increase the dilution per share to new investors by $                , assuming no change in the assumed initial public offering price and after deducting underwriting discounts and estimated offering expenses payable by us.

The following table summarizes, as of February 3, 2018, on a pro forma basis, the number of shares of common stock purchased or to be purchased from us, the total consideration paid or to be paid to us and the average price per share paid by existing stockholders or to be paid by new investors purchasing shares of common stock in this offering at an assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the underwriting discounts and estimated offering expenses payable by us.

 

     Shares Purchased      Total Consideration      Average Price
Per Share
 
     Number      Percent      Amount      Percent     

Existing stockholders

                    %      $                                 %      $               

New investors

              
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

        100%      $        100%     
  

 

 

    

 

 

    

 

 

    

 

 

    

Each $1.00 increase (decrease) in the assumed initial public offering price of $                 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) total consideration paid by new investors by $                million and total consideration paid by all stockholders and average price per share paid by all stockholders by $                 million and $                 per share, respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and estimated offering expenses payable by us. An increase (decrease) of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) total consideration paid by new investors by $                million and total consideration paid by all stockholders and average price per share paid by all stockholders by $                 million and $                 per share, respectively, assuming the assumed initial public offering price remains the same, and after deducting underwriting discounts and estimated offering expenses payable by us.

The table above assumes the underwriters do not exercise their option to purchase                  additional shares from the selling stockholders in this offering. If the underwriters fully exercise their option to purchase                 additional shares of our common stock in this offering, there would be no change to the pro forma net tangible book value per share or the dilution to new investors in this offering. If the underwriters fully exercise their option, the number of shares held by new investors will increase to                 shares of our common stock, or approximately    % of the total number of shares of our common stock outstanding after this offering, and the number of shares held by existing stockholders would decrease to                  shares of our common stock, or approximately     % of the total number of shares of our common stock outstanding after this offering.

The number of shares of common stock to be outstanding after this offering excludes:

 

   

                 shares of common stock issuable upon the exercise of options outstanding under our equity incentive plans as of February 3, 2018 at a weighted average exercise price of $                per share;

 

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                 additional shares of common stock reserved for future issuance under our new omnibus incentive plan; and

 

   

                 shares reserved for issuance under our new employee stock purchase plan.

To the extent any options are granted and exercised in the future, there may be additional economic dilution to new investors.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We have derived the following selected consolidated statements of operations and cash flow data for the fiscal years ended January 30, 2016, January 28, 2017 and February 3, 2018 and the consolidated balance sheet data for the fiscal years ended January 28, 2017 and February 3, 2018 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the following selected consolidated statements of operations and cash flow data for the fiscal years ended February 1, 2014 and January 31, 2015 and the consolidated balance sheet data as of February 1, 2014, January 31, 2015 and January 30, 2016 from our unaudited consolidated financial statements not included in this prospectus.

The historical results presented below are not necessarily indicative of the results to be expected for any future period. You should read the selected consolidated financial data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Fiscal Year Ended  
    February 1,
2014
    January 31,
2015
    January 30,
2016
    January 28,
2017
    February 3,
2018
 
    (dollars in thousands, except per share data)  

Statement of Operations Data:

         

Net sales

  $ 12,342,450     $ 12,488,247     $ 12,220,215     $ 12,095,302     $ 12,495,995  

Membership fee income

    242,367       243,023       247,338       255,235       258,594  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    12,584,817       12,731,270       12,467,553       12,350,537       12,754,589  

Cost of sales

    10,621,719       10,758,461       10,476,519       10,223,017       10,513,492  

Selling, general and administrative expenses

    1,807,507       1,776,432       1,797,780       1,908,752       2,017,821  

Preopening expenses

    7,443       12,310       6,458       2,749       3,004  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    148,148       184,067       186,796       216,019       220,272  

Interest expense, net

    168,364       154,481       150,093       143,351       196,724  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    (20,216     29,586       36,703       72,668       23,548  

Provision (benefit) for income taxes

    (9,786     10,277       12,049       27,968       (28,427
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (10,430     19,309       24,654       44,700       51,975  

Loss from discontinued operations, net of income taxes

    (4,457     (296     (550     (476     (1,674
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (14,887   $ 19,013     $ 24,104     $ 44,224     $ 50,301  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data(1):

         

Income (loss) from continuing operations per share attributable to common stockholders—basic

  $ (0.83)     $ 1.54     $ 1.96     $ 3.55     $ 4.12  

Income (loss) from continuing operations per share attributable to common stockholders—diluted

  $ (0.83)     $ 1.50     $ 1.91     $ 3.45     $ 3.94  

Weighted average number of shares outstanding:

         

Basic

    12,495       12,496       12,553       12,595       12,627  

Diluted

    12,495       12,894       12,892       12,962       13,181  

Cash dividends per share

  $ 33.06       —         —         —       $ 58.15  

 

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     Fiscal Year Ended  
     February 1,
2014
    January 31,
2015
    January 30,
2016
    January 28,
2017
    February 3,
2018
 
     (in thousands)        

Statement of Cash Flow Data:

          

Net cash provided by operating activities(2)

   $ 204,512     $ 285,821     $ 159,361     $ 297,428     $ 210,085  

Net cash (used in) investing activities

     (144,820     (158,073     (112,363     (114,756     (137,466

Net cash (used in) financing activities

     (69,778     (130,467     (46,236     (188,118     (69,629
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (10,086   $ (2,719   $ 762     $ (5,446   $ 2,990  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     As of  
     February 1,
2014
    January 31,
2015
    January 30,
2016
    January 28,
2017
    February 3,
2018
 
     (in thousands)        

Balance Sheet Data:

          

Cash and cash equivalents

   $ 39,367     $ 36,648     $ 37,410     $ 31,964     $ 34,954  

Merchandise inventories

     1,015,788       1,038,194       1,061,854       1,031,844       1,019,138  

Property and equipment, net

     854,865       850,422       794,446       763,643       758,750  

Net working capital(3)

     156,664       97,495       131,129       52,090       51,813  

Total assets

     3,528,387       3,482,980       3,408,933       3,232,219       3,273,856  

Total debt(4)

     (2,411,423     (2,289,568     (2,229,835     (2,056,406     (2,748,112

Contingently redeemable common stock

     7,198       6,944       7,951       8,145       10,438  

Total stockholders’ deficit

     (450,344     (427,475     (401,073     (347,211     (1,029,857

 

     Fiscal Year Ended  
     February 1,
2014
     January 31,
2015
     January 30,
2016
     January 28,
2017
     February 3,
2018
 

Other Financial and Operating Data:

              

Total clubs at end of period

     201        207        213        214        215  

Comparable club sales(5)

     (1.1)%        (0.5)%        (4.2)%        (2.6)%        0.8%  

Comparable club sales excluding gasoline sales

     (1.0)%        (0.3)%        (0.5)%        (2.3)%        (0.9)%  

Adjusted EBITDA (in thousands)(6)

   $ 411,729      $ 413,904      $ 405,992      $ 457,326      $ 533,507  

Free cash flow (in thousands)(7)

     62,485        130,624        46,998        182,672        72,619  

Membership renewal rate

     83%        83%        84%        85%        86%  

Capital expenditures

   $ 142,027      $ 155,197      $ 112,363      $ 114,756      $ 137,466  

 

(1)

See Note 21 to our consolidated financial statements included elsewhere in this prospectus for additional information regarding the calculation of basic and diluted income per share attributable to common stockholders.

(2)

Includes charges for discontinued operations.

(3)

Net working capital is defined as total current assets (excluding cash and cash equivalents) less total current liabilities (excluding current portion of long-term debt).

(4)

Total debt includes current and non-current portion of long-term debt, net of discount and debt issuance costs and our obligations under capital leases and financing obligations.

(5)

Represents the change in net sales among all clubs open in both the given period and the prior period. In determining comparable club sales, we include all clubs that had been open for at least 13 months at the beginning of the relevant period and were in operation during all of both periods being compared, including relocated clubs and expansions. If a club is in the process of closing, it is excluded from the determination of comparable club sales. In addition, when applicable, we adjust for the effect of an additional week in a fiscal year or quarter. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding our calculation of comparable club sales.

 

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(6)

The following is a reconciliation of our income from continuing operations to Adjusted EBITDA for the periods presented:

 

     Fiscal Year Ended  
     February 1,
2014
     January 31,
2015
     January 30,
2016
     January 28,
2017
     February 3,
2018
 
     (dollars in thousands)  

Income (loss) from continuing operations

   $ (10,430    $ 19,309      $ 24,654      $ 44,700      $ 51,975  

Interest expense, net

     168,364        154,481        150,093        143,351        196,724  

Provision (benefit) for income taxes

     (9,786      10,277        12,049        27,968        (28,427

Depreciation and amortization

     197,375        186,701        177,483        178,325        164,061  

Compensatory payments related to options(a)

     34,366        1,690        1,497        6,143        77,953  

Stock-based compensation expense(b)

     300        2,344        2,265        11,828        9,102  

Preopening expenses(c)

     7,443        12,310        6,458        2,749        3,004  

Management fees(d)

     8,222        8,021        8,139        8,053        8,038  

Noncash rent(e)

     12,176        11,417        8,976        7,138        5,391  

Strategic consulting(f)

     —          —          14,619        26,157        30,316  

Severance(g)

     1,592        4,392        7,488        2,320        9,065  

Asset retirement obligations(h)

     —          —          (7,044      —          —    

Other adjustments(i)

     2,107        2,962        (685      (1,406      6,305  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 411,729      $ 413,904      $ 405,992      $ 457,326      $ 533,507  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA as a percentage of net sales

     3.3%        3.3%        3.3%        3.8%        4.3%  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (a)

Represents payments to holders of our stock options made pursuant to antidilution provisions in connection with dividends paid to our Sponsors.

  (b)

Represents non-cash stock-based compensation expense.

  (c)

Represents direct incremental costs of opening or relocating a facility that are charged to operations as incurred.

  (d)

Represents management fees paid to our Sponsors (or advisory affiliates thereof) in accordance with our management services agreement, which will terminate on the consummation of this offering. See “Certain Relationships and Related Party Transactions—Management Services Agreement.”

  (e)

Consists of an adjustment to remove the non-cash portion of rent expense, which has been recorded on a straight-line basis in accordance with GAAP.

  (f)

Represents fees paid to external consultants for two strategic initiatives of limited duration.

  (g)

Represents termination costs associated with voluntary and involuntary workforce reductions that occurred in January 2016, incremental severance expense to former executives and voluntary workforce reductions that occurred in February 2018.

  (h)

Represents non-cash gain related to a change in the estimated removal costs of our tanks and other infrastructure at our gasoline stations that has been accounted for as an asset retirement obligation.

  (i)

Other non-cash or discrete items as determined by management, including amortization of a deferred gain from sale lease back transactions in 2013, non-cash accretion expense on asset retirement obligations, obligations associated with our post-retirement medical plan and incremental expense to former executives. Fiscal year 2017 includes corporate related transaction costs.

See “Non-GAAP Financial Measures” for more information on our use of Adjusted EBITDA.

 

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(7)

The following is a reconciliation of our net cash from operating activities to free cash flow for the periods presented:

 

     Fiscal Year Ended  
     February 1,
2014
     January 31,
2015
     January 30,
2016
     January 28,
2017
     February 3,
2018
 
     (in thousands)  

Net cash from operating activities

     $204,512        $285,821      $ 159,361      $ 297,428      $ 210,085  

Less: Capital expenditures

     142,027        155,197        112,363        114,756        137,466  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Free cash flow

     $  62,485        $130,624      $ 46,998      $ 182,672      $ 72,619  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

See “Non-GAAP Financial Measures” for more information on our use of free cash flow.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

We prepared the following unaudited pro forma consolidated financial statements to give effect to (i) the reclassification of our contingently redeemable common stock to stockholders’ equity resulting from the automatic termination of the non-Sponsor stockholders’ put rights upon the consummation of this offering, (ii) our issuance and sale of shares of our common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and estimated offering expenses payable by us, (iii) the application of the net proceeds from our initial public offering together with cash and borrowings under the ABL Facility, to repay approximately $ million of indebtedness plus $         million of accrued and unpaid interest and prepayment premium under the Second Lien Facility and (iv) the termination of the annual fee for our management services agreement with our Sponsors.

The unaudited pro forma consolidated balance sheet as of February 3, 2018 gives effect to the transactions above as if they had been completed on February 3, 2018. The unaudited pro forma consolidated statements of operations for the year ended February 3, 2018 give effect to the transactions above as if they occurred on January 29, 2017 (the first day of fiscal year 2017). We derived these unaudited pro forma consolidated financial statements from, and you should read them in conjunction with, our audited consolidated financial statements and the related notes to those statements included elsewhere in this prospectus.

The unaudited pro forma consolidated financial statements are presented for illustrative purposes and are based on available information and assumptions we believe are reasonable. The unaudited pro forma consolidated financial statements were prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and should not be considered indicative of the consolidated financial position or results of operations that would have occurred if the transactions above had been completed on the dates indicated, nor are they necessarily indicative of our future consolidated financial position or results of operations. Our historical consolidated financial statements have been adjusted in the unaudited pro forma consolidated financial statements to give effect to pro forma events that are (1) directly attributable to transactions above, (2) factually supportable and (3) with respect to the statements of operations, expected to have a continuing impact on the consolidated results.

 

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BJ’S WHOLESALE CLUB HOLDINGS, INC.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

(Amounts in thousands, except per share amounts)

 

     Historical
February 3,
2018
    Pro Forma
Adjustments
     Note      Pro Forma
February 3,
2018
 

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 34,954          A      $           

Accounts receivable, net

     190,756          

Merchandise inventories

     1,019,138          

Prepaid expenses

     81,972          

Prepaid federal and state income taxes

     9,784          
  

 

 

   

 

 

       

 

 

 

Total current assets

     1,336,604          

Property and equipment:

          

Land and buildings

     404,400          

Leasehold costs and improvements

     184,165          

Furniture, fixtures and equipment

     924,616          

Construction in progress

     20,775          
  

 

 

   

 

 

       

 

 

 

Less: accumulated depreciation and amortization

     (775,206        
  

 

 

   

 

 

       

 

 

 

Total property and equipment, net

     758,750          

Goodwill

     924,134          

Intangibles, net

     224,876          

Other assets

     29,492          B     
  

 

 

   

 

 

       

 

 

 

Total assets

   $ 3,273,856           $  
  

 

 

   

 

 

       

 

 

 

LIABILITIES

          

Current liabilities:

          

Current portion of long-term debt

   $ 219,750          D      $  

Accounts payable

     751,948          

Accrued expenses and other current liabilities

     495,767          C     

Closed store obligations due within one year

     2,122          
  

 

 

   

 

 

       

 

 

 

Total current liabilities

     1,469,587          

Long-term debt

     2,492,660          D     

Noncurrent closed store obligations

     6,561          

Deferred income taxes

     57,074          

Other noncurrent liabilities

     267,393          

Commitments and contingencies (See Note 8)

          

Contingently redeemable common stock, par value $0.01; 208 shares issued and outstanding, actual; no shares issued and outstanding, pro forma

     10,438          E     

STOCKHOLDERS’ DEFICIT

          

Common stock, par value $0.01; 20,000 shares authorized; 12,439 shares issued and outstanding, actual;              shares issued and outstanding, pro forma

     124          E     

Additional paid-in capital

     2,883          E     

Accumulated deficit

     (1,035,265        F     

Accumulated other comprehensive income

     2,401          
  

 

 

   

 

 

       

 

 

 

Total stockholders’ deficit

     (1,029,857        
  

 

 

   

 

 

       

 

 

 

Total liabilities, contingently redeemable common stock and stockholders’ deficit

   $ 3,273,856           $  
  

 

 

   

 

 

       

 

 

 

 

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BJ’S WHOLESALE CLUB HOLDINGS, INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

(Amounts in thousands, except per share amounts)

 

     Historical
Fiscal Year
Ended

February 3,
2018
    Pro Forma
Adjustments
     Note      Pro Forma
Fiscal Year
Ended
February 3,
2018
 

Net sales

   $ 12,495,995           $           

Membership fee income

     258,594          
  

 

 

   

 

 

       

 

 

 

Total revenues

     12,754,589          

Cost of sales

     10,513,492          

Selling, general and administrative expenses

     2,017,821          G     

Preopening expenses

     3,004          
  

 

 

   

 

 

       

 

 

 

Operating income

     220,272          

Interest expense, net

     196,724          H     
  

 

 

   

 

 

       

 

 

 

Income from continuing operations before income taxes

     23,548          

Provision for income taxes

     (28,427        I     
  

 

 

   

 

 

       

 

 

 

Net income from continuing operations

   $ 51,975           $  
  

 

 

   

 

 

       

 

 

 

Income from continuing operations per share attributable to common stockholders

   $ 4.12          J     

Basic

          

Diluted

   $ 3.94          J      $  
  

 

 

   

 

 

       

 

 

 

Weighted-average number of common shares outstanding:

          

Basic

     12,627          J     

Diluted

     13,181          J     

 

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BJ’S WHOLESALE CLUB HOLDINGS, INC.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts)

1. Description of Transactions

We intend to issue and sell          shares of our common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus. Our net proceeds from this offering will be net of underwriting discounts and estimated offering expenses payable by us. Upon consummation of this offering, we intend to use the net proceeds from our initial public offering together with cash and borrowings under the ABL Facility to repay approximately $         million of indebtedness plus $         million of accrued and unpaid interest and prepayment premium under the Second Lien Facility. In addition, upon consummation of this offering, our contingently redeemable common stock will be reclassified to stockholders’ equity resulting from the automatic termination of the non-Sponsor stockholders’ put rights and we no longer will have to pay a fee for our management services agreement with our Sponsors.

2. Pro Forma Adjustments

The following pro forma adjustments are included in the Company’s unaudited pro forma consolidated financial statements related to the transactions described above:

Unaudited Pro Forma Consolidated Balance Sheet Adjustments

 

  (A)

Cash and cash equivalents—An adjustment was recorded to increase cash and cash equivalents by $         to reflect net proceeds from this offering of $        , plus an additional $         reflecting offering expenses that we had already paid in cash as of February 3, 2018.

An adjustment was recorded to decrease cash and cash equivalents by $         to reflect the repayment of principal, prepayment fees and interest outstanding under our Second Lien Facility upon the consummation of our initial public offering.

 

  (B)

Other assets—An adjustment was recorded to decrease other assets by $         to reflect the reclassification of deferred offering costs incurred in connection with this offering to stockholders’ equity upon the consummation of this offering.

 

  (C)

Accrued expenses and other current liabilities—An adjustment was recorded to decrease accrued expenses and other current liabilities by $         to reflect the payment of accrued interest under our Second Lien Facility upon the consummation of our initial public offering.

An adjustment was recorded to decrease accrued expenses and other current liabilities by $         to reflect the payment of accrued initial public offering costs upon the consummation of this offering.

 

  (D)

Current portion of long-term debt and long-term debt—Adjustments were recorded to decrease the current portion of long-term debt and long-term debt by $         and $        , respectively, to reflect the repayment of principal under our Second Lien Facility in connection with the consummation of our initial public offering.

Adjustments were recorded to increase current portion of our long-term debt by $         to reflect borrowings under our ABL Facility to repay our Second Lien Facility.

 

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BJ’S WHOLESALE CLUB HOLDINGS, INC.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts)

 

  (E)

Contingently redeemable common stock, common stock and additional paid-in capital—Adjustments were recorded to decrease contingently redeemable common stock by $         and increase common stock and additional paid-in capital by $         and $        , respectively, to reflect the conversion of our contingently redeemable common stock to stockholders’ equity resulting from the automatic termination of the non-Sponsor stockholders’ put rights upon consummation of this offering.

An adjustment was recorded to increase common stock and additional paid-in capital by $         and $        , respectively, for          shares issued in this offering.

 

  (F)

Accumulated deficit—An adjustment was recorded to increase accumulated deficit by $         to reflect the loss on the extinguishment of debt as a result of the repayment of outstanding indebtedness under our Second Lien Facility as described above.

Unaudited Pro Forma Consolidated Statement of Operations Adjustments

Year Ended February 3, 2018

 

  (G)

Selling, general and administrative expenses—An adjustment was recorded to eliminate selling, general and administrative expenses of $         related to the fee from our management services agreement with our Sponsors, which will terminate upon the consummation of this offering.

 

  (H)

Interest expense—An adjustment of $         was recorded to record interest expense for the fiscal year ended February 3, 2018 related to the borrowings under our ABL Facility, which were used to repay our Second Lien Facility. The ABL Facility bears interest, either on LIBOR plus a range of 150 to 200 basis points based on excess availability, or an alternative base rate calculation based on the higher of prime or the federal funds rate plus 50 basis points, plus a range of 50 to 100 basis points based on excess availability. The Company may elect 1 week or 1, 2, 3, or 6 month LIBOR terms. For the purpose of preparing these unaudited pro forma consolidated financial statements, an interest rate of         % was assumed, which reflects the rate in effect as of the date of this offering. A 1/8th percent increase in the LIBOR rate would result in an increase to the above noted interest expense of approximately $        .

An adjustment of $         was recorded to reduce interest expense for the fiscal year ended February 3, 2018 to reflect the repayment of approximately $         million of indebtedness plus $         million of accrued and unpaid interest and prepayment premium under the Second Lien Facility as if such repayment had occurred on January 29, 2017.

The unaudited pro forma consolidated statements of operations does not include an adjustment of approximately $         to reflect the loss on the extinguishment of debt as a result of the repayment of outstanding indebtedness under our Second Lien Facility, which is one-time in nature and not expected to have a continuing impact on our results of operations.

 

  (I)

Provision for income taxes—An adjustment of $         was recorded to increase the provision for income taxes for the fiscal year ended February 3, 2018 to reflect the impact of the pro forma adjustments noted above using a blended federal and state statutory tax rate of     % .

 

  (J)

Weighted average shares outstanding, basic and diluted—The weighted average shares outstanding used to compute basic and diluted net income per share for the fiscal year ended February 3, 2018 have been adjusted to give effect to the issuance of shares issued in this offering whose proceeds will be used to repay outstanding principal under our Second Lien facility, as if such issuances had occurred on January 29, 2017.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information included in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” sections of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to the last day of January. Accordingly, references herein to “fiscal year 2012” relate to the 53 weeks ended February 2, 2013, references herein to “fiscal year 2013” relate to the 52 weeks ended February 1, 2014, references herein to “fiscal year 2014” relate to the 52 weeks ended January 31, 2015, references herein to “fiscal year 2015” relate to the 52 weeks ended January 30, 2016, references herein to “fiscal year 2016” relate to the 52 weeks ended January 28, 2017 and references herein to “fiscal year 2017” relate to the 53 weeks ending February 3, 2018.

Overview

BJ’s Wholesale Club is a leading warehouse club operator on the East Coast of the United States. We deliver significant value to our members, consistently offering 25% or more savings on a representative basket of manufacturer-branded groceries compared to traditional Supermarket Competitors. We provide a curated assortment focused on perishable products, continuously refreshed general merchandise, gas and other ancillary services to deliver a differentiated shopping experience, that is further enhanced by our omnichannel capabilities.

Over the last two years, we have hired Chris Baldwin as President and Chief Executive Officer and have made multiple senior management hires and changes, adding consumer packaged goods, digital and consulting experience to our leadership team. This new leadership team has implemented significant cultural and operational changes to our business, including transforming how we use data to improve member experience, instilling a culture of cost discipline, adopting a more proactive approach to growing our membership base and building an omnichannel offering oriented towards making shopping at BJ’s more convenient. These changes have delivered results rapidly, evidenced by positive and accelerating comparable club sales over the last two quarters and net income growth of over 109% and Adjusted EBITDA growth of 31% in aggregate over the last two fiscal years. We believe that these changes will continue to impact sales, profit margins and free cash flow performance favorably in the future. In fiscal year 2017, we generated total revenues, net income and Adjusted EBITDA of $12.8 billion, $50 million and $534 million, respectively.

Since pioneering the warehouse club model in New England in 1984, we have grown our footprint to 215 large-format, high volume warehouse clubs spanning 16 states. In our core New England markets, which have high population density and generate a disproportionate part of U.S. GDP, we operate almost three times the number of clubs compared to the next largest warehouse club competitor. In addition to shopping in our clubs, members are able to shop when and how they want through our website, bjs.com; our highly-rated mobile app and our integrated Instacart same-day delivery offering.

Our goal is to offer our members significant value and a meaningful return, in savings, on their annual membership fee. We have more than five million members paying annual fees to gain access to savings on groceries, consumables, general merchandise, gas and ancillary services. The annual membership fee for our base Inner Circle® Membership is $55 per year, and our BJ’s Perks Rewards® Membership, which offers additional value-enhancing features, costs $110 annually. We believe that members can save over ten times their $55 Inner

 

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Circle membership fee versus what they would have paid at traditional supermarket competitors when they spend $2,500 or more per year at BJ’s on manufacturer-branded groceries. In addition to providing significant savings on a representative basket of manufacturer-branded groceries, we accept all manufacturer coupons and rebates and also carry our own exclusive brands that enable members to save on price without compromising on quality. Our two private label brands, Wellsley Farms® and Berkley Jensen®, represent over $2 billion in sales, and are the largest brands we sell. Our customers recognize the relevance of our value proposition across economic environments, as demonstrated by over 20 consecutive years of membership fee income growth. Our membership fee income was $259 million for fiscal year 2017, and represents approximately half of our Adjusted EBITDA.

For additional detail regarding these initiatives, see “Business—Our Company.”

Our business is moderately seasonal in nature. Historically, our business has realized a slightly higher portion of net sales, operating income and cash flows from operations in the second and fourth fiscal quarters, attributable primarily to the impact of the summer and year-end holiday season, respectively.

We believe we are well-positioned to fill a niche between other warehouse clubs and grocery retailers, where we can more effectively compete for the weekly shopping trip. We are pursuing a number of strategies designed to continue our growth, including investing in our membership program to grow our member base, improving the member experience to drive sales and margins, investing in technology to improve member convenience and differentiate our online offering, expanding our strategic footprint and continuing to execute on our strong track record of productivity improvements.

Factors Affecting Our Business

Overall economic trends. The overall economic environment and related changes in consumer behavior have a significant impact on our business. In general, positive conditions in the broader economy promote customer spending in our clubs, while economic weakness which generally results in a reduction of customer spending may have a different or more extreme effect on spending at our clubs. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, business conditions, changes in the housing market, the availability of credit, interest rates, tax rates and fuel and energy costs. In addition, during periods of low unemployment, we may experience higher labor costs.

Size and loyalty of membership base. The membership model is a critical element of our business. Members drive our results of operations through their membership fee income and their purchases. The majority of members renew within six months following their renewal date. Therefore, our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. We have grown our membership fee income each year over the past two decades. Our membership fee income totaled $259 million in fiscal year 2017. Our membership renewal rate, a key indicator of membership engagement, satisfaction and loyalty, reached an all-time high of 86% during fiscal year 2017.

Consumer preferences and demand. Our ability to maintain our appeal to existing customers and attract new customers depends on our ability to originate, develop and offer a compelling product assortment responsive to customer preferences. If we misjudge the market for our products, we may be faced with excess inventories for some products and may be required to become more promotional in our selling activities, which would impact our net sales and gross profit.

Infrastructure investment. Our historical operating results reflect the impact of our ongoing investments to support our growth. We have made significant investments in our business that we believe have laid the foundation for continued profitable growth. We believe that strengthening our management team and enhancing our information systems, including our distribution center management and POS systems, will enable us to replicate our profitable club format and provide a differentiated shopping experience. We expect these infrastructure investments to support our successful operating model across our club operations.

 

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Product mix. Changes in our product mix affect our performance. For example, we continue to add private label products to our assortment of product offerings at our clubs, which we generally price lower than the manufacturer branded products of comparable quality that we also offer. Accordingly, a shift in our sales mix in which we sell more units of our private label products and fewer units of our manufacturer branded products would generally have a positive impact on our profit margins but an adverse impact on our overall net sales. Changes in our revenues from gasoline sales may also negatively affect our performance. Since gasoline generates lower profit margins than the remainder of our business, we could expect to see our overall gross profit margin rates decline as sales of gasoline increase.

Effective sourcing and distribution of products. Our net sales and gross profit are affected by our ability to purchase our products in sufficient quantities at competitive prices. While we believe our vendors have adequate capacity to meet our current and anticipated demand, our level of net sales could be adversely affected in the event of constraints in our supply chain, including our inability to procure and stock sufficient quantities of some merchandise in a manner that is able to match market demand from our customers, leading to lost sales.

Gas prices. The market price of gasoline impacts our net sales and comparable club sales, and large fluctuations in the price of gasoline can produce a short term impact on our margins. Retail gasoline prices are driven by daily crude oil and wholesale commodity market changes and are volatile, as they are influenced by factors that include changes in demand and supply of oil and refined products, global geopolitical events, regional market conditions and supply interruptions caused by severe weather conditions. Typically, the change in crude oil prices impacts the purchase price of wholesale petroleum fuel products, which in turn impacts retail gasoline prices at the pump. During times when prices are particularly volatile, differences in pricing and procurement strategies between the Company and its competitors may lead to temporary margin contraction or expansion depending on whether prices are rising or falling, and this impact could affect our overall results for a fiscal quarter.

In addition, the relative level of gasoline prices from period to period can lead to differences in our net sales between those periods. Further, because we generally attempt to maintain a fairly stable gross profit per gallon, this variance in net sales, which may be substantial, may or may not have a significant impact on our operating income.

Fluctuation in quarterly results. Our quarterly results have historically varied depending upon a variety of factors, including our product offerings, promotional events, club openings, weather related events and shifts in the timing of holidays, among other things. As a result of these factors, our working capital requirements and demands on our product distribution and delivery network may fluctuate during the year.

Inflation and deflation trends. Our financial results can be expected to be directly impacted by substantial increases in product costs due to commodity cost increases or general inflation, which could lead to a reduction in our sales as well as greater margin pressure as costs may not be able to be passed on to consumers. To date, changes in commodity prices and general inflation have not materially impacted our business. In response to increasing commodity prices or general inflation, we seek to minimize the impact of such events by sourcing our merchandise from different vendors, changing our product mix or increasing our pricing when necessary.

Refinancings. We expect to use the proceeds of this offering to repay indebtedness under our Second Lien Facility, which will reduce our cost of capital and debt service obligations. For more information, please see “Use of Proceeds.”

53rd week. Our fiscal year 2017 consisted of 53 weeks and our fiscal years 2016 and 2015 each consisted of 52 weeks. Fiscal years in which there are 53 weeks will see increased net sales and expenses from the additional week.

 

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How We Assess the Performance of Our Business

In assessing our performance, we consider a variety of performance and financial measures. The key GAAP measures include net sales, membership fee income, cost of sales and selling, general and administrative expenses. In addition, we also review other important metrics such as Adjusted EBITDA, comparable club sales and comparable club sales excluding gasoline sales.

Net sales

Net sales are derived from direct retail sales to customers in our clubs and online, net of merchandise returns and discounts. Growth in net sales is impacted by opening new clubs and increases in comparable club sales.

Comparable club sales

Comparable club sales, also known as same store sales, is an important measure throughout the retail industry. In determining comparable club sales, we include all clubs that were open for at least 13 months at the beginning of the period and were in operation during all of both periods being compared, including relocated clubs and expansions. There may be variations in the way in which some of our competitors and other retailers calculate comparable or “same club” sales. As a result, data in this prospectus regarding our comparable club sales may not be comparable to similar data made available by other retailers.

Comparable club sales allow us to evaluate how our club base is performing by measuring the change in period-over-period net sales in clubs that have been open for the applicable period. Various factors affect comparable club sales, including consumer preferences and trends, product sourcing, offerings and pricing, customer experience and purchase amounts, weather and holiday shopping period timing and length.

We intend to improve comparable club sales by continuing initiatives aimed at increasing club visits and basket size. Among these initiatives are those aimed at tailoring promotional offerings, improving the convenience of accessing our offering, and allowing our members to complete their shopping more quickly.

Opening new clubs is an important part of our growth strategy. As we continue to pursue our growth strategy, we anticipate that an increasing percentage of our net sales will come from clubs not included in our comparable club sales calculation. Accordingly, comparable club sales are only one measure we use to assess the success of our growth strategy.

Comparable club sales excluding gasoline sales

Comparable club sales excluding gasoline sales is calculated by excluding sales from our gasoline operations from comparable club sales for the applicable period.

Membership fee income

Membership fee income reflects the amount collected from our customers to be a member of our clubs. Membership fee income is recognized in revenue on a straight-line basis over the life of the membership, which is typically twelve months.

Cost of sales

Cost of sales consists primarily of the direct cost of merchandise and gasoline sold at our clubs, including the following:

 

   

costs associated with operating our distribution centers, including payroll, payroll benefits, occupancy costs and depreciation;

 

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

 

   

vendor allowances, rebates and cash discounts.

Selling, general and administrative expenses

Selling, general and administrative expenses (“SG&A”) consist of various expenses related to supporting and facilitating the sale of merchandise in our clubs, including the following:

 

   

payroll and payroll benefits for club and corporate employees;

 

   

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

 

   

advertising expenses;

 

   

tender costs, including credit and debit card fees;

 

   

amortization of intangible assets; and

 

   

consulting, legal, insurance and other professional services expenses.

SG&A includes both fixed and variable components and, therefore, is not directly correlated with net sales. In addition, the components of our SG&A expenses may not be comparable to those of other retailers. We expect that our SG&A expenses will increase in future periods due to our continuing club growth and in part due to additional legal, accounting, insurance and other expenses that we expect to incur as a result of being a public company, including compliance with the Sarbanes-Oxley Act. In addition, any increase in future stock option or other stock-based grants or modifications will increase our stock-based compensation expense included in SG&A.

Adjusted EBITDA

Adjusted EBITDA is defined as income from continuing operations before interest expense, net, provision (benefit) for income taxes and depreciation and amortization, adjusted for the impact of certain other items, including compensatory payments related to options, stock-based compensation expense, pre-opening expenses, management fees, noncash rent, strategic consulting expenses, severance, asset retirement obligations and other adjustments. For a reconciliation of Adjusted EBITDA to income from continuing operations, the most directly comparable GAAP measure, see “—Non-GAAP Financial Measures.”

Non-GAAP Financial Measures

Adjusted EBITDA

We present Adjusted EBITDA, which is not a recognized financial measure under GAAP, because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, such as compensatory payments related to options, stock-based compensation expense, preopening expenses, management fees, noncash rent, strategic consulting, severance, asset retirement obligations and other adjustments. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA following this offering, and any such modification may be material. In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.

 

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Management believes Adjusted EBITDA is helpful in highlighting trends in our core operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also use Adjusted EBITDA in connection with establishing discretionary annual incentive compensation; to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies; to make budgeting decisions; and to compare our performance against that of other peer companies using similar measures. See “Non-GAAP Financial Measures.”

The following is a reconciliation of our income from continuing operations to Adjusted EBITDA for the periods presented:

 

     Fiscal Year Ended  
     January 30,
2016
    January 28,
2017
    February 3,
2018
 
     (in thousands)  

Income from continuing operations

   $ 24,654     $ 44,700     $ 51,975  

Interest expense, net

     150,093       143,351       196,724  

Provision (benefit) for income taxes

     12,049       27,968       (28,427

Depreciation and amortization

     177,483       178,325       164,061  

Compensatory payments related to options(1)

     1,497       6,143       77,953  

Stock-based compensation expense(2)

     2,265       11,828       9,102  

Preopening expenses(3)

     6,458       2,749       3,004  

Management fees(4)

     8,139       8,053       8,038  

Noncash rent(5)

     8,976       7,138       5,391  

Strategic consulting(6)

     14,619       26,157       30,316  

Severance(7)

     7,488       2,320       9,065  

Asset retirement obligations(8)

     (7,044     —         —    

Other adjustments(9)

     (685     (1,406     6,305  
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 405,992     $ 457,326     $ 533,507  
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA as a percentage of net sales

     3.3%       3.8%       4.3%  
  

 

 

   

 

 

   

 

 

 

 

(1)

Represents payments to holders of our stock options made pursuant to antidilution provisions in connection with dividends paid to our Sponsors.

(2)

Represents non-cash stock-based compensation expense.

(3)

Represents direct incremental costs of opening or relocating a facility that are charged to operations as incurred.

(4)

Represents management fees paid to our Sponsors (or advisory affiliates thereof) in accordance with our management services agreement, which will terminate on the consummation of this offering. See “Certain Relationships and Related Party Transactions—Management Services Agreement.”

(5)

Consists of an adjustment to remove the non-cash portion of rent expense, which has been recorded on a straight-line basis in accordance with GAAP.

(6)

Represents fees paid to external consultants for two strategic initiatives of limited duration.

(7)

Represents termination costs associated with voluntary and involuntary workforce reductions that occurred in January 2016, incremental severance expense to former executives and voluntary workforce reductions that occurred in February 2018.

(8)

Represents non-cash gain related to a change in the estimated removal costs of our tanks and other infrastructure at our gasoline stations that has been accounted for as an asset retirement obligation.

(9)

Other non-cash or discrete items as determined by management, including amortization of a deferred gain from sale lease back transactions in 2013, non-cash accretion expense on asset retirement obligations, obligations associated with our post-retirement medical plan and incremental expense to former executives. Fiscal year 2017 includes corporate related transactional costs.

See “Non-GAAP Financial Measures” for more information on our use of Adjusted EBITDA.

 

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Free cash flow

We present free cash flow, which is not a recognized financial measure under GAAP, because we use it to report to our board of directors and we believe it assists investors and analysts in evaluating our liquidity. Free cash flow should not be considered as an alternative to cash flows from operations as a liquidity measure. We define “free cash flow” as net cash provided by operating activities net of capital expenditure.

The following is a reconciliation of our net cash from operating activities to free cash flow for the periods presented:

 

     Fiscal Year Ended  
     January 30,
2016
     January 28,
2017
     February 3,
2018
 
     (in thousands)  

Net cash from operating activities

   $ 159,361      $ 297,428      $ 210,085  

Less: Capital expenditures

     112,363        114,756        137,466  
  

 

 

    

 

 

    

 

 

 

Free cash flow

   $ 46,998      $ 182,672      $ 72,619  
  

 

 

    

 

 

    

 

 

 

Results of Operations

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

 

     Fiscal Year Ended  
     January 30,
2016
     January 28,
2017
     February 3,
2018
 

Statement of Operations Data (in thousands):

        

Net sales

   $ 12,220,215      $ 12,095,302      $ 12,495,995  

Membership fee income

     247,338        255,235        258,594  
  

 

 

    

 

 

    

 

 

 

Total revenues

     12,467,553        12,350,537        12,754,589  

Cost of sales

     10,476,519        10,223,017        10,513,492  

Selling, general and administrative expenses

     1,797,780        1,908,752        2,017,821  

Preopening expenses

     6,458        2,749        3,004  
  

 

 

    

 

 

    

 

 

 

Operating income

     186,796        216,019        220,272  

Interest expense, net

     150,093        143,351        196,724  
  

 

 

    

 

 

    

 

 

 

Income from continuing operations before income taxes

     36,703        72,668        23,548  

Provision (benefit) for income taxes

     12,049        27,968        (28,427)  
  

 

 

    

 

 

    

 

 

 

Income from continuing operations

     24,654        44,700        51,975  

Loss from discontinued operations, net of income taxes

     (550)        (476)        (1,674)  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 24,104      $ 44,224      $ 50,301  
  

 

 

    

 

 

    

 

 

 

Operational Data:

        

Total clubs at end of period

     213        214        215  

Comparable club sales

     (4.2)%        (2.6)%        0.8%  

Comparable club sales excluding gasoline sales

     (0.5)%        (2.3)%        (0.9)%  

Adjusted EBITDA (in thousands)

   $ 405,992      $ 457,326      $ 533,507  

Free cash flow (in thousands)

     46,998        182,672        72,619  

 

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Fiscal Year Ended February 3, 2018 Compared to Fiscal Year Ended January 28, 2017

Net Sales

Net sales for fiscal year 2017 were $12.5 billion, a 3.3% increase from net sales reported in fiscal year 2016 of $12.1 billion. The increase was due to a 0.8% increase in comparable club sales, incremental sales from two new clubs opened since the beginning of last year and the impact of the 53rd week in fiscal year 2017. Adjusting for the additional week, net sales increased by approximately 1.3% to $12.3 billion from fiscal year 2016 to fiscal year 2017.

Comparable club sales

 

     Fiscal Year Ended  
     January 28,
2017
    February 3,
2018
 

Comparable club sales

     (2.6 )%      0.8

Less: contribution from gasoline sales

     (0.3 )%      1.7
  

 

 

   

 

 

 

Comparable club sales excluding gasoline sales

     (2.3 )%      (0.9 )% 
  

 

 

   

 

 

 

Comparable club sales increased 3.4%, to 0.8% in fiscal year 2017 from (2.6)% in fiscal year 2016. The increase in comparable club sales includes a favorable contribution from gasoline sales of 1.7% primarily due to price inflation. The average retail price per gallon increased by approximately 11.5% versus fiscal year 2016. Gallons sold increased by 4.7% over fiscal year 2016.

Merchandise comparable club sales decreased 0.9% in fiscal year 2017 due to a 1.6% decrease in sales of edible grocery and a 0.9% decrease in sales of perishables, partially offset by a 0.8% increase in sales of non-edible groceries and a 2.0% increase in sales of general merchandise. The decline in edible grocery sales was driven by decreased sales of beverages, candy and breakfast foods partially offset by increases in specialty foods and water. The decrease in perishable sales was driven by lower sales of frozen meat and fresh produce, partially offset by increased sales in prepackaged meat and full-service deli. Non-edible grocery sales increased due to better sales of household chemicals, partially offset by lower sales in pet care. Finally, the sales increase in general merchandise was driven by strong sales of apparel and home office supplies, slightly offset by lower sales in electronics.

Membership fee income

Membership fee income was $258.6 million in fiscal year 2017 versus $255.2 million in fiscal year 2016, a 1.3% increase. The growth was driven by a 5.8% increase in membership fee income on a cash basis, an increase in our renewal rate and incremental member acquisition efforts. The increase also reflects one month of our membership fee increase that became effective January 2, 2018.

Cost of sales

Costs of sales was $10.5 billion, or 84.1% of net sales, in fiscal year 2017, compared to $10.2 billion, or 84.5% of net sales, in fiscal year 2016. The decrease of 0.4% was attributable to improved merchandise margins on sales excluding gasoline of approximately 0.6% that was partially offset by an unfavorable margin contribution from higher gasoline sales of approximately 0.2%. The merchandise margin rate increased due to successful assortment optimization and better sales penetration of private label items. Private label penetration increased to 19% in fiscal year 2017 from 18% in fiscal year 2016.

Selling, general and administrative expenses

SG&A expenses were $2.0 billion, or 16.2% of net sales in fiscal year 2017, compared to $1.9 billion, or 15.8% of net sales, in fiscal year 2016. The 0.4% increase was driven primarily by $78.0 million in compensatory

 

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payments to stock option holders pursuant to antidilution provisions in connection with dividends paid to our Sponsors and $9.1 million of severance expense associated with a voluntary reduction in force in February 2018. Excluding these items, SG&A expense as a percent of net sales decreased by approximately 0.3% due primarily to lower credit card related expenses of 0.1% and lower payroll benefits expense of 0.2% due mostly to lower medical and bonus expense.

Total payroll and payroll benefits expense, excluding the compensatory dividend payments and severance expense described above, increased by $23.7 million in fiscal year 2017, compared to fiscal year 2016. Total payroll and payroll benefits represented approximately 43% of total SG&A expense in fiscal year 2017 compared to 45% in fiscal 2016.

Preopening expenses

Preopening expenses were $3.0 million in fiscal year 2017, compared to $2.7 million in fiscal year 2016. Preopening expenses for fiscal year 2017 include charges for one new club, two new gasoline stations and one club relocation that occurred in the first quarter of fiscal year 2018. Preopening expenses for fiscal 2016 includes expenses for one new club and three gasoline stations.

Preopening expenses vary due to the number of club openings and the timing of those openings within the fiscal year. The average capital outlay for a new or relocated club is approximately $4 million which represents the cost of construction and equipment to bring the leased premises to operative. We expect these expenditures to be financed primarily with cash from operations.

Interest expense

Interest expense was $196.7 million in fiscal year 2017, compared to $143.4 million in fiscal year 2016. Interest expense for fiscal year 2017 includes interest of $163.2 million related to debt service on outstanding borrowings, $8.5 million of amortization expense on deferred financing costs and original issue discounts on our outstanding borrowings, $21.1 million of charges related to debt refinancing loss on extinguishment of debt and $3.9 million of other interest charges.

Interest expense for fiscal year 2016 includes interest of $122.2 million related to debt service on outstanding borrowings, $17.1 million of amortization expense on deferred financing costs and original issue discounts on our outstanding borrowings and $4.1 million of other interest charges.

Provision for income taxes

Our effective tax rate during the twelve months ended February 3, 2018 was impacted by the Tax Cuts and Jobs Act (“TCJA”), which was enacted into law on December 22, 2017. The TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, effective as of January 1, 2018; limitation of the tax deduction for interest expense; limitation of the deduction for net operating losses to 80% of annual taxable income and elimination of net operating loss carrybacks (though any such tax losses may be carried forward indefinitely); and modifying or repealing many business deductions and credits.

Income tax effects resulting from changes in tax laws are provisional and accounted for by the Company in accordance with the authoritative guidance, which requires that these tax effects be recognized in the period in which the law is enacted and the effects are recorded as a component of provision for income taxes from continuing operations. As a result, the effective tax rate from continuing operations was a benefit of (120.7%) in fiscal year 2017 compared to a rate of 38.5% in fiscal year 2016, primarily driven by a one-time adjustment of $32.1 million for the revaluation of the Company’s net deferred tax liabilities, and other non-recurring items in fiscal year 2017 including a solar tax credit net tax benefit of $3.1 million, and a stock option windfall tax benefit of $1.3 million. Further, our effective tax rate in future periods will be favorably impacted by the lower federal statutory corporate income tax rate of 21%.

 

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Loss from discontinued operations

Loss from discontinued operations (net of income tax benefit) was $1.7 million in fiscal year 2017, compared to $0.5 million in fiscal year 2016. The loss for both periods consists of post-tax accretion expense on lease obligations related to two closed locations. The loss in fiscal year 2017, includes a charge of $2.1 million to the reserve due to a change in our estimated sublease income for the locations.

Fiscal Year Ended January 28, 2017 Compared to Fiscal Year Ended January 30, 2016

Net Sales

Net sales for fiscal year 2016 were $12.1 billion, a 1.0% decrease compared to net sales for fiscal year 2015 of $12.2 billion. The decrease was driven by a decrease in comparable club sales of 2.6%, partially offset by incremental sales from seven new clubs opened since the beginning of fiscal year 2015.

Comparable club sales

 

     Fiscal Year Ended  
     January 30,
2016
    January 28,
2017
 

Comparable club sales

     (4.2 )%      (2.6 )% 

Less: contribution from gasoline sales

     (3.7 )%      (0.3 )% 
  

 

 

   

 

 

 

Comparable club sales excluding gasoline sales

     (0.5 )%      (2.3 )% 
  

 

 

   

 

 

 

The 2.6% decrease in comparable club sales in fiscal year 2016 includes an unfavorable contribution from gasoline sales of 0.3% due to price deflation, offset by an increase in gallons sold by 6.1% over fiscal year 2015. Comparable club sales excluding gasoline sales decreased 2.3% in fiscal year 2016, comprised of decreases in sales of approximately 4% in perishables, 1% in non-edible grocery, 1% in edible grocery and flat sales in general merchandise. Sales results were directly impacted by increased deflation, particularly in the meat and dairy categories. We also experienced indirect pressure from deflation, as it enabled grocery competitors to advertise aggressive pricing in these categories in order to drive traffic. We also took steps during the year that negatively impacted sales in favor of greater profitability, primarily by reducing sales of certain low-margin merchandise items, such as bulk cigarettes, at our clubs and by closing cafes operated in many clubs and replacing them with Dunkin Donuts franchises pursuant to a license agreement. Efforts such as growing our private label penetration had a positive impact on margins and a discrete impact on sales dollars.

Comparable club sales attributable to gasoline remained flat in fiscal year 2016, compared to a decrease of 3.7% in fiscal year 2015, which was primarily to due to lower gasoline prices over the course of the year.

Membership fee income

Membership fee income was $255.2 million in fiscal year 2016 compared to $247.3 million in fiscal year 2015, a 3.2% increase. The growth was driven primarily by an increase in total members due to new club openings and an increase in member renewals.

Cost of sales

Cost of sales was $10.2 billion, or 84.5% of net sales in fiscal year 2016, compared to $10.5 billion, or 85.7% of net sales in fiscal year 2015. The decrease of 1.2% was attributable to improved merchandise margins on sales excluding gasoline of approximately 1.3% that was partially offset by an unfavorable contribution from gasoline margins of approximately 0.1%. The merchandise margin rate increased due to successful assortment optimization and better sales penetration of private label items.

 

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Selling, general and administrative expenses

SG&A expenses were $1.9 billion, or 15.8% of net sales in fiscal year 2016, compared to $1.8 billion, or 14.7% of net sales in fiscal year 2015. The 1.1% increase was driven by higher bonus expense of 0.3% due to the Company exceeding fiscal 2016 bonus targets, higher rent and occupancy costs of 0.2% mainly attributable to new club and gas station openings, increased advertising costs of 0.2%, increased strategic consulting costs of 0.1%, non-recurring credit card related expense of 0.1%, higher stock compensation expense of 0.1% due to a modification of existing awards and the impact of a non-cash gain recorded last year related to a change in estimated asset retirement obligations of 0.1%.

Total payroll and payroll benefits expense increased by $44.5 million in fiscal year 2016, compared to fiscal year 2015 due primarily to increased bonus and stock compensation expense. Total payroll and payroll benefits represented approximately 45% of total SG&A expense in both periods.

Preopening expenses

Preopening expenses were $2.7 million in fiscal year 2016 compared to $6.5 million in fiscal year 2015. Preopening expenses for fiscal year 2016 include expenses for one new club and 3 new gas stations. Preopening expenses for fiscal year 2015 include expenses for six new club openings and seven new gas stations.

Preopening expenses vary due to the number of club openings and the timing of those openings within the fiscal year. The average capital outlay for a new or relocated club is approximately $4 million which represents the cost of construction and equipment to bring the leased premises to operative. We expect these expenditures primarily to be financed with cash from operations.

Interest expense

Interest expense was $143.4 million in fiscal year 2016 compared to $150.1 million in fiscal year 2015. Interest expense for fiscal year 2016 included interest of $122.2 million related to debt service on outstanding borrowings, $17.1 million of amortization expense on the deferred financing costs and original issue discounts on our outstanding borrowings and $4.1 million of other interest charges.

Interest expense for fiscal year 2015 included interest of $127.3 million related to debt service on outstanding borrowings, $16.8 million of amortization expense on the deferred financing costs and original issue discounts on our outstanding borrowings and $6.0 million of other interest charges.

Provision for income taxes

Our effective tax rate from continuing operations was 38.5% in fiscal year 2016 compared to 32.8% in fiscal year 2015. The increase in our effective income tax rate was due primarily to the increase in our pre-tax income and a decrease in discrete tax benefits associated with the reversal of liabilities for uncertain tax positions resulting from the expiration of statutes of limitations.

Loss from discontinued operations

Loss from discontinued operations (net of income tax benefit) was $0.5 million in fiscal year 2016 compared to $0.6 million in fiscal year 2015. The loss for both periods consists of post-tax accretion expense on lease obligations related to two closed locations.

Seasonality

Our business is moderately seasonal in nature. Historically, our business has realized a slightly higher portion of net sales, operating income and cash flows from operations in the second and fourth fiscal quarters,

 

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attributable primarily to the impact of the summer and year-end holiday season, respectively. Our quarterly results have been and will continue to be affected by the timing of new club openings and their associated pre-opening costs. As a result of these factors, our financial results for any single quarter or for periods of less than a year are not necessarily indicative of the results that may be achieved for a full fiscal year.

Quarterly Results of Operations

The following table sets forth certain financial and operating information for each quarter during fiscal years 2016 and 2017. The quarterly information includes all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the information presented. This information should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this prospectus. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.

 

     Fiscal Year 2016      Fiscal Year 2017  
     (in thousands)      (in thousands)  
     First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
     First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
 

Net sales

   $ 2,929,287      $ 3,077,141      $ 2,922,385      $ 3,166,489      $ 2,883,298      $ 3,103,335      $ 3,019,389      $ 3,489,973  

Membership fees

     63,765        64,335        63,810        63,325        63,530        64,192        64,856        66,016  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     2,993,052        3,141,476        2,986,195        3,229,814        2,946,828        3,167,527        3,084,245        3,555,989  

Cost of sales

     2,488,855        2,596,291        2,456,204        2,681,667        2,441,306        2,620,805        2,523,297        2,928,084  

Selling, general and administrative expenses

     475,622        472,729        475,483        484,918        532,499        470,715        480,285        534,322  

Preopening expenses

     333        607        1,455        354        807        1,226        123        848  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss)

     28,242        71,849        53,053        62,875        (27,784)        74,781        80,540        92,735  

Interest expense, net

     36,632        35,880        35,484        35,355        64,070        43,820        42,321        46,513  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations before income taxes

     (8,390)        35,969        17,569        27,520        (91,854)        30,961        38,219        46,222  

Provision (benefit) for income taxes

     (3,293)        14,118        6,317        10,826        (33,067)        11,146        15,346        (21,852)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations

     (5,097)        21,851        11,252        16,694        (58,787)        19,815        22,873        68,074  

Loss from discontinued operations, net of income taxes

     (123)        (122)        (117)        (114)        (107)        (103)        (98)        (1,366)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ (5,220)      $ 21,729      $ 11,135      $ 16,580      $ (58,894)      $ 19,712      $ 22,775      $ 66,708  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operational data:

                       

Total clubs at end of period

     213        213        213        214        214        215        215        215  

Comparable club sales

     (1.3)%        (3.2)%        (4.0)%        (1.9)%        (2.0)%        0.1%        2.8%        2.2%  

Comparable club sales excluding gasoline sales

     0.5%        (1.7)%        (3.9)%        (3.6)%        (4.5)%        (0.9)%        0.4%        1.2%  

Adjusted EBITDA (in thousands)

   $ 86,815      $ 129,109      $ 113,752      $ 127,650      $ 98,684      $ 135,741      $ 141,084      $ 157,998  

Free cash flow (in thousands)

     21,230        57,691        23,697        80,054        (89,581)        97,298        6,520        58,382  

 

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The following is a reconciliation of our income from continuing operations to Adjusted EBITDA for the periods presented:

 

     Fiscal Year 2016     Fiscal Year 2017  
     (in thousands)     (in thousands)  
     First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
    First
Quarter
    Second
Quarter
    Third
Quarter
     Fourth
Quarter
 

Income (loss) from continuing operations

   $ (5,097   $ 21,851     $ 11,252     $ 16,694     $ (58,787   $ 19,815     $ 22,873      $ 68,074  

Interest expense, net

     36,632       35,880       35,484       35,355       64,070       43,820       42,321        46,513  

Provision (benefit) for income taxes

     (3,293     14,118       6,317       10,826       (33,067     11,146       15,346        (21,852

Depreciation and amortization

     45,223       45,681       45,329       42,092       41,071       41,216       41,117        40,657  

Compensatory payments related to options (a)

     746       1,489       1,886       2,022       71,574       2,126       4,253        —    

Stock-based compensation expense (b)

     1,300       2,632       2,930       4,966       3,661       2,078       1,909        1,454  

Preopening expenses (c)

     333       607       1,455       354       807       1,226       123        848  

Management fees (d)

     2,001       2,000       2,015       2,037       2,051       2,017       2,005        1,965  

Noncash rent (e)

     1,873       1,849       1,782       1,634       1,497       1,500       1,384        1,010  

Strategic consulting (f)

     7,194       3,696       5,800       9,467       6,121       10,833       7,448        5,914  

Severance (g)

     —         —         —         2,320       —         —         —          9,065  

Other adjustments (h)

     (97     (694     (498     (117     (314     (36     2,305        4,350  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted EBITDA

   $ 86,815     $ 129,109     $ 113,752     $ 127,650     $ 98,684     $ 135,741     $ 141,084      $ 157,998  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(a)

Represents payments to holders of our stock options made pursuant to antidilution provisions in connection with dividends paid to our Sponsors.

(b)

Represents non-cash stock-based compensation expense.

(c)

Represents direct incremental costs of opening or relocating a facility that are charged to operations as incurred.

(d)

Represents management fees paid to our Sponsors (or advisory affiliates thereof) in accordance with our management services agreement, which will terminate on the consummation of this offering. See “Certain Relationships and Related Party Transactions—Management Services Agreement.”

(e)

Consists of an adjustment to remove the non-cash portion of rent expense, which has been recorded on a straight-line basis in accordance with GAAP.

(f)

Represents fees paid to external consultants for two strategic initiatives of limited duration.

(g)

Represents termination costs associated with voluntary and involuntary workforce reductions that occurred in January 2016 and incremental severance expense to former executives and voluntary workforce reductions that occurred in February 2018.

(h)

Other non-cash or discrete items as determined by management, including amortization of a deferred gain from sale lease back transactions in 2013, non-cash accretion expense on asset retirement obligations, obligations associated with our post-retirement medical plan and incremental expense to former executives. Fiscal year 2017 includes corporate related transaction costs.

See “Non-GAAP Financial Measures” for more information on our use of Adjusted EBITDA.

The following is a reconciliation of our net cash from operating activities to free cash flow for the periods presented:

 

     Fiscal Year 2016      Fiscal Year 2017  
     (in thousands)      (in thousands)  
     First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
     First
Quarter
    Second
Quarter
     Third
Quarter
     Fourth
Quarter
 

Net cash from operating activities

   $ 43,668      $ 84,209      $ 66,413      $ 103,138      $ (65,148   $ 119,118      $ 46,389      $ 109,726  

Less: Capital expenditures

     22,438        26,518        42,716        23,084        24,433       21,820        39,869        51,344  

Free cash flow

   $ 21,230      $ 57,691      $ 23,697      $ 80,054      $ (89,581   $ 97,298      $ 6,520      $ 58,382  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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Liquidity and Capital Resources

Our primary sources of liquidity are cash flows generated from club operations and borrowings from our ABL Credit Facility. Cash and cash equivalents totaled $35.0 million as of February 3, 2018. We believe that our current resources, together with anticipated cash flows from operations and borrowing capacity under our ABL Credit Facility will be sufficient to finance our operations, meet our current debt obligations, and fund anticipated capital expenditures.

Summary of Cash Flows

A summary of our cash flows from operating, investing and financing activities is presented in the following table:

 

     Fiscal Year Ended  
     January 30,
2016
     January 28,
2017
     February 3,
2018
 
     (in thousands)  

Net cash provided by operating activities

   $ 159,361      $ 297,428      $ 210,085  

Net cash (used in) investing activities

     (112,363      (114,756      (137,466

Net cash (used in) financing activities

     (46,236      (188,118      (69,629
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 762      $ (5,446    $ 2,990  
  

 

 

    

 

 

    

 

 

 

Net Cash from Operating Activities

Net cash provided by operating activities was $210.1 million in fiscal year 2017, compared to $297.4 million in fiscal year 2016. The decrease in operating cash flow was primarily due to non-recurring costs of $88.2 million related to the dividend transaction in February 2017, including the compensatory payments related to stock options and debt issuance costs that could not be deferred. Excluding those items, operating cash flow increased by $0.9 million in fiscal year 2017.

Average inventory per club decreased 1.7% from fiscal year 2016 due to strong fourth quarter sales results and improved inventory turns in fiscal year 2017.

Net cash provided by operating activities was $297.4 million in fiscal year 2016 versus $159.4 million in fiscal year 2015. The increase in operating cash flow was due to increased operating income from improved margin rates and increased membership fee income and a favorable change in working capital due to improved inventory levels and quicker collections of accounts receivable.

Average inventory per club decreased 3.3% from 2015. We focused on maintaining optimal inventory levels throughout 2016 by better managing presentation levels and reordering quantities as well as taking markdowns where it made sense to move unproductive merchandise.

Net Cash from Investing Activities

Cash used for capital expenditures was $137.5 million in fiscal year 2017, compared to $114.8 million in fiscal year 2016. The increase is due to more investment in club renovations and IT projects.

Net cash used in investing activities was $114.8 million in fiscal year 2016 versus $112.4 million in fiscal year 2015. The increase is due mainly to more investment in club renovations compared to the prior year.

 

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Net Cash from Financing Activities

Cash used in financing activities in fiscal year 2017 was $69.6 million and includes net borrowings of $162.0 million on the ABL Credit Facility and net borrowings of $533.1 million on the First and Second Lien Term Loans, partially offset by dividend payments of $735.5 million and debt issuance costs of $24.6 million.

Cash used in financing activities in fiscal year 2016 was $188.1 million and includes $44.7 million of principal payments on the First Lien Term Loan, $20.5 million of principal payments on the Second Lien Term Loan and net payments of $121.0 million on the Prior ABL Credit Facility.

Cash used in financing activities in fiscal year 2015 was $46.2 million and includes $15.0 million of principal payments on the Prior First Lien Term Loan and $1.8 million of net payments on the Prior Second Lien Term Loan and net payments of $30.0 million on the Prior ABL Credit Facility.

Financing Obligations

On February 3, 2017, we entered into a senior secured asset based revolving credit and term facility (the “ABL Facility”). On February 3, 2017, we entered into a senior secured first lien term loan facility (the “First Lien Facility”) and a senior secured second lien term loan facility (the “Second Lien Facility” and, together with the First Lien Facility, the “Term Loan Facilities”). We entered into the ABL Facility and Term Loan Facilities in part to amend our Prior ABL Facility and refinance our Prior Term Loan Facilities. We describe our ABL Facility and Term Loan Facilities in greater detail under “Description of Certain Indebtedness.”

Special Dividend and Facilities Refinancing

On February 3, 2017, we distributed a $735.5 million dividend to our stockholders, including funds affiliated with the Sponsors. In conjunction with the dividend, we paid $67.5 million to stock option holders as required under the related option agreements. The payments to option holders were recorded as compensation expense in SG&A in 2017. We also paid $5.4 million to employees under retention bonus arrangements, of which $4.6 million was accrued in 2016 and the remaining $0.8 million was recognized as compensation expense in 2017. We financed these transactions by refinancing our Prior ABL Facility and Prior Term Loan Facilities with the ABL Facility and Term Loan Facilities and borrowing additional amounts under the new facilities.

In order to fund these payments, we executed the following transactions immediately prior to the payment of the dividend:

 

   

Refinanced and upsized the First Lien Term Loan to $1,925.0 million, subject to an original issue discount of $4.8 million. The First Lien Term Loan now matures on February 3, 2024.

 

   

Refinanced and upsized the Second Lien Term Loan to $625.0, subject to an original issue discount of $6.3 million. The Second Lien Term Loan now matures on February 3, 2025.

 

   

Amended the ABL Facility and borrowed $340.0 million. The maturity date on the ABL Facility was extended to February 3, 2022.

 

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Contractual Obligations

We enter into long-term obligations and commitments in the normal course of business, primarily debt obligations and non-cancelable operating leases. As of February 3, 2018, our contractual cash obligations over the next several periods were as follows (in thousands):

 

     Total      2018      2019 to
2020
     2021 to
2022
     2023 and
thereafter
 

Long term debt

   $ 2,752,563      $ 219,750      $ 38,500      $ 88,500      $ 2,405,813  

Operating leases

     3,425,408        302,622        596,029        548,619        1,978,138  

Capital and financing leases

     63,168        4,791        9,317        9,727        39,333  

Closed store lease obligations

     12,686        2,122        4,266        4,298        2,000  

Purchase obligations(1)

     635,937        608,375        21,266        6,296        —    

Other long term liabilities(2)

     91,738        733        19,606        19,525        51,874  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,981,500      $ 1,138,393      $ 688,984      $ 676,965      $ 4,477,158  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes the Company’s significant contractual unconditional purchase obligations. For cancelable agreements, any penalty due upon cancellation is included. These commitments do not exceed the Company’s projected requirements and are in the normal course of business. Examples include firm commitments for merchandise purchase orders, gasoline and IT.

(2)

Other long-term liabilities include long-term obligations recorded on the Company’s combined balance sheet as of February 3, 2018 that are not presented separately within the table above. They include the fair value of contingent payment liabilities associated with post-retirement medical benefits, worker’s compensation, general insurance, and gas station disposals.

Off-Balance Sheet Arrangements

We have not entered into off-balance sheet arrangements. We do enter into operating lease commitments, letters of credit and purchase obligations in the normal course of our operations.

Critical Accounting Policies and Use of Estimates

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We review our estimates on an ongoing basis and make judgments about the carrying value of assets and liabilities based on a number of factors. These factors include historical experience and assumptions made by management that are believed to be reasonable under the circumstances. Although management believes the judgment applied in preparing estimates is reasonable based on circumstances and information known at the time, actual results could vary materially from estimates based on assumptions used in the preparation of our consolidated financial statements. This section summarizes critical accounting policies and the related judgments involved in their application.

The most significant accounting estimates involve a high degree of judgment or complexity. Management believes the estimates and judgments most critical to the preparation of our consolidated financial statements and to the understanding of our reported financial results include those made in connection with revenue recognition, estimating vendor rebates and allowances; estimating the value of inventory; impairment assessments for goodwill and other indefinite-lived intangible assets, and long-lived assets; self-insurance reserves and estimating equity-based compensation expense. Our significant accounting policies related to these accounts in the preparation of our consolidated financial statements are described below. See Note 2 to our audited consolidated financial statements presented elsewhere in this prospectus for additional information regarding our critical accounting policies.

 

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Revenue Recognition

We recognize revenue from the sale of merchandise, net of estimated returns, at the time of purchase by the customer in the club. In the limited instances when the customer is not able to take delivery at the point of sale, revenue from the sale of merchandise is not recognized until title and risk of loss pass to the customer. For sales of merchandise on our website, revenue is also recognized when title and risk of loss pass to the customer, which is normally at the time the merchandise is received by the customer.

Sales incentives redeemable only at BJ’s, such as coupons and instant rebates, are recorded as a reduction of net sales. Membership fee revenue is recognized on a straight-line basis over the life of the membership, which is typically twelve months. Consideration from manufacturers’ incentives (such as rebates or coupons) is recorded gross in net sales when the incentive is generic and can be tendered by a consumer at any reseller and the Company receives direct reimbursement from the manufacturer, or clearinghouse authorized by the manufacturer, based on the face value of the incentive. If these conditions are not met, such consideration is recorded as a decrease in cost of sales.

The Company’s BJ’s Perks Rewards® members earn 2% cash back, up to a maximum of $500 per year, on all qualified purchases made at BJ’s. The Company’s My BJ’s Perks Mastercard holders earn 3% or 5% cash back on all qualified purchases made at BJ’s and 1% to 2% cash back on purchases made with the card outside of BJ’s. Cash back is in the form of electronic awards issued in $20 increments that may be used in-club at the register and expire six months from the date of issuance. Cash back may be requested in the form of a check before awards expire. The Company accounts for the Awards as a reduction in net sales, with the related liability being classified within other current liabilities.

BJ’s gift cards are available for purchase at all of our clubs. We do not charge administrative fees on unused gift cards, and gift cards do not have an expiration date. Revenue from gift card sales is recognized upon redemption of the gift card. We record revenue from gift card breakage when the likelihood of the gift card being redeemed is remote and we do not have a legal obligation to escheat the value of unredeemed gift cards to the relevant jurisdictions.

In the ordinary course of business, sales taxes are collected on items purchased by the members that are taxable in the jurisdictions when the purchases take place. These taxes are then remitted to the appropriate taxing authority. These taxes collected are excluded from revenues in the financial statements.

Vendor Rebates and Allowances

We receive various types of cash consideration from vendors, principally in the form of rebates and allowances that typically do not exceed a one-year time period. We recognize such vendor rebates and allowances as a reduction of cost of sales based on a systematic and rational allocation of the cash consideration offered to the underlying transaction that results in progress by BJ’s toward earning the rebates and allowances, provided the amounts to be earned are probable and reasonably estimable. Otherwise, rebates and allowances are recognized only when predetermined milestones are met. We review the status of all rebates and allowances at least once per quarter and update our estimates, if necessary, at that time. We believe that our review process has allowed us to avoid material adjustments in estimates of vendor rebates and allowances.

Inventory

Merchandise inventories are stated at the lower of cost, determined under the average cost method, or net realizable value. We recognize the write-down of slow-moving or obsolete inventory in cost of sales when such write-downs are probable and estimable. Records are maintained at the stock keeping unit (“SKU”) level. We utilize various reports that allow our merchandising staff to make timely markdown decisions to ensure rapid inventory turnover, which is essential in our business. The carrying value of any SKU whose selling price is marked down to below cost is immediately reduced to that selling price.

 

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We take physical inventories of merchandise on a cycle basis at every location at least once every 18 months, relying on our weekly cycle counting programs in the intervening periods. A physical inventory is taken at the end of the year at selected locations that don’t meet our targeted accuracy rates or are experiencing unusual shrink activity. We write down inventory for estimated shrinkage for the period between physical inventories. This estimate is based on historical results of previous physical inventories, shrinkage trends or other judgments management believes to be reasonable under the circumstances. We have not had material adjustments between our estimated shrinkage percentages and actual results.

Impairment of Goodwill, Indefinite-Lived and Long-Lived Assets

Goodwill

We evaluate goodwill annually to determine whether it is impaired. Goodwill is also tested more frequently if an event occurs or circumstances change that would indicate that the fair value of a reporting unit is less than its carrying amount. We have identified one reporting unit and selected the fourth fiscal quarter to perform our annual goodwill impairment testing. Goodwill impairment guidance provides entities an option to perform a qualitative assessment (commonly known as “step zero”) to determine whether further impairment testing is necessary before performing the two-step test. The qualitative assessment requires significant judgments by management about economic conditions including the entity’s operating environment, its industry and other market considerations, entity-specific events related to financial performance or loss of key personnel and other events that could impact the reporting unit. If management concludes, based on assessment of relevant events, facts and circumstances, that it is more likely than not that a reporting unit’s fair value is greater than its carrying value, no further impairment testing is required.

If management’s assessment of qualitative factors indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a two-step quantitative assessment is performed. We also have the option to bypass the qualitative assessment described above and proceed directly to the two-step quantitative assessment. In the first step, we compare the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.

To assess for impairment, we performed a step-zero test for the years ended January 28, 2017 and February 3, 2018. Our tests for impairment of goodwill resulted in a determination that the fair value of the reporting unit exceeded the carrying value of our net assets and no impairment was recorded in the years ended January 28, 2017 and February 3, 2018. The Company does not believe our reporting unit is considered at risk of failing the impairment test as the fair value of the reporting unit significantly exceeded the carrying value of the reporting unit. We do not anticipate any material impairment charges in the near term.

Indefinite-Lived Intangible Assets

We consider the BJ’s trade name to be an indefinite-lived intangible asset, as we currently anticipate that this trade name will contribute cash flows to us indefinitely. We evaluate whether the trade name continues to have an indefinite life on an annual basis. Our trade name is reviewed for impairment annually in the fourth fiscal quarter and may be reviewed more frequently if indicators of impairment are present. If the recorded carrying value of the intangible asset exceeds its estimated fair value, we record a charge to write the intangible asset down to its estimated fair value. Calculating the fair value requires significant judgment. We determine the fair value of our trade name using the relief from royalty method, a variation of the income approach. The use of different assumptions, estimates or judgments, such as the estimated future cash flows, the discount rate used to discount such cash flows or the estimated royalty rate, could significantly increase or decrease the estimated fair value of the intangible.

 

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We assessed the recoverability of the BJ’s trade name and determined that its estimated fair value exceeded its carrying value and that no impairment was recorded in the years ended January 28, 2017 and February 3, 2018.

Long-Lived Assets

We review the realizability of our long-lived assets at the lowest level for which identifiable cash flows are present, our club level, periodically and whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We monitor our club portfolio to identify clubs that are underperforming. When we identify an underperforming club, we perform a review to reassess the future cash flows of the club. Current and expected operating results and cash flows and other factors are considered in connection with our reviews. Significant judgments are made in projecting future cash flows and are based on a number of factors, including the maturity level of the club, historical experience of clubs with similar characteristics, recent sales, margin and other trends and general economic assumptions. Our estimates of future cash flows are based on our experience, knowledge and judgments. These estimates can be affected by factors that are difficult to predict including future revenue, operating results and economic conditions. While we believe our estimates are reasonable, different assumptions regarding future cash flows could affect our analysis and result in future impairment. Impairment losses are measured and recorded as the difference between the carrying amount and the fair value of the assets. No impairment charges were recorded in the years ended January 28, 2017 and February 3, 2018.

Self-Insurance Reserves

We are primarily self-insured for workers’ compensation, general liability claims and medical claims. Reported reserves for these claims are derived from estimated ultimate costs based upon individual claim file reserves and estimates for incurred but not reported claims. Estimates are based on historical claims experience and other actuarial assumptions believed to be reasonable under the circumstances.

Income Taxes

We pay income taxes to federal, state and municipal taxing authorities. We are subject to audit by these jurisdictions and maintain reserves for those uncertain tax positions which we believe may be subject to challenge. Our reserves are based on our estimate of the likely outcome of these audits, and are revised periodically based on changes in tax law and court cases involving taxpayers with similar circumstances.

We recognize the financial statement impact for uncertain income tax positions based on a two-step process. We recognize the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. In future periods, changes in facts, circumstances and new information may require us to change the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recorded in income tax expense and liability in the period in which such changes occur.

Share-Based Compensation

We recognize compensation cost for employee stock options awards based on the estimated fair value of the awards on the grant date. Compensation cost is recognized over the period during which the employee is required to provide service in exchange for the awards, which is typically the vesting period. For awards that contain only a service vesting feature, we use straight-line attribution to recognize the cost of the awards. For awards with a performance condition feature, we recognize compensation cost ratably over the awards’ expected vesting periods when achievement of the performance condition is deemed probable.

 

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We estimate the fair value of our stock option awards using the Black-Scholes option pricing model, which uses as inputs the fair value of our common stock and subjective assumptions we make, including the expected stock price volatility, the expected term of the award, the risk-free interest rate and expected dividends. The riskfree interest rate was based on United States Treasury yields in effect at the time of the grant for notes with terms comparable to the awards. Expected volatility was determined based on the historical and implied volatilities of comparable companies. We use the simplified method to calculate the expected term for options granted to employees. The expected dividend yield is assumed to be zero as we do not have current plans to pay any dividends on common stock.

Determination of Fair Value of Common Stock

As there has been no public market for our common stock to date, the estimated fair value of our common stock has been determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuations of common stock and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

In estimating the fair value of our common stock, we estimate the aggregate fair value of the Company and then allocate this aggregate value to our capital structure. In determining the fair value, we used a combination of the income approach and the market approach. Under the income approach, fair value is estimated based on the discounted present value of the cash flows that the business can be expected to generate in the future. The most significant estimates and assumptions inherent in this approach are based on the estimated present value of future net cash flows the business is expected to generate over a forecasted period and an estimate of the present value of cash flows beyond that period, which is referred to as the terminal value. The estimated present value is calculated using a discount rate, which is based on rates of return available from alternative investments of similar type and quality as of the date of value, which accounts for the time value of money and the appropriate degree of risks inherent in the business. Under the market approach, fair value is estimated using the guideline public company method. The guideline public company method uses a peer group of publicly traded companies and considers multiples of financial metrics to derive a range of indicated values. Determination of the peer group is based on factors including, but not limited to, the similarity of their industry, growth rate and stage of development, business model and financial risk. To derive our fair value we sum a 50% weighting of the fair value derived by the income approach and a 50% weighting of the market approach.

The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different.

Following the completion of this offering, the fair value of our common stock will be determined based on the quoted market price of our common stock.

 

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Grants of Stock-Based Awards

The following table presents the grant dates, number of underlying shares of common stock, the per share purchase prices and exercise prices, the fair values of the underlying common stock as of the grant dates for awards granted between January 29, 2017 and February 3, 2018 along with the fair value per award on the date of grant:

 

Grant Date

    Type of
Award
  Number of
Shares
Underlying
Awards
    Per Share
Exercise or
Strike Price
    Fair Value of
Common Stock
per Share on
Grant Date
    Per Share
Estimated Fair
Value of Awards
 
  2/28/2017     Option     16,500       $        49.00     $         49.00     $         18.29  
  6/5/2017     Option     33,000               49.00               49.00       17.23  
  6/5/2017     Option     500               49.00               49.00       18.12  

Recent Accounting Pronouncements

See Note 2 to our audited financial statements included elsewhere in this prospectus for information regarding recently issued accounting pronouncements.

Quantitative and Qualitative Disclosures about Market Risks

We are exposed to changes in market interest rates and these changes in rates will impact our net interest expense and our cash flow from operations. Substantially all our borrowings carry variable interest rates. An increase in interest rates could have a material impact on our cash flow. As of February 3, 2018, a 100 basis point increase in assumed interest rates for our variable interest credit facilities, before impact of any hedges, would have an annual impact of approximately $24.9 million on interest expense. We had a forward cap arrangement covering $1.0 billion notional of the outstanding principal balance that capped our interest rate exposure through September 29, 2017. We do not have any interest rate swaps or other hedging arrangements to mitigate interest rate.

 

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LETTER FROM OUR CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL & ADMINISTRATIVE OFFICER

Dear Potential Shareholders,

On behalf of more than 25,000 team members, we’re thrilled to bring BJ’s Wholesale Club back to the public markets. Our company started in 1984 with one club in Medford, Massachusetts, a largely blue-collar community outside Boston. Today, our company is built on a strong foundation of paid membership, a commitment to delivering value and a strategy that has equipped BJ’s to thrive in the current retail landscape. Yet our company still reflects its humble roots—scrappy and hardworking, proud and productive.

BJ’s Wholesale Club Today

We’ve come a long way since that first club. As of today, BJ’s:

 

   

operates 215 clubs and 134 gasoline stations from Maine to Miami, with outstanding locations in 16 states, including the Boston, New York, Philadelphia, Washington and Miami metropolitan areas;

 

   

serves over five million paying members, with more than one million members visiting us over fifty times last year;

 

   

has created a Wellsley Farms® and Berkley Jensen® private label franchise with about $2 billion in sales across a broad range of great products, including our Berkley Jensen toilet tissue, which was recently ranked as #1 by Good Housekeeping;

 

   

is making it more convenient for our members to shop by launching a new app, redesigning bjs.com, offering same-day delivery through our new partnership with Instacart, and offering “Shop BJs.com—Pick Up in-Club” across our chain;

 

   

sold over half a billion eggs, nearly three million bottles of Tide laundry detergent, over 80 million Duracell batteries, 640 million gallons of fuel and enough toilet tissue to reach to the moon and back more than 22 times in fiscal year 2017; and

 

   

has supported our communities through the BJ’s Charitable Foundation, donating millions of dollars and millions of meals to help families thrive by helping to alleviate hunger and improving access to quality education.

All of our hard work resulted in more than $12.5 billion in net sales and $534 million in Adjusted EBITDA last year. Our success is due to our loyal members and our committed team.

Our Foundation

Members are the foundation of our company, and our team considers it a privilege to serve them every day. We target families in households with an average annual income of approximately $75,000 per year and typically consisting of working parents and children. These households work hard to save money for their families, and we’re proud to play a crucial role in their lives by delivering tremendous value in their everyday shopping.

If members are the foundation, value is the core of our company. Our members expect a return on their membership fee investment, and we give it to them on every trip. BJ’s members consistently save 25% or more on a representative basket of manufacturer branded groceries compared to traditional supermarket competitors. We believe that members who spend $2,500 or more per year at BJ’s on manufacturer-branded groceries can save over ten times their $55 Inner Circle membership fee versus what they would have paid at traditional supermarket competitors. And we’re finding more ways to provide value to our members every day.

 

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Our vibrant fresh food business—produce, meat and deli—is crucial to delivering value. We aim to motivate our members to visit our clubs on a weekly basis. We do this by carrying a broader assortment of fresh foods in smaller pack sizes than our club store competitors. This enables us to meet our members’ weekly shopping needs.

At BJ’s, we extend “freshness” into our general merchandise categories, whether it’s the latest electronics, the newest trend in apparel or exciting seasonal offerings for the holidays. This emphasis on freshness throughout our clubs gives members a reason to shop at BJ’s every week. At the same time, our broad assortment means members don’t have to make a trip to another retailer to meet their weekly needs.

Our Strategy

Our strategy is simple and focused. We work to attract more members, get them shopping and make every trip as convenient as possible.

The most important metric in our business is our membership renewal rate. By deciding whether or not to renew, our members effectively vote each year on whether we delivered on our commitment to provide value for their membership fee. Our renewal rate is 86%, up from 84% two years ago. Nearly half of our Adjusted EBITDA comes from membership fee income (MFI), and the majority of our MFI comes from renewals. The more categories a member shops in our clubs, the more trips they make to BJ’s. The more trips a member makes, the more likely they are to renew.

We continue to engage with our members and to deliver the benefits and value that drive renewal. Our strong membership renewal rate has been the basis of our growth for more than 20 years.

Despite challenges across the retail industry, BJ’s has seen improvements in traffic and basket size. We continue to test and learn new ways to improve performance, and we’re enthusiastic about the opportunities in front of us. Our members expect the unexpected finds—the “treasure hunt,” as they call it—that go along with shopping at BJ’s. We believe we’re well positioned to capitalize on fresh and exciting assortment additions as the retail landscape continues to evolve rapidly.

In recent years, new technologies and evolving consumer behavior have redefined convenience in the U.S. retail industry. At BJ’s, our approach to investing in our business is focused on making it easier for members to access the outstanding value we offer. Members love our recent additions, including more self-checkout lanes; an app that allows members to digitally click coupons rather than clip paper ones; and same-day delivery through Instacart with no mark-up to in-club pricing. We’re also testing a program that lets members scan items on their phone and bypass the traditional checkout line. We’ll continue to add value in the form of convenience as we continue the transformation of BJ’s Wholesale Club.

Our Transformation

Since 2011, Leonard Green and CVC have been great stewards of our company. During their tenure as our sponsors, we have invested over $875 million in our business. We have opened 25 new clubs and spent over $230 million improving our systems and technology. Thanks to their support, BJ’s is a growing company with a full suite of SAP capabilities and a leadership team with the experience to take advantage of it.

We have made substantial progress as we implemented our new strategy. Since 2015, Adjusted EBITDA has grown by 31% and free cash flow has increased by 55%. Our topline performance has improved sequentially in each quarter of the past year, and we expect to build on this progress in the future.

Our Team

Over the past two years, we’ve also made enormous strides in transforming our culture. As a team, we are moving faster and innovating more frequently. We are instilling discipline and accountability across the organization.

 

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Most of our executive team grew up in families like the ones we have the privilege to serve. We understand what saving money means to these families. Being a small piece of those families’ lives means something to all of us. Our executive team is a mix of long-tenured BJ’s team members and relative newcomers. We all share a fundamental belief: the foundation and core of this company are great, and our future is bright.

We are proud of our progress over the past few years, but we all see the potential in our company and know that we have much more to do. We’d love for you to come along on that journey, and we’re excited to have you as a potential shareholder.

 

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BUSINESS

Our Company

BJ’s Wholesale Club is a leading warehouse club operator on the East Coast of the United States. We deliver significant value to our members, consistently offering 25% or more savings on a representative basket of manufacturer-branded groceries compared to traditional supermarket competitors. We provide a curated assortment focused on perishable products, continuously refreshed general merchandise, gas and other ancillary services to deliver a differentiated shopping experience that is further enhanced by our omnichannel capabilities.

Over the last two years, we have hired Chris Baldwin as President and Chief Executive Officer and have made multiple senior management hires and changes, adding consumer packaged goods, digital and consulting experience to our leadership team. This new leadership team has implemented significant cultural and operational changes to our business, including transforming how we use data to improve member experience, instilling a culture of cost discipline, adopting a more proactive approach to growing our membership base and building an omnichannel offering oriented towards making shopping at BJ’s more convenient. These changes have delivered results rapidly, evidenced by positive and accelerating comparable club sales over the last two quarters and net income growth of over 109% and Adjusted EBITDA growth of 31% in aggregate over the last two fiscal years. We believe that these changes will continue to impact sales, profit margins and free cash flow performance favorably in the future. In fiscal year 2017, we generated total revenues, net income and Adjusted EBITDA of $12.8 billion, $50 million and $534 million, respectively.

Since pioneering the warehouse club model in New England in 1984, we have grown our footprint to 215 large-format, high volume warehouse clubs spanning 16 states. In our core New England markets, which have high population density and generate a disproportionate part of U.S. GDP, we operate almost three times the number of clubs compared to the next largest warehouse club competitor. In addition to shopping in our clubs, members are able to shop when and how they want through our website, bjs.com; our highly-rated mobile app and our integrated Instacart same-day delivery offering.

Our goal is to offer our members significant value and a meaningful return, in savings, on their annual membership fee. We have more than five million members paying annual fees to gain access to savings on groceries, consumables, general merchandise, gas and ancillary services. The annual membership fee for our base Inner Circle® Membership is $55 per year, and our BJ’s Perks Rewards® Membership, which offers additional value-enhancing features, costs $110 annually. We believe that members can save over ten times their $55 Inner Circle membership fee versus what they would have paid at traditional supermarket competitors when they spend $2,500 or more per year at BJ’s on manufacturer-branded groceries. In addition to providing significant savings on a representative basket of manufacturer-branded groceries, we accept all manufacturer coupons and rebates and also carry our own exclusive brands that enable members to save on price without compromising on quality. Our two private label brands, Wellsley Farms® and Berkley Jensen®, represent over $2 billion in sales, and are the largest brands we sell. Our customers recognize the relevance of our value proposition across economic environments, as demonstrated by over 20 consecutive years of membership fee income growth. Our membership fee income was $259 million for fiscal year 2017, and represents approximately half of our Adjusted EBITDA.

 

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LOGO

Our approach to merchandising positions us between other warehouse clubs and grocery retailers. We sell a wide range of products, combining the bulk savings of a warehouse club with a broader assortment and selectively smaller pack sizes in perishable and grocery products than our club competitors. We have more stock keeping units (“SKUs”) than other warehouse retailers (around 7,200 versus around 4,500), which allows us to offer a greater selection while still enabling us to manage our inventory more efficiently than supermarket and mass-market competitors (which can carry 40,000 or upwards of 100,000 SKUs, respectively). We also offer a “treasure-hunt” experience with exciting finds in apparel, electronics, home goods and seasonal merchandise, as well as ancillary services such as tire installation, vision care, travel and insurance at attractive values. Our 134 gas stations provide members with additional savings and convenience, which we believe drive more trips and reinforce our strong value proposition. We believe our continuously refreshed assortment, expanded perishable offerings and differentiated value proposition drive strong member loyalty and our warehouse club industry-leading average shopping frequency of 22 trips to BJ’s annually. Our membership renewal rate for members with two or more years of tenure, a key indicator of member satisfaction and loyalty, was at an all-time high of 86% during fiscal year 2017.

Our target members care about value, quality and convenience and shop at warehouse clubs for their family needs. Our target members are a price sensitive demographic with large household sizes, representing nine million households in our trade areas. While we believe that we appeal to households with a wide range of incomes, we target households with an average annual income of approximately $75,000. We believe this group represents a historically underserved demographic in our core markets. Our membership offerings include our core Inner Circle® Membership and three enhanced levels of membership and affiliation through our BJ’s Perks Rewards® Membership and our My BJ’s Perks® Mastercard® offerings, which offer benefits such as cash back on purchases and discounted gasoline prices. These value-added membership tiers and affiliations further consolidate our members’ spend and improve customer loyalty and renewal rates, which ultimately increase the lifetime value of the member. The membership model allows us to capture more comprehensive data about our members, which we proactively use to optimize price, promotion and assortment to evolve with changing consumer demands.

Recent Strategic Initiatives

Led by Chris Baldwin, who became our CEO in February 2016 and Chairman in 2018, we have implemented significant changes to corporate culture and business operations over the last two fiscal years, modernizing the tools we use to compete in a rapidly evolving retail environment, including:

 

   

Next Generation Leadership Team and Reinvigorated Culture: Our leadership team is led by Chris Baldwin, who we hired as President and Chief Operating Officer in 2015 and became our Chief Executive Officer in 2016 and Chairman in 2018, and Bob Eddy, who has been our Executive Vice President and Chief Financial Officer since January 2011 and took on the expanded responsibility of Chief Financial and Administrative Officer in February 2018. Our leadership team comprises management talent from diverse disciplines and backgrounds across all aspects of our business. We

 

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have newly hired, promoted or added responsibility for all 12 of our executive officers. The diverse backgrounds of our management team reflect experience in retail, consumer packaged goods (CPG), digital, audit and consulting, at leading companies such as Hess, Procter & Gamble, Nabisco, Bain & Company PricewaterhouseCoopers, eBay and Dick’s, among others. The diversity of backgrounds supports various aspects of strategic initiatives across our company. For example, our leadership team’s experience in the CPG industry provides well-informed insight that helps position BJ’s as a key partner with suppliers and drive value for our customers while growing volume and margins. Our new leadership team has instilled a more proactive culture and approach to many facets of corporate decision making, which has rapidly delivered results.

 

   

Relentless Focus on Our Consumer: Our membership program provides us access to comprehensive data on consumer behavior and purchasing patterns. To capitalize on these data, we have used rich, data-driven analytics, to drive improved decision-making in all aspects of our business, including procurement, merchandising, product positioning, club openings, marketing and promotion campaigns, among others. As a result, we have been able to implement a range of assortment initiatives such as supplier renegotiations, competitive contract options, SKU optimization and brand switching. We are also using our data to better target member acquisition and retention efforts for existing and new clubs. While we have made substantial progress, we believe there are opportunities to further develop our data analytics capabilities.

 

   

Enterprise-Wide Cost Discipline and Improved Profitability: We have created a culture of cost discipline across both member- and non-member facing functions. In 2015, we launched our category profitability improvement (“CPI”) program to address our procurement spending, and during fiscal years 2016 and 2017 we negotiated over $260 million in expected annual procurement savings. We drove these savings by improving dialogue with our national brand and private label suppliers to educate them on the value proposition we offer to our members and by implementing competitive bidding throughout our buying process. In partnership with our suppliers, we are now using our data to maximize marketing campaigns, creating a symbiotic relationship that provides benefits to both parties. We further lowered our cost of goods sold by recalibrating and streamlining our portfolio of private label brands from 13 to two focused brands and by emphasizing our value proposition versus national brand equivalents, which increased our private label penetration from 10% of total merchandise sales in fiscal year 2012 to 19% in fiscal year 2017. We have also focused on staying disciplined in our overhead cost structure and have been able to hold addressable SG&A expenses relatively flat, allowing topline growth and gross profit expansion to translate into Adjusted EBITDA growth. We believe these cost savings will allow us to drive our next wave of growth through thoughtful investments in our business.

 

   

Technology-Driven Improvements to Customer Experience and Convenience: We have invested in omnichannel initiatives to boost convenience for our members. Powered by substantial back-end IT investments, we now offer, alongside in-store shopping, the enhanced convenience of an omnichannel shopping experience. We have launched mobile apps with Add-to-Card Coupons and Express Scan capabilities, have added Shop BJs.com — Pick Up in-Club capability, and recently rolled out same-day delivery of certain grocery items with no mark-up to item pricing which is available at most of our clubs, providing our members convenient ways to shop when and how they feel most comfortable.

 

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These strategic initiatives have delivered results rapidly, as evidenced by several key operating metrics:

 

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BJ’s Wholesale Club is a leading player in the large and growing U.S. warehouse club channel, a retail channel characterized by highly discounted prices and a curated selection of SKUs and services offered in a warehouse format. According to the Warehouse Club Intelligence Center, our channel generated $167 billion of sales in 2017 and has grown at a compound annual growth rate (CAGR) of 4.5% since 2007. This pace of growth exceeded that of the grocery and GAFO (General Merchandise, Apparel and Accessories, Furniture and Other Sales) retail channels, which experienced CAGRs of 2.7% and 1.1%, respectively, during this period, according to the U.S. Census.

 

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Source: Warehouse Club Intelligence Center-2017 Warehouse Club Guide

The warehouse club model maintains several structural advantages over other retail formats that enable operators to provide significant value and a differentiated experience for the customer while also achieving an attractive return on invested capital. These advantages include:

 

   

membership fee subscriptions that provide stable cash flows while driving consolidation of customer spend and encouraging “buy more, save more” behavior;

 

   

comprehensive customer purchasing data, enabling operators to analyze customer spend more effectively and meet consumer demand;

 

   

low operating costs per square foot due to high inventory turnover, low club labor requirements and efficient distribution networks; and

 

   

limited and bulk-sized SKUs, and a “no-frills” warehouse environment, which deliver a clear value proposition to consumers who are increasingly focusing on savings and price transparency.

 

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According to the Warehouse Club Intelligence Center, the U.S. warehouse club channel is projected to grow at a five year CAGR of 4.0% from 2017 through 2022. Our channel is well-positioned to continue taking market share from a variety of other retail channels, including supermarkets, mass, convenience, department, specialty and variety stores. In recent years, fundamental changes in consumer shopping behavior have contributed to significant disruptions in the retail industry. Among these key changes is a growing consumer focus on value, driven by multiple factors including the growth of ecommerce, an increase in price transparency and demographic trends such as household-forming millennials and retiring baby boomers. Together, these factors favor retailers that offer strong value propositions, including warehouse clubs, where value is a fundamental part of the consumer perception. Additional tailwinds for the channel include recent retail store closures and bankruptcies that, we believe, provide an opportunity to take incremental market share. Warehouse clubs are also well-positioned against e-commerce retailers due to competitive pricing, an emphasis on fresh food, differentiated service offerings including gasoline, and the “treasure hunt” experience of the warehouse club trip. We believe that warehouse club customers view online retail and club visits as complementary for their shopping needs, with club visits providing great value in essential needs and online retail filling in for one-off purchases not available at warehouse clubs.

Our Competitive Strengths

 

   

Differentiated Shopping Experience: We believe our business model enables us to provide significant value to our members versus non-warehouse club competitors. We define providing value in multiple ways. First, BJ’s consistently offers prices that are 25% lower on a representative basket of manufacturer-branded groceries compared to traditional supermarket competitors. Second, we offer a continuously refreshed assortment of on-trend general merchandise, competitively-priced gas and a variety of ancillary services that our non-warehouse club competitors generally do not provide. We believe that members can save over ten times their $55 Inner Circle membership fee compared to what they would have paid at traditional supermarket competitors when they spend $2,500 or more per year at BJ’s on manufacturer-branded groceries. Our clubs also carry 950 fresh food SKUs in selectively smaller pack sizes, whereas other warehouse club competitors offer significantly fewer SKUs in predominantly larger pack sizes. Together, we believe our significant value proposition and broader offering drive increased customer loyalty and higher trip frequency, positioning us to compete more effectively for weekly shopping market share.

 

•  Well-Positioned Footprint and Flexible New Club Model: We are a leading warehouse club operator on the East Coast of the United States, where our 215 clubs and 134 gas stations are well-positioned in some of the most attractive markets in the United States. In our core New England markets, we operate almost three times the number of clubs when compared to the next largest warehouse club competitor. Nearly all of our clubs generate positive club-level EBITDA. Many of our clubs are located in densely populated, high traffic locations that are difficult to replicate due to expensive and limited real estate. In 2016, the markets in which we operate delivered GDP contribution, population growth and

  

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and household incomes above the respective U.S. averages. Our club sizes range from 63,000 sq. ft. to 150,000 sq. ft., with newer clubs primarily made up of our 85,000 sq. ft. model. We have also recently implemented a more data-driven model for new club site selection and member acquisition. This model, combined with our wide range of warehouse club sizes, allows for a flexible real estate expansion strategy that can be customized for infill or adjacent markets. We operate or contract for six distribution centers that serve our existing club base and have capacity to support up to 100 additional clubs along the East Coast of the United States.

 

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Large and Loyal Membership Base: Our business model creates a virtuous cycle of member spending, savings and loyalty, which drives our large and loyal membership base. We have over five million paid memberships, made up of more than 10 million total members, as of fiscal year 2017. Due to our wider assortment and their more frequent visits, our members provide us with more comprehensive purchasing data compared to other warehouse club operators. This member data allows us to better execute supplier renegotiations, competitive contract options, SKU optimization and brand switching. Our target member represents the largest segment of warehouse club shoppers in BJ’s trade areas with 9 million households and $7 billion of annual club channel grocery spend. The strong loyalty of our membership base is reflected in our all-time high renewal rate of 86% during fiscal year 2017. Additionally, as our membership base is price sensitive, our value proposition resonates even more during economic downturns, as evidenced by our stronger comparable club sales results versus other warehouse clubs during these historical periods.

 

   

Attractive Strong Free Cash Flow across Economic Cycles: Our membership model, low operating cost structure and disciplined capital spending allow us to generate predictable, strong free cash flow. Membership fees provide us with a stable stream of high margin revenue that is independent of merchandise sales, accounting for approximately half of Adjusted EBITDA in 2017, and positions us advantageously versus non-warehouse competitors. This income stream has grown every year over the past two decades. Additionally, our low club labor requirements and efficient distribution network result in low operating costs per square foot. We maintain a disciplined working capital strategy focused on sustaining low receivable levels and inventory turnover that matches or exceeds payment terms. Our clubs typically require a limited amount of maintenance capital expenditures to operate. Our business model enabled cash flow from operating activities to grow by 32%, from $159 million to

 

$210 million, and free cash flow to grow by 55%, from $47 million to $73 million, from fiscal 2015 to fiscal 2017. Our strong and steady free cash flow allows us to invest growth-focused capital in new clubs and initiatives, which we believe will generate positive returns on investment.

 

   

Experienced Management Team with a Proven Track Record: Our management team is led by Chairman, President and Chief Executive Officer Chris Baldwin, who we appointed Chief Executive Officer in February 2016 and Chairman in 2018. Chris has over 30 years of experience in retail and consumer products and, given his significant experience in the consumer products industry, brings a differentiated, “consumer-oriented” approach to retail. Chris also serves as the Chairman of the National Retail Federation, where he gains valuable insight into the broader retail industry. Chris collaborates closely with Bob Eddy, our Executive Vice President and Chief Financial and Administrative Officer. Bob is among the longest serving members of the BJ’s executive team, joining BJ’s in 2007, becoming Executive Vice President and Chief Financial Officer in 2011, and taking on the expanded responsibility of Chief Financial and Administrative Officer in February 2018. We also recently bolstered our team by appointing Lee Delaney as Chief Growth Officer in May 2016. Lee took on the expanded responsibility of Chief Commercial Officer in May 2018. Prior to joining BJ’s, Lee was a Partner in the Consumer Products practice at Bain & Company, where he gained a deep understanding of retailer-supplier dynamics. Other members of the BJ’s management team include recent outside hires and internal promotions. Our current management team has driven BJ’s recent performance momentum and is implementing a culture of operational discipline with processes and procedures focused on long-term, profitable growth.

Our Growth Strategies

We believe we can drive sustainable sales and profit growth by executing on the following strategies:

 

   

Grow Our Member Base: We benefit from access to comprehensive data on our members’ shopping behaviors that, we believe, is instrumental in implementing targeted, data-driven marketing and merchandising initiatives that improve the in-club shopping experience, grow wallet share and increase new member acquisition. We have invested significantly in augmenting our member acquisition and retention strategies, including investments in member segmentation and marketing, with the aim of

 

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driving a shift towards greater member engagement and membership renewals. For example, by recently upgrading our prospecting strategy from rigid, analog, semiannual mass campaigns to personalized, digital, “always on” campaigns, we believe we can continue to grow our member base.

We have been successful in driving members into higher tiers of membership and affiliation, growing by 316% the number of members holding one of our My BJ’s Perks Mastercard offerings from fiscal year 2014 through fiscal year 2017. We are continually investing in our membership program to increase new member acquisition rates and drive renewals through value added membership and affiliation tiers. We believe we have the potential to significantly increase the penetration levels of our value-added membership and affiliation tiers. We are developing models to predict our members’ likelihood to renew so that we can proactively market to at-risk members, highlighting the value of their membership while encouraging breadth of shop and trip frequency with targeted promotions. We recently launched checkout lane prompting of premium membership awards and are piloting checkout lane credit card approvals to expedite the application process.

Our ongoing efforts also include increasing our use of social media, optimizing direct mail, converting promotional offer members into paid memberships, engaging young families and facilitating ease of membership renewals. We grew our BJ’s Easy Renewal® penetration from 18% in fiscal year 2015 to 37% in fiscal year 2017. We believe we can grow our Easy Renewal penetration further. We expect to leverage our membership data and deep analytics to dynamically optimize offers, providing a platform that, we believe, enables us to more effectively engage our members, transition them into value added membership and affiliation tiers and deliver greater share of wallet.

 

   

Relentlessly Focus on the Consumer to Drive Sales: We intend to continue our efforts to optimize our product assortment and positioning and plan to expand our current product offerings into new and adjacent categories, including a broader apparel assortment, enhanced perishable offerings, tools and new family-oriented categories. We also have ongoing initiatives to enhance our private label offerings, deliver novel in-club experiences by continuously refreshing our assortment, improve workforce training and management through scheduling algorithms and provide services that enhance the overall member experience. We intend to continue initiatives aimed at growing comparable club sales through advancing member engagement, tailoring promotional offerings, improving the convenience of accessing our offering and allowing our members to complete their shopping in less time. We utilize social media, including via personalized outreach, to enhance our understanding both of member engagement and of the implications for shopping at our clubs and online. We are leveraging our learning to deliver greater value to our members and drive improved engagement. We also plan to expand our gas penetration and have identified opportunities to expand on-site and near-site gas stations at existing clubs and optimize pricing and loyalty programs. We focus our efforts on supporting the ease and consistency of each member’s experience, increasing trips to our clubs and enhancing the appeal of our clubs as a shopping destination.

 

   

Improve Trip Convenience and Differentiate Omnichannel Offering: During the Sponsors’ tenure as our owners, we have invested over $230 million in IT initiatives, including the implementation of SAP, which we believe is a key enabler in our ability to collect and utilize our data and further build our omnichannel capabilities. We are currently expanding several technology initiatives to enhance our omnichannel capabilities over the next two years. These initiatives include:

 

   

mobile apps with “Add-to-Card” (which allows users to add digital coupons to their membership card) and “Express Scan” functionalities (which allows members to use smart phones or hand-held devices to scan bar codes as they shop the club to facilitate quick checkout);

 

   

“Shop BJs.com—Pick Up in-Club” (which allows members to buy products online and pick-up in club within two hours); and

 

   

a same-day delivery offering, which allows members to shop our clubs from the convenience of BJs.com, and have orders delivered in as quickly as one hour for a nominal delivery fee.

 

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We are also aggressively advancing our digital capabilities to enhance personal outreach to our members. We have already added experienced and accomplished omnichannel and IT leadership talent to our team to facilitate these efforts and will continue to invest in our omnichannel capabilities and data analytics. We believe these initiatives will result in a more seamless, convenient shopping experience for our members and will drive financial results.

 

   

Expand Our Strategic Footprint: We believe the six existing Company-operated and contracted distribution centers that serve our clubs are sufficient to support the opening of about 100 additional clubs along the East Coast of the United States, and we plan to open a total of 15-20 new clubs over the next five years. We will focus this expansion on infill and markets adjacent to our existing locations. We also expect to benefit from recent club and department store closures in several of our markets and adjacent markets. In fiscal years 2016 and 2017, we implemented a data-driven approach to club openings with results in our latest pilot clubs that included new membership at club opening that was 240% greater than our average new club opening in fiscal year 2015.

 

   

Continue to Enhance Profitability: Over the last three years, our management team led a number of operational improvements at BJ’s and delivered significant savings. For example, under our CPI program, which we launched in fiscal year 2015 to address procurement spend across 70 product categories, we implemented initiatives such as supplier renegotiations, SKU optimization and brand switching. During fiscal years 2016 and 2017, we negotiated over $260 million in expected annual procurement savings, with over $200 million of those savings impacting our cost of sales during those fiscal years and another $60 million scheduled to impact our cost of sales during fiscal year 2018. We are continuing to review additional product categories through our CPI program, which we believe can deliver significant incremental procurement savings.

In January 2018, we increased our membership fees by 10%, consistent with our historical practice of raising membership fees every five years. Additionally, we have been focused on controlling our Selling, General and Administrative spend, and we will continue to invest in technologies to drive efficiencies in the club.

We believe we have opportunities to drive further productivity savings in the near- to medium-term through additional procurement savings, greater private label penetration and continued cost discipline. We believe our Adjusted EBITDA and free cash flow will improve further as we capture additional benefits from initiatives both already undertaken and to come.

Industry and Competition

Warehouse clubs offer a relatively narrow assortment of food and general merchandise items within a wide range of product categories. In order to achieve high sales volumes and rapid inventory turnover, merchandise selections are generally limited to items that are brand name leaders in their categories alongside an assortment of private label brands. Since warehouse clubs sell a diversified selection of product categories, they attract customers from a wide range of other wholesale and retail distribution channels, such as supermarkets, supercenters, internet retailers, gasoline stations, hard discounters, department and specialty stores and operators selling a narrow range of merchandise. These higher cost distribution channels have traditionally been unable to match the low prices offered by warehouse clubs over long periods.

Warehouse clubs eliminate many of the merchandise handling costs associated with traditional multiple-step distribution channels by purchasing full truckloads of merchandise directly from manufacturers and by storing merchandise on the sales floor rather than in central warehouses. By operating no-frills, self-service warehouse facilities, warehouse clubs have fixturing and operating costs substantially below those of traditional retailers. Because of their higher sales volumes and rapid inventory turnover, warehouse clubs generate cash from the sale of a large portion of their inventory before they are required to pay merchandise vendors. As a result, a greater percentage of the inventory is financed through vendor payment terms than by working capital. Two broad

 

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groups of customers, individual households and small businesses, have been attracted to the savings made possible by the high sales volumes and operating efficiencies achieved by warehouse clubs. Customers at warehouse clubs are generally limited to members who pay an annual fee.

Our Clubs

As of February 3, 2018, we operated 215 clubs ranging in size from 63,000 square feet to 150,000 square feet. We aim to locate our larger clubs in high density, high traffic locations that are difficult to replicate. We design our smaller format clubs to serve markets whose population is not sufficient to support a larger club or that are in locations, such as urban areas, where there is inadequate real estate space for a larger club. Including space for parking, the amount of land required for a BJ’s club generally ranges from 8 acres to approximately 14 acres. The use of garage parking can in some cases reduce the amount of land necessary for a club. Our clubs are located in both free-standing locations and shoppi