SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 1, 2003
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-13143
BJS WHOLESALE CLUB, INC.
(Exact name of registrant as specified in its charter)
Delaware |
04-3360747 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
One Mercer Road |
||
Natick, Massachusetts |
01760 | |
(Address of principal executive offices) |
(Zip Code) |
Registrants telephone number, including area code: (508) 651-7400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered | |
Common Stock, par value $.01 |
New York Stock Exchange | |
Preferred Share Purchase Rights |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
The aggregate market value of the voting stock held by non-affiliates of the Registrant on August 2, 2002 was approximately $2,221,132,000 based on the closing price of $31.70 on the New York Stock Exchange as of such date.
There were 69,292,607 shares of the Registrants Common Stock, $.01 par value, outstanding as of March 31, 2003.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Registrants 2003 Annual Meeting of Stockholders (Part III).
PART I
Item 1. Business
General
BJs Wholesale Club introduced the warehouse club concept to New England in 1984 and has since expanded to become a leading warehouse club operator in the eastern United States. As of February 1, 2003, BJs operated 140 warehouse clubs in 16 states. The table below shows the number of BJs locations by state.
State |
Number of Locations | |
New York |
31 | |
Florida |
18 | |
New Jersey |
15 | |
Massachusetts |
14 | |
Pennsylvania |
11 | |
Maryland |
8 | |
Connecticut |
7 | |
North Carolina |
7 | |
Virginia |
7 | |
Ohio |
6 | |
New Hampshire |
5 | |
Georgia |
4 | |
Rhode Island |
3 | |
Maine |
2 | |
Delaware |
1 | |
South Carolina |
1 | |
TOTAL |
140 | |
On July 28, 1997, BJs Wholesale Club, Inc., a Delaware corporation, (BJs or the Company) became an independent, publicly owned entity when Waban Inc. (Waban), BJs parent company at the time, distributed to its stockholders on a pro rata basis all of the Companys outstanding common stock. Before that date, BJs business had operated as a division of Waban.
The fiscal year ended February 1, 2003 is referred to as 2002 or fiscal 2002 below. Other fiscal years are referred to in a similar manner.
Industry Overview
Warehouse clubs offer a narrow assortment of brand name 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. 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, department stores, drug stores, discount stores, office supply stores, consumer electronics stores, automotive stores and wholesale distributors. BJs believes that it is difficult for these higher cost channels of distribution to match the low prices offered by warehouse clubs.
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.
1
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 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.
Business Model
The Company has developed an operating model that it believes differentiates it from its warehouse club competition. First, BJs places added focus on the retail customer, its Inner Circle® member, through merchandising strategies that emphasize a customer-friendly shopping experience. Second, by clustering its clubs, BJs achieves the benefit of name recognition and maximizes the efficiencies of management support, distribution and marketing activities. Finally, BJs seeks to establish and maintain the industry leading position in each market where it operates. BJs creates an exciting shopping experience for its members with a constantly changing mix of food and general merchandise items and carries a broader product assortment than its warehouse club competitors. By supplementing the warehouse format with aisle markers, express check-out lanes and low-cost video-based sales aids, BJs makes shopping more efficient for its members. BJs is also the only major warehouse club operator to accept manufacturers coupons, which provides added value for its members, and to accept VISA® and MasterCard® payment cards chainwide.
Expansion
Since the beginning of 1997, BJs has grown from 81 clubs to 140 clubs in operation at February 1, 2003. Approximately 45% of BJs clubs have been in operation for fewer than six years, and most of these are considered to be in the early stages of maturation.
BJs plans to open 12 or 13 new clubs in the current year, all of which are expected to be in existing markets. For at least the next two years, BJs plans to increase the square footage of the chain by approximately 10% annually.
Year |
Clubs in Operation at Beginning of Year |
Clubs Opened During the Year |
Clubs Closed During the Year |
Clubs in Operation at End of Year | ||||
1997 |
81 |
4 |
1 |
84 | ||||
1998 |
84 |
12 |
|
96 | ||||
1999 |
96 |
11 |
|
107 | ||||
2000 |
107 |
11 |
|
118 | ||||
2001 |
118 |
12 |
|
130 | ||||
2002 |
130 |
13 |
3 |
140 |
In addition to the club openings shown above, BJs relocated one club in each of 2000 and 2001.
Store Profile
As of February 1, 2003, BJs operated 124 traditional size big box warehouse clubs that averaged approximately 111,000 square feet and 16 smaller format warehouse clubs that averaged approximately 69,000 square feet. The smaller format clubs are designed to serve markets whose population is not sufficient to support a full-sized warehouse club. Including space for parking, a typical full-sized BJs club requires nine to eleven acres of land. The smaller version typically requires approximately eight acres. BJs clubs are located in both free-standing locations and shopping centers.
2
Construction and site development costs for a full-sized owned BJs club generally range from $5 million to $7 million. Land acquisition costs for a club generally range from $3 million to $5 million but can be significantly higher in some locations. BJs also invests approximately $2.7 million for fixtures and equipment and $2 million for inventory (net of accounts payable) and incurs approximately $.8 to $.9 million for preopening costs in a new full-sized club.
Merchandising
BJs services its existing members and attracts new members by providing a broad range of high quality, brand name merchandise at prices that are consistently lower than the prices of traditional wholesalers, discount retailers, supermarkets, supercenters and specialty retail operations. BJs limits the items offered in each product line to fast selling styles, sizes and colors, carrying an average of approximately 6,500 active stockkeeping units (SKUs). By contrast, supermarkets normally stock from 27,000 to 52,000 SKUs, and supercenters typically stock up to 125,000 SKUs. BJs works closely with manufacturers to develop packaging and sizes which are best suited to selling through the warehouse club format in order to minimize handling costs and to provide increased value to members.
Excluding gasoline, food accounted for approximately 61% of BJs sales in 2002. The remaining 39% consisted of a wide variety of general merchandise items. Food categories at BJs include frozen foods, fresh meat and dairy products, dry grocery items, fresh produce and flowers, canned goods, and household paper products and cleaning supplies. General merchandise includes office supplies and equipment, consumer electronics, prerecorded media, small appliances, auto accessories, tires, jewelry, housewares, health and beauty aids, computer software, books, greeting cards, apparel, tools, toys and seasonal items. BJs believes that more than 70% of its products are items that can also be found in supermarkets.
To ensure that its merchandise selection is closely attuned to the tastes of its members, BJs employs regional buyers who are responsible for tailoring the product selection in individual warehouse clubs to the regional and ethnic tastes of the local market. BJs is increasingly using checkout data to understand and respond to member preferences.
BJs continued to expand its private label program during 2002. Products are sold under two labels: Executive Choice for products targeted to business members, and Berkley and Jensen for products targeted to BJs Inner Circle members. BJs private label products are premium quality only and generally are priced 20% lower than the top branded competing product. At the end of 2002, products sold under BJs private labels had achieved a sales penetration of approximately 5% on an annualized basis. BJs expects its private label products to represent an increasing percentage of total sales over time.
BJs is testing pharmacies in the four Atlanta clubs opened in 2002 and in three existing Massachusetts clubs, which were retrofitted for this business. The Company plans to continue testing pharmacies in additional clubs in 2003. In 2002, BJs also began offering members the ability to purchase and activate phone cards and gift cards at the cash registers.
BJs also offers a number of specialty services that are designed to enable members to complete more of their shopping at BJs and to encourage more frequent trips to the clubs. Most of these services are provided by outside operators in space leased from BJs. Specialty services include full-service optical stores, food courts, some of which offer brand name fast food service, communications centers for cellular phones and wireless needs, on-site photo service, BJs Vacations®, a selection of garden sheds, patios and sunrooms, a propane tank filling service, and a muffler and brake service operated in conjunction with Monro Muffler/Brake and Speedy Auto Service.
As of February 1, 2003, BJs had 68 gas stations in operation at its clubs. The gas stations are generally self-service, relying on pay at the pump technology that accepts MasterCard, VISA, Discover® and debit card transactions. Cash is also accepted at some locations. Both regular and premium gasoline are available. BJs has
3
generally maintained its gas prices at well below the average prices in each market. Results to date have shown increased sales and membership at clubs with gas stations. BJs plans to continue expanding this service in 2003.
The Companys BJs Premier Benefits program is designed to enhance the value of BJs membership, particularly to business members. Included in the program are discounted payroll processing, payment processing of all major credit cards, participation in an established preferred medical provider network that provides comprehensive health care services at discounted rates, local and long-distance phone and Internet access, rebates on the buying and selling of residential real estate, an automobile buying service, BJs Vacations and printing of business forms and checks.
Membership
Paid membership is an essential part of the warehouse club concept. In addition to providing a source of revenue which permits BJs to offer low prices, membership reinforces customer loyalty. BJs has two types of members: Inner Circle members and business members. BJs Inner Circle members are likely to be home owners whose incomes are above the average for the Companys trading areas. BJs believes that a significant percentage of its business members also shops BJs for their personal needs. The Company had approximately 8.2 million members (including supplemental cardholders) at February 1, 2003. BJs offered free memberships in conjunction with its entry into the Atlanta market in 2002. Excluding the free first-year memberships offered during the preopening and initial opening periods for the four new clubs in the Atlanta market, the Company had approximately 7.6 million members (including supplemental cardholders) at February 1, 2003.
BJs generally charges $40 per year for a primary Inner Circle membership that includes one free supplemental membership. Members in the same household may purchase additional supplemental memberships for $20 each. A business membership also costs $40 per year and includes one free supplemental membership. Additional supplemental business memberships cost $20 each.
BJs plans to launch a premium membership program in 2003. Geared to high frequency, high volume consumer members, the program will offer a 2% rebate, capped at $500 per year, on generally all in-club purchases for an annual fee of $75.
Advertising and Public Relations
BJs increases customer awareness of its warehouse clubs primarily through direct mail, public relations efforts, new store marketing programs, and television and radio advertising (some of which is vendor funded) during the holiday season. BJs also employs dedicated marketing personnel who solicit potential business members and who contact other selected organizations to increase the number of members. From time to time, BJs runs free trial membership promotions to attract new members, with the objective of converting them to paid membership status, and also uses one-day passes to introduce non-members to its warehouse clubs. These programs result in very low marketing expenses compared with typical retailers. In 2003, BJs plans to significantly upgrade its customer relationship management capabilities with the objective of developing new tools to drive shopping frequency and encourage membership renewals.
Club Operations
BJs ability to achieve profitable operations depends upon high sales volumes and the efficient operation of its warehouse clubs. The Company buys most of its merchandise from manufacturers for shipment either to a BJs cross-dock facility or directly to BJs clubs. This eliminates many of the costs associated with traditional multiple-step distribution channels, including distributors commissions and the costs of storing merchandise in central distribution facilities.
BJs routes the majority of its purchases through cross-dock facilities which break down truckload quantity shipments from manufacturers and reallocate these goods for shipment to individual clubs, generally on a same-day basis. BJs efficient distribution systems result in reduced freight expenses and lower receiving costs.
4
The Company works closely with manufacturers to minimize the amount of handling required once merchandise is received at a club. Most merchandise is pre-marked by the manufacturer so that it does not require ticketing at the club. Merchandise for sale is generally displayed on pallets containing large quantities of each item, thereby reducing labor required for handling, stocking and restocking. Back-up merchandise is generally stored in steel racks above the sales floor.
BJs has been able to limit inventory shrinkage to levels well below those typical of other retailers by strictly controlling the exits of its clubs, by generally limiting customers to members and by using state-of-the-art electronic article surveillance technology. BJs inventory shrinkage was less than .20% of net sales in each of the last five fiscal years. Problems associated with payments by check have been insignificant, as members who issue dishonored checks are restricted to cash-only terms. BJs policy is to accept returns of merchandise within 30 days after purchase.
BJs is the only warehouse club operator to accept both MasterCard and VISA chainwide. Additionally, BJs members may pay for their purchases by cash, check, debit cards or Discover Card.
In 2002, BJs rolled out a new BJs co-branded MasterCard underwritten by a major financial institution on a non-recourse basis. Purchases made at BJs with the co-branded MasterCard earn a 1.5% rebate. All other purchases with the BJs MasterCard earn rebates ranging from 0.5% to 1.0%. Rebates up to $500 per year per membership account are issued by the financial institution in the form of BJs Bucks® checks redeemable for merchandise at any BJs club.
Information Systems
Over the course of its development, BJs has made a significant investment in information systems. BJs was the first warehouse club operator to introduce scanning devices which work in conjunction with its electronic point of sale (EPOS) terminals. In recent years, BJs implemented 360 degree scanning, upgraded the cash register printers at the checkout stations in its clubs to enhance the efficiency of the checkout process and implemented an on-line refund system at the clubs to more effectively process sales returns. In 2002, BJs completed the implementation of a new inventory replenishment system and installed self checkout technology in 40 clubs. BJs plans to roll out self checkout to 60 additional clubs in 2003.
Sales data is generally analyzed daily for replenishment purposes. Detailed purchasing data permits the buying staff and store managers to track changes in members buying behavior. Detailed shrinkage information by SKU by club allows management to quickly identify inventory shrinkage problems and formulate effective action plans.
Competition
BJs competes with a wide range of national, regional and local retailers and wholesalers selling food or general merchandise in its markets, including supermarkets, supercenters, general merchandise chains, specialty chains and other warehouse clubs, some of which have significantly greater financial and marketing resources than BJs. Major competitors that operate warehouse clubs include Costco Wholesale Corporation and Sams Clubs (a division of Wal-Mart Stores, Inc.), each of which operates on a nationwide basis.
A large number of competitive membership warehouse clubs exists in BJs markets. Approximately 86% of BJs 124 full-sized warehouse clubs have at least one competitive membership warehouse club in their trading areas at a distance of about ten miles or less. None of the smaller format clubs has direct competition from other warehouse clubs within ten miles.
BJs believes price is the major competitive factor in the markets in which it competes. Other competitive factors include store location, merchandise selection, member services and name recognition. BJs believes its efficient, low-cost form of distribution gives it a significant competitive advantage over more traditional channels of wholesale and retail distribution.
5
Seasonality
Sales and net income have typically been strongest in the fourth quarter holiday season and lowest in the first quarter of each fiscal year.
Employees
As of February 1, 2003, BJs had approximately 17,000 full-time and part-time employees (team members). None of the Companys team members is represented by a union. BJs considers its relations with its team members to be excellent.
Available Information
BJs makes available free of charge on its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC). Internet users can access this information on BJs website at http://www.bjs.com.
Item 2. Properties
BJs operated 140 warehouse club locations as of February 1, 2003, of which 87 are leased under long-term leases and 43 are owned. BJs owns the buildings at the remaining 10 locations, which are subject to long-term ground leases. A listing of the number of BJs locations in each state is shown on page 1.
The unexpired terms of BJs leases range from approximately 1.5 to 38 years, and average approximately 13 years. BJs has options to renew all but one of its leases for periods that range from approximately 10 to 50 years and average approximately 21 years. These leases require fixed monthly rental payments which are subject to various adjustments. Certain leases require payment of a percentage of the warehouse clubs gross sales in excess of certain amounts. Generally, all leases require that BJs pay all property taxes, insurance, utilities and other operating costs.
BJs home offices in Natick, Massachusetts, occupy 166,000 square feet under leases expiring January 31, 2006, with options to extend these leases through January 31, 2011. The Company also leases two cross-dock facilities, which occupy a total of 776,000 square feet under leases which expire in 2010 and 2021, with options to extend these leases through 2025 and 2041, respectively. The Company opened a new owned 480,000 square foot cross-dock facility in Jacksonville, Florida, in April 2003.
See Note E of Notes to Consolidated Financial Statements included elsewhere in this report for additional information with respect to the Companys leases.
Item 3. Legal Proceedings
BJs is involved in various legal proceedings that are typical of a retail business. Although it is not possible to predict the outcome of these proceedings or any related claims, the Company believes that such proceedings or claims will not, individually or in the aggregate, have a material adverse effect on its financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Companys security holders during the fourth quarter of the fiscal year ended February 1, 2003.
6
Item 4A. Executive Officers of the Registrant
Name |
Age |
Office and Employment During Last Five Years | ||
Herbert J. Zarkin |
64 |
Chairman of the Board of the Company since July 1997; President, Chief Executive Officer and Director of Waban (1993-1997); Executive Vice President of Waban (1989-1993); President of the BJs Division of Waban (the BJs Division) (1990-1993). Mr. Zarkin was also Chairman of Waban (now known as House2Home) from July 1997 to June 2002 and was President and Chief Executive Officer of House2Home from March 2000 to September 2001. House2Home filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code on November 7, 2001. (See Note B of Notes to the Consolidated Financial Statements included elsewhere in this report for additional information.) | ||
Michael T. Wedge |
49 |
President, Chief Executive Officer and Director of the Company since September 2002; Executive Vice President, Club Operations of the Company (July 1997-September 2002); Executive Vice President, Sales Operations of the BJs Division from February 1997 to July 1997 | ||
Frank D. Forward |
48 |
Executive Vice President and Chief Financial Officer of the Company since July 1997; Executive Vice President, Finance of the BJs Division from February 1997 to July 1997 | ||
Edward F. Giles, Jr. |
43 |
Executive Vice President, Club Operations of the Company since September 2002; Senior Vice President, Field Operations of the Company (June 2001-September 2002); Senior Vice President, Sales Operations of the Company (June 1999-June 2001); Zone Vice President, Club Operations of the Company (July 1997-June 1999); Zone Vice President, Club Operations of the BJs Division from February 1997 to July 1997 | ||
Kellye L. Walker |
36 |
Senior Vice President, General Counsel and Secretary of the Company since February 2003; Hill & Barlow, PC (Boston, Massachusetts) (Of Counsel/Member, July 2000-February 2003); Chaffe, McCall, Phillips, Toler & Sarpy, LLP (New Orleans, Louisiana) Partner, September 1998-June 2000; associate, November 1995-September 1998) |
All officers serve at the discretion of the Board of Directors and hold office until the next annual meeting of the Board of Directors and until their successors are elected and qualified.
7
PART II
Item 5. Market for the Registrants Common Stock and Related Stockholder Matters
The common stock of the Company is listed on the New York Stock Exchange (symbol BJ). The quarterly high and low stock prices for the fiscal years ended February 1, 2003 and February 2, 2002 were:
Fiscal Year Ended February 1, 2003 |
Fiscal Year Ended February 2, 2002 | |||||||||||
Quarter |
High |
Low |
High |
Low | ||||||||
First |
$ |
47.90 |
$ |
40.40 |
$ |
48.35 |
$ |
41.33 | ||||
Second |
|
46.20 |
|
30.24 |
|
57.24 |
|
41.34 | ||||
Third |
|
33.83 |
|
14.42 |
|
56.86 |
|
39.25 | ||||
Fourth |
|
22.45 |
|
15.13 |
|
52.70 |
|
39.57 |
The approximate number of stockholders of record at March 31, 2003 was 2,200. The Company has never declared or paid any cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. For restrictions on the payment of dividends, see Note D of Notes to the Consolidated Financial Statements included elsewhere in this report.
8
Item 6. Selected Financial Data
Fiscal Year Ended |
||||||||||||||||||||
Feb. 1, 2003 |
Feb. 2, 2002 |
Feb. 3, 2001 |
Jan. 29, 2000 |
Jan. 30, 1999 |
||||||||||||||||
(53 Weeks) |
||||||||||||||||||||
(Dollars in Thousands except Per Share Data) |
||||||||||||||||||||
Income Statement Data |
||||||||||||||||||||
Net sales |
$ |
5,728,955 |
|
$ |
5,105,912 |
|
$ |
4,766,612 |
|
$ |
4,054,526 |
|
$ |
3,443,454 |
| |||||
Membership fees and other |
|
130,747 |
|
|
117,394 |
|
|
102,514 |
|
|
89,097 |
|
|
74,829 |
| |||||
Total revenues |
|
5,859,702 |
|
|
5,223,306 |
|
|
4,869,126 |
|
|
4,143,623 |
|
|
3,518,283 |
| |||||
Cost of sales, including buying and occupancy costs |
|
5,231,001 |
|
|
4,632,117 |
|
|
4,316,460 |
|
|
3,666,912 |
|
|
3,122,269 |
| |||||
Selling, general and administrative expenses |
|
397,186 |
|
|
345,785 |
|
|
334,768 |
|
|
288,189 |
|
|
252,889 |
| |||||
Preopening expenses |
|
11,735 |
|
|
10,343 |
|
|
8,471 |
|
|
8,896 |
|
|
7,019 |
| |||||
Pension termination costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,521 |
| |||||
Operating income |
|
219,780 |
|
|
235,061 |
|
|
209,427 |
|
|
179,626 |
|
|
134,585 |
| |||||
Interest income, net |
|
293 |
|
|
4,137 |
|
|
6,180 |
|
|
4,030 |
|
|
1,219 |
| |||||
Income (loss) on contingent lease obligations (1) |
|
15,607 |
|
|
(106,359 |
) |
|
|
|
|
|
|
|
|
| |||||
Income from continuing operations before income taxes and cumulative effect of accounting principle changes |
|
235,680 |
|
|
132,839 |
|
|
215,607 |
|
|
183,656 |
|
|
135,804 |
| |||||
Provision for income taxes |
|
89,871 |
|
|
49,068 |
|
|
83,009 |
|
|
71,075 |
|
|
53,371 |
| |||||
Income from continuing operations before cumulative effect of accounting principle changes |
|
145,809 |
|
|
83,771 |
|
|
132,598 |
|
|
112,581 |
|
|
82,433 |
| |||||
Loss from discontinued operations, net of income tax benefit (2) |
|
(14,943 |
) |
|
(1,423 |
) |
|
(1,097 |
) |
|
(1,432 |
) |
|
(628 |
) | |||||
Income before cumulative effect of accounting principle changes |
|
130,866 |
|
|
82,348 |
|
|
131,501 |
|
|
111,149 |
|
|
81,805 |
| |||||
Cumulative effect of accounting principle changes |
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,326 |
) | |||||
Net income |
$ |
130,866 |
|
$ |
82,348 |
|
$ |
131,501 |
|
$ |
111,149 |
|
$ |
62,479 |
| |||||
Income per common share: |
||||||||||||||||||||
Basic earnings per share: |
||||||||||||||||||||
Income from continuing operations before cumulative effect of accounting principle changes |
$ |
2.07 |
|
$ |
1.16 |
|
$ |
1.82 |
|
$ |
1.53 |
|
$ |
1.10 |
| |||||
Loss from discontinued operations |
|
(0.21 |
) |
|
(0.02 |
) |
|
(0.02 |
) |
|
(0.02 |
) |
|
(0.01 |
) | |||||
Cumulative effect of accounting principle changes |
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.26 |
) | |||||
Net income |
$ |
1.86 |
|
$ |
1.14 |
|
$ |
1.80 |
|
$ |
1.51 |
|
$ |
0.83 |
| |||||
Diluted earnings per share: |
||||||||||||||||||||
Income from continuing operations before cumulative effect of accounting principle changes |
$ |
2.05 |
|
$ |
1.13 |
|
$ |
1.78 |
|
$ |
1.49 |
|
$ |
1.08 |
| |||||
Loss from discontinued operations |
|
(0.21 |
) |
|
(0.02 |
) |
|
(0.01 |
) |
|
(0.02 |
) |
|
(0.01 |
) | |||||
Cumulative effect of accounting principle changes |
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.25 |
) | |||||
Net income |
$ |
1.84 |
|
$ |
1.11 |
|
$ |
1.77 |
|
$ |
1.47 |
|
$ |
0.82 |
| |||||
Balance Sheet Data |
||||||||||||||||||||
Working capital |
$ |
117,042 |
|
$ |
127,818 |
|
$ |
179,928 |
|
$ |
133,476 |
|
$ |
108,979 |
| |||||
Total assets |
|
1,480,957 |
|
|
1,422,511 |
|
|
1,233,969 |
|
|
1,131,096 |
|
|
952,642 |
| |||||
Long-term debt and obligations under capital leases |
|
|
|
|
1,558 |
|
|
1,828 |
|
|
2,050 |
|
|
32,249 |
| |||||
Stockholders' equity |
|
740,803 |
|
|
686,567 |
|
|
664,915 |
|
|
577,398 |
|
|
485,042 |
| |||||
Clubs open at end of year |
|
140 |
|
|
130 |
|
|
118 |
|
|
107 |
|
|
96 |
|
(1) | See Note 2 of Notes to Consolidated Financial Statements |
(2) | See Note 3 of Notes to Consolidated Financial Statements |
9
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction
BJs Wholesale Club, Inc., which previously had been a wholly owned subsidiary of Waban Inc., became a separate and independent public entity on July 28, 1997, when Waban distributed to its stockholders on a pro rata basis all of the Companys outstanding common stock (the spin-off).
Unless noted otherwise, the fiscal year ended February 1, 2003 is referred to as 2002. Other fiscal years are referred to in a similar manner.
Critical Accounting Policies and Estimates
The preparation of the Companys 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. The Company reviews its estimates on an ongoing basis and makes judgments about the carrying value of assets and liabilities based on a number of factors. These factors include historical experience, guidance provided by outside experts and assumptions made by management that are believed to be reasonable under the circumstances. This section summarizes critical accounting policies and the related judgments involved in their application.
The Company recognizes revenue from the sale of merchandise when the customer takes delivery of and title to the merchandise, typically at the time of purchase in the club. In the limited instances when the customer is not able to take delivery at the club, shipping terms are normally FOB shipping point. In all cases, revenue from the sale of merchandise is not recognized until title and risk of loss pass to the customer. Membership fee revenue is recognized on a straight-line basis over the life of the membership, which is typically twelve months.
In determining comparable club information, the Company includes 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. However, if a club is in the process of closing, it is excluded from comparable clubs. The Company includes relocated clubs and expansions in comparable clubs. The Company reports comparable club sales information on a same-week basis whenever it is comparing sales between two fiscal years having 52 weeks in one year and 53 weeks in another. Sales for the 52 weeks ended February 2, 2002 were compared with sales for the last 52 weeks of the fiscal year ended February 3, 2001 to have a proper comparison for comparable sales reporting.
The Company receives various types of cash consideration from vendors, principally in the form of rebates based on purchasing or selling certain volumes of product; time-based rebates or allowances, which may include product placement allowances or exclusivity arrangements covering a predetermined period of time; price protection rebates and allowances for retail reductions on certain merchandise; and salvage allowances for product that is damaged, defective or becomes out-of-date. The Company recognizes such vendor rebates and allowances based on a systematic and rational allocation of the cash consideration offered to the underlying transaction that results in progress by the Company 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. Vendor rebates and allowances are typically realized as a reduction of cost of sales when the merchandise is sold or otherwise disposed of.
The Company also receives cash consideration from vendors for demonstrating their products in the clubs or for advertising their products, particularly in the BJs Journal, a publication sent to BJs members several times a year. Cash consideration for product demonstrations is recognized as a reduction of selling, general and administrative (SG&A) expenses in the period during which the demonstrations are performed. Cash consideration for advertising vendors products is recognized as a reduction of SG&A expenses in the period in which the advertising takes place. In both cases, cash consideration represents a reimbursement of specific, incremental and identifiable SG&A costs incurred by the Company to sell the vendors products.
10
Merchandise inventories are stated at the lower of cost, determined under the average cost method, or market. The Company recognizes 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 stockkeeping unit (SKU) level. A report that details the number of weeks of selling supply for each SKU allows the merchandising staff to make timely markdown decisions to help maintain rapid inventory turnover, which is essential in the Companys business. The carrying value of any SKU whose selling price is marked down to below cost is immediately reduced to that selling price.
The Company takes physical inventories of merchandise on a cycle basis at every location each year. A second physical inventory is taken at the end of the year at selected locations. The Company estimates a reserve for inventory 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.
The Company reviews the realizability of its long-lived assets annually and whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Current and expected operating results and cash flows and other factors are considered in connection with the Companys reviews. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows of individual clubs and consolidated net cash flows for long-lived assets not identifiable to individual clubs. 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 trends and general economic assumptions. The time period for newer clubs to become profitable varies, especially for clubs in a new market. BJs does not consider newer clubs at risk for impairment of long-lived assets until they meet planned dates for maturity. Impairment losses are measured as the difference between the carrying amount and the fair value of the impaired assets.
As of February 1, 2003, the Company had not established a valuation allowance for its deferred tax assets because those assets can be realized by offsetting deferred tax liabilities and future taxable income, which management believes will more likely than not be earned, based on the Companys historical record and projected earnings. Significant changes in projections of future taxable income could result in the Companys establishment of a valuation allowance, which would reduce the carrying value of deferred tax assets.
During the fiscal year ended February 2, 2002, the Company established reserves for its liability related to House2Home, Inc. (House2Home) leases. Pursuant to an agreement with The TJX Companies, Inc. (TJX), BJs agreed to indemnify TJX for 100% of House2Homes lease liabilities guaranteed by TJX through January 31, 2003 and for 50% of any such liabilities thereafter. House2Home filed for bankruptcy in November 2001. (See Note B of Notes to Consolidated Financial Statements for additional information.) BJs recorded liabilities were based on the present value of rent liabilities under the House2Home leases, including estimated real estate taxes and common area maintenance charges, reduced by estimated income from the subleasing of these properties. An annual discount rate of 6% was used to calculate the present value of these lease obligations. This rate was based on estimated incremental borrowing rates for the Company during the weighted-average period of time over which these obligations are expected to be paid.
A considerable amount of judgment was involved in determining BJs net liability related to House2Home leases, particularly in estimating potential sublease income. The Company obtained an independent appraisal to help make this determination. Assumptions included an average period of time it would take to sublease the properties and the amount of potential sublease income for each property. The Company continually evaluates the adequacy of its House2Home reserves based on progress made in settling its obligations and the status of ongoing negotiations. A significant number of House2Home leases were settled in 2002 and an adjustment to reduce the House2Home reserve was made in the third quarter of 2002. Because the vast majority of the House2Home settlements to date have been made through lump sum settlements and because the Company believes that most of the remaining leases will be settled in the same manner, the Company is now basing the determination of its liability on estimated lump sum settlements instead of the previous assumption that the properties would be subleased. The Company may still satisfy its obligations by subleasing properties, which could change the timing of cash outflows.
11
During the fiscal year ended February 1, 2003, the Company established reserves for its lease liabilities for three clubs which were closed in November 2002. Two of these clubs were in the Columbus, Ohio, market and one was in North Dade, Florida. See Note C of Notes to Consolidated Financial Statements for additional information. BJs recorded liabilities are based on the present value of rent liabilities under these leases, including estimated real estate taxes and common area maintenance charges, reduced by estimated income from the subleasing of these properties. An annual discount rate of 6% was used to calculate the present value of these lease obligations. This rate was based on the estimated incremental borrowing rate for the Company during the weighted-average period of time over which these obligations are expected to be paid.
A considerable amount of judgment was involved in determining BJs net liability related to the closed club leases, particularly in estimating potential sublease income. Based on its knowledge of real estate conditions in the local markets and its experience in those markets, the Company assumed an average period of time it would take to sublease the properties and the amount of potential sublease income for each property. Net payments that the Company makes to settle its lease obligations will reduce operating cash flows in varying amounts over the remaining terms of the leases, which expire at various times up to 2019. Instead of subleasing the properties, the Company may satisfy its obligations through lump sum settlements, which could result in accelerated cash outflows.
The Company is primarily self-insured for workers compensation and general liability 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 valuations provided by third-party actuaries, historical loss development factors, and other assumptions believed to be reasonable under the circumstances.
The Company is involved in various legal proceedings that are typical of a retail business. Along with outside legal counsel, the Company assesses its exposure related to these proceedings and determines the amount of accruals required, if any, for these contingencies.
Results of Operations
The following table presents income statement data for continuing operations for the last three fiscal years:
Fiscal Year Ended |
|||||||||||||||||||
February 1, 2003 |
February 2, 2002 |
February 3, 2001 |
|||||||||||||||||
(53 weeks) |
|||||||||||||||||||
$ |
% of Net Sales |
$ |
% of Net Sales |
$ |
% of Net Sales |
||||||||||||||
(Dollars in Millions except Per Share Amounts) |
|||||||||||||||||||
Net sales |
$ |
5,729.0 |
100.0 |
% |
$ |
5,105.9 |
|
100.0 |
% |
$ |
4,766.6 |
100.0 |
% | ||||||
Membership fees and other |
|
130.7 |
2.3 |
|
|
117.4 |
|
2.3 |
|
|
102.5 |
2.2 |
| ||||||
Total revenues |
|
5,859.7 |
102.3 |
|
|
5,223.3 |
|
102.3 |
|
|
4,869.1 |
102.2 |
| ||||||
Cost of sales, including buying and occupancy costs |
|
5,231.0 |
91.3 |
|
|
4,632.1 |
|
90.7 |
|
|
4,316.4 |
90.6 |
| ||||||
Selling, general and administrative expenses |
|
397.2 |
7.0 |
|
|
345.8 |
|
6.8 |
|
|
334.8 |
7.0 |
| ||||||
Preopening expenses |
|
11.7 |
0.2 |
|
|
10.3 |
|
0.2 |
|
|
8.5 |
0.2 |
| ||||||
Operating income |
|
219.8 |
3.8 |
|
|
235.1 |
|
4.6 |
|
|
209.4 |
4.4 |
| ||||||
Interest income, net |
|
0.3 |
0.0 |
|
|
4.1 |
|
0.1 |
|
|
6.2 |
0.1 |
| ||||||
Income (loss) on contingent lease obligations |
|
15.6 |
0.3 |
|
|
(106.4 |
) |
(2.1 |
) |
|
0.0 |
0.0 |
| ||||||
Income from continuing operations before income taxes |
|
235.7 |
4.1 |
|
|
132.8 |
|
2.6 |
|
|
215.6 |
4.5 |
| ||||||
Provision for income taxes |
|
89.9 |
1.6 |
|
|
49.0 |
|
1.0 |
|
|
83.0 |
1.7 |
| ||||||
Income from continuing operations |
$ |
145.8 |
2.5 |
% |
$ |
83.8 |
|
1.6 |
% |
$ |
132.6 |
2.8 |
% | ||||||
Diluted net income per common share |
$ |
2.05 |
$ |
1.13 |
|
$ |
1.78 |
||||||||||||
Number of clubs in operation at year end |
|
140 |
|
130 |
|
|
118 |
12
Net sales increased by 12.2% from 2001 to 2002 and by 7.1% from 2000 to 2001. 2000 was a 53-week fiscal year. These increases were due to the opening of new clubs and gasoline stations and to comparable club sales increases. Increases in comparable club sales represented 16% of the total increase in net sales from 2001 to 2002 and, on a same-week basis, 41% of the total increase in net sales from 2000 to 2001. New clubs accounted for the remainder of the increases.
Comparable club sales increased by 2.0% from 2001 to 2002 and, on a same-week basis, increased by 3.6% from 2000 to 2001. Additionally, the Company expanded the number of gasoline stations it operates from 34 at the end of 2000 to 55 at the end of 2001 and 68 at the end of 2002. Excluding sales of gasoline, comparable club sales increased by 1.1% from 2001 to 2002 and by 3.1% from 2000 to 2001. Comparable club sales results in 2002 reflected a generally weaker economic climate, price deflation in a number of food and general merchandise categories and increased competition.
Total revenues included membership fees of $117.9 million in 2002, $105.6 million in 2001 and $90.1 million in 2000. The increases were due mainly to an increase in BJs membership fee from $35 to $40, effective January 1, 2001, and to new members. Because members renew throughout the year and because membership fee income is realized over the life of the membership, the benefit of the fee increase was spread over 2001 and 2002. Business members renewed at a rate of 87% and Inner Circle members renewed at a rate of 83% in both 2002 and 2001.
The Company entered the Atlanta market with four new clubs in 2002. Because Atlanta was a market where BJs had no other clubs, very limited name recognition and two entrenched competitors, the Company tested a program of free first-year memberships during the preopening and initial opening periods of the new Atlanta clubs in 2002. Because of the initial free membership offer, the Company believes that it attracted more members and generated more sales in these clubs in 2002 than would have been the case if new members had to pay a membership fee. The Company will generate incremental income from members who renew their membership for a fee in 2003 in this market. Sales are expected to decrease to a more normalized volume in 2003 than was experienced as a result of the initial free memberships offered the previous year in the Atlanta market clubs.
Cost of sales (including buying and occupancy costs) was 91.31% of net sales in 2002, 90.72% in 2001 and 90.56% in 2000. The increase in the cost of sales percentage from 2001 to 2002 was due to decreased merchandise gross margins and the increased sales contribution of gasoline, which together combined for approximately 63% of the increase in the cost of sales ratio, and higher occupancy expenses, which accounted for most of the remainder of the increase. Gross margins on merchandise sales were lower in 2002 because of an unfavorable sales mix toward lower margin consumables and because of certain pricing initiatives begun in the fourth quarter to drive additional sales. The gross margin rate on gasoline sales is significantly lower than the overall gross margin rate for the rest of BJs business. Occupancy expenses increased as a percentage of sales due to lower than planned comparable club sales increases and the opening of 25 new clubs (which generally start out with lower sales volumes than mature clubs) in the last eighteen months. The increase in the cost of sales percentage from 2000 to 2001 was attributable mainly to the increased sales contribution of gasoline, higher expenses for utilities and other occupancy costs, and initial excess capacity at the Companys new cross-dock facility in Burlington, New Jersey. Excluding gas, merchandise gross margin as a percentage of sales in 2001 rose slightly over the previous year.
Selling, general and administrative expenses were 6.93% of net sales in 2002, 6.77% in 2001 and 7.02% in 2000. The increase in the SG&A ratio in 2002 was due principally to increases in payroll, debit and credit card expenses and medical insurance, partially offset by lower incentive pay expenses and the increased contribution of gasoline sales, which have low related SG&A costs. The Company also included $1.8 million of asset impairment charges in SG&A in 2002. The SG&A ratio in general was unfavorably impacted by the effect of lower than planned comparable club sales increases on certain fixed expenses. The decrease in the SG&A ratio from 2000 to 2001 was due mainly to increased comparable club sales, lower payroll expenses as a percentage of sales and the increased contribution of gasoline sales.
13
Total SG&A expenses rose by $51.4 million from 2001 to 2002 and by $11.0 million from 2000 (a 53-week year) to 2001. These increases were due mainly to an increase in the number of clubs in operation in both periods. Payroll and payroll benefits accounted for 82% of all SG&A expenses in 2002, and 83% in each of 2001 and 2000. Payroll and payroll benefits accounted for 69% of the increase in total SG&A expenses from 2001 to 2002 and 94% of the increase in total SG&A expenses from 2000 to 2001. The amount of the increase from 2001 to 2002 contributed by payroll and related benefits was lower than usual, primarily because of lower incentive pay expenses in 2002. Excluding the effect of expenses incurred in connection with the relocation of a cross-dock facility in 2000 (see next paragraph), payroll and related benefits accounted for 82% of the increase in total SG&A expenses from 2000 to 2001.
In 2000, the Company recorded pretax charges of $2.6 million associated with the relocation of its cross-dock facility from Bristol, Pennsylvania, to Burlington, New Jersey. This relocation was completed in April 2001. The Company recorded $1.6 million of the charges in SG&A expenses and $1.0 million in cost of sales, including buying and occupancy expenses. In 2002, the Company extended subleases for its former cross-dock facility in Bristol, Pennsylvania, and consequently reduced its related lease liabilities by $1.0 million. The credit was recorded in SG&A expenses.
Preopening expenses were $11.7 million in 2002, $10.3 million in 2001 and $8.5 million in 2000. The Company opened thirteen new clubs in 2002, twelve new clubs in 2001 and eleven new clubs in 2000. One club was relocated in each of 2001 and 2000. A portion of 2002s preopening expenses was incurred for a new cross-dock facility which opened in Jacksonville, Florida, in April 2003.
Interest income, net was $0.3 million in 2002, $4.1 million in 2001 and $6.2 million in 2000. The decrease in net interest income from 2001 to 2002 was due primarily to lower invested cash balances, net of borrowings, resulting mainly from slower inventory turns, from treasury stock purchases of approximately $83 million and House2Home lease obligation payments of approximately $50 million in the last twelve months. The decrease from 2000 to 2001 was attributable primarily to lower interest rates, which reduced income earned on invested cash. See Note L of Notes to Consolidated Financial Statements for a summary of the components of interest income and expense.
The Company recorded a pretax charge of $105.0 million in the third quarter of 2001 for its estimated loss associated with House2Home leases. This loss was based on the present value of rent liabilities under these leases, including estimated real estate taxes and common area maintenance charges, reduced by estimated income from the subleasing of these properties. An annual discount of 6% was used to calculate the present value of these lease obligations. The Company also recorded accretion charges of $1.4 million in connection with these obligations in 2001.
Based on the Companys continuing evaluation of its remaining obligations and the significant progress made in settling liabilities for House2Home leases, the Company recorded a $20 million pretax gain in 2002 to reduce its estimated liability related to its contingent lease obligations. This was partially offset by pretax accretion charges of $4.4 million recorded in 2002 in connection with these obligations. See Note B of Notes to Consolidated Financial Statements for additional information.
The Companys income tax provision was 38.1% of pretax income from continuing operations in 2002, 36.9% in 2001 and 38.5% in 2000. The lower rate in 2001 was due primarily to the effect of the tax benefit on the loss of contingent lease obligations, which was recorded at an incremental tax rate of 40%. Excluding the loss on contingent lease obligations, the Companys income tax was 38.0% of pretax income from continuing operations in 2002, 38.3% in 2001 and 38.5% in 2000. The decreases in the overall effective rates were due mainly to lower effective state income tax rates in each of the last two fiscal years.
Income from continuing operations was $145.8 million, or $2.05 per diluted share, in 2002, $83.8 million, or $1.13 per diluted share, in 2001 and $132.6 million, or $1.78 per diluted share, in 2000. These amounts
14
included a post-tax gain from the reduction in the Companys House2Home lease reserve of $12.0 million, or $.17 per diluted share, in 2002 and a post-tax loss of $63.0 million, or $.85 per diluted share, in 2001 to establish its liabilities for House2Home lease obligations.
Loss from discontinued operations, net of tax benefit, was $14.9 million, or $.21 per diluted share, in 2002, $1.4 million, or $.02 per diluted share, in 2001 and $1.1 million, or $.01 per diluted share, in 2000. The loss in 2002 included a post-tax loss of $12.8 million, or $.18 per diluted share, to close three clubs in November 2002 and post-tax operating losses of $2.1 million for those three clubs. Loss from discontinued operations in 2001 and 2000 consisted entirely of the operating losses of the three closed clubs.
Net income was $130.9 million, or $1.84 per diluted share, in 2002, versus $82.3 million, or $1.11 per diluted share, in 2001 and $131.5 million, or $1.77 per diluted share, in 2000.
Outlook for 2003
During the second half of 2002, BJs senior management team performed a strategic analysis of the Companys current position within the warehouse club industry as well as its sales and earnings prospects for the future. On the basis of that analysis, the Company affirmed its commitment to a business model based, in part, on long-term objectives to achieve comparable club sales growth of 3-5%, annual selling square footage growth of up to 10% and annual growth in earnings per share in the range of 10-15%.
To support these objectives the Company began making new investments in merchandising, marketing, technology and club appearance that will continue throughout 2003:
| In merchandising, the Company has lowered prices in dairy and other high-volume food categories to enhance its competitive position and is improving quality in its produce, bakery and certain other departments while maintaining its retail prices. |
| The Companys marketing plans for 2003 include the complete upgrade of its Customer Relationship Management (CRM) system, as well as the launch of a premium membership program that will reward high volume members with rebates of up to $500 per year for an annual membership fee of $75. |
| By the end of 2002, the Company completed a migration to a new inventory replenishment system and the installation of self checkout lanes in 40 clubs. In 2003, the Company is planning a significant increase in technology initiatives, including a new warehouse management system for the Companys cross-dock operations, upgrades to labor scheduling software and the addition of self checkout lanes in 60 more clubs. A major redesign of BJs website was completed in March 2003. |
| During the second half of 2002, the Company began making new investments in club layout by upgrading club décor, relocating its expanded health and beauty aids department to the front of the club and improving its presentation in a number of fresh food departments. In 2003 the Company plans to refurbish a total of 30 clubs in this manner and to evaluate the renovation or relocation of some of its older clubs. |
Most of BJs initiatives in 2003 are focused on increasing sales and market share. In order to achieve sales increases, the Company plans to lower margins on certain merchandise and gasoline, increase marketing expenses to support its new CRM and merchandising initiatives and increase club payroll to execute its initiatives. The Company expects that incentive pay expenses will increase above their minimal level of 2002. BJs will incur initial excess capacity costs in connection with a new cross-dock facility which opened in April 2003. Net interest expense is projected to be approximately $1 million in 2003. Accretion charges on the Companys House2Home lease liabilities are expected to decrease in 2003. The Companys ongoing tax rate is expected to be slightly higher than 2002s rate of 38.0% due to certain tax law changes in states where BJs is located.
15
Seasonality
The Companys business, in common with the business of retailers generally, is subject to seasonal influences. The Companys sales and operating income have typically been strongest in the fourth quarter holiday season and lowest in the first quarter of each fiscal year.
Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) issued the following standards which became effective in the fourth quarter of 2002 or will become effective in 2003:
| Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that the Company recognize future costs for asset retirements to be incurred primarily in connection with removal of gasoline tanks from its gasoline stations. The Company will recognize a liability for existing asset retirement obligations, adjusted for cumulative accretion, and an asset retirement cost capitalized as an increase to the carrying amount of associated long-lived assets, adjusted for accumulated depreciation, upon initial application of SFAS No. 143. As of the beginning of fiscal 2003, the Company will recognize the cumulative effect of applying this statement as a change in accounting principle, which the Company expects will result in a post-tax charge of approximately $1.0 to $1.4 million. The Company estimates that the post-tax charge for the ongoing impact of SFAS No. 143 for the full 2003 fiscal year will be approximately $0.6 to $0.8 million. |
| SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, addresses financial accounting and reporting for costs associated with such activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of an entitys commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002. In accordance with the transition provisions of SFAS No. 146, the Company will continue to apply the provisions of EITF Issue 94-3 for the three clubs it closed in November 2002. |
| SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This standard becomes effective for financial statements for fiscal years ending after December 15, 2002 and for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The Company accounts for stock-based compensation under the principles of APB 25. The disclosure provisions of SFAS No. 148 have been applied in this report on Form 10-K and will be applied in interim periods beginning with the Companys first quarter of fiscal 2003. |
| FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in this Interpretation are effective for |
16
financial statements of interim or annual periods ending after December 15, 2002. The disclosure provisions of this Interpretation have been applied in this report on Form 10-K and will be applied in interim periods beginning with the Companys first quarter of fiscal 2003. |
| FASB Interpretation No. 46, Consolidation of Variable Interest Entities addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: |
1) | The equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity. |
2) | The equity investors lack one or more of certain essential characteristics of a controlling financial interest as stated in this Interpretation. |
This Interpretation applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company believes that the adoption of this Interpretation will result in no material change from its existing reporting.
Emerging Issues Task Force Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received by a Vendor, (EITF 02-16) addresses how a reseller should account for cash consideration received from a vendor. The first issue of EITF 02-16 became effective for arrangements entered into or modified after December 31, 2002. Under this issue, there is a presumption that cash consideration received by a customer from a vendor should be characterized as a reduction of cost of sales. That presumption is overcome when the consideration is a reimbursement of costs incurred by the customer to sell the vendors products, in which case the cash consideration should be characterized as a reduction of that cost. If the amount of cash consideration exceeds the cost being reimbursed, that excess amount should be characterized as a reduction of cost of sales. Beginning in fiscal 2003, the Company will classify any cash consideration in excess of expenses being reimbursed, should such an excess occur, as a reduction of cost of sales.
The second issue of EITF 02-16, which became effective for arrangements entered into after November 21, 2002, addresses the recognition and classification of cash consideration that is payable pursuant to a binding arrangement only if the customer completes a specified cumulative level of purchases or remains a customer for a specified period of time. The adoption of this issue resulted in no change from the Companys existing accounting.
Liquidity and Capital Resources
Net cash provided by operating activities was $151.3 million in 2002 compared with $194.8 million in 2001 and $158.3 million in 2000. The decrease in net cash provided by operating activities in 2002 versus 2001 was due principally to payments made to settle House2Home liabilities and a decrease in cash provided by the tax benefit from the exercise of stock options. The increase in net cash provided by operating activities in 2001 versus 2000 was due mainly to an increase in cash provided by the change in accounts payable. Accounts payable balances were higher than normal at the beginning of 2000 due in part to the January replenishment of inventories in categories with millennium-related demand, much of which was paid for after the end of January 2000. Cash provided by net income before depreciation and amortization and the net post-tax loss on contingent lease obligations, store closing costs and asset impairment losses was $208.6 million in 2002 versus $207.8 million in 2001 and $186.5 million in 2000.
17
Cash expended for property additions was $134.8 million in 2002 versus $166.3 million in 2001. In 2002, the Company opened thirteen new clubs and purchased one existing club, which was previously leased. In 2001, the Company opened twelve new clubs and relocated one club. Two of the 2002 openings and five of the 2001 openings were at owned locations. The Company also opened 14 new gas stations in 2002 and 21 new gas stations in 2001. One gas station was closed in 2002.
The Company expects that capital expenditures will total approximately $215 to $225 million in 2003, based on plans to open 12 or 13 new clubs and 16 gas stations. The Company expects to own approximately four of the new club locations opening in 2003. The Company opened a new 480,000 square foot owned cross-dock facility in Jacksonville, Florida, in April 2003. This facility will service the Companys growing presence in the Southeast. In addition to the purchase of the new cross-dock facility, the Company expects to refurbish approximately 30 clubs and increase capital spending for a number of technology initiatives. The timing of actual club openings and the amount of related expenditures could vary from the estimates above due, among other things, to the complexity of the real estate development process.
During 2002, the Board of Directors authorized the repurchase of an additional $100 million of the Companys common stock in addition to the $300 million previously authorized. In 2002, the Company repurchased 2,648,700 shares of common stock for $83.5 million, or an average price of $31.51 per share. From the inception of its share repurchase activities in August 1998, the Company has repurchased a total of $309.5 million of common stock at an average cost of $31.69 per share. As of February 1, 2003, the Companys remaining repurchase authorization was $90.5 million.
On June 12, 2002, the Company entered into a new $200 million unsecured credit agreement with a group of banks which expires June 13, 2005. The agreement includes a $50 million sub-facility for letters of credit, of which $2.3 million was outstanding at February 1, 2003. The Company is required to pay an annual facility fee which is currently 0.125% of the total commitment. Interest on borrowings is payable at the Companys option either at (a) the Eurodollar rate plus a margin which is currently 0.45% or (b) a rate equal to the higher of the sum of the Federal Funds Effective Rate plus 0.50% or the agent banks prime rate. The Company is also required to pay a usage fee in any calendar quarter during which the average daily amount of loans and undrawn or unreimbursed letters of credit outstanding exceeds 33% of the total commitment. The usage fee, if applicable, would currently be at an annual rate of 0.05% of the average daily amount of credit used under the facility during the calendar quarter. The facility fee, Eurodollar margin and usage fee are subject to change based upon the Companys fixed charge coverage ratio. The agreement contains covenants which, among other things, include minimum net worth and fixed charge coverage requirements and a maximum funded debt-to-capital limitation. The Company is required to comply with these covenants on a quarterly basis. Under the credit agreement, the Company may pay dividends or repurchase its own stock in any amount so long as the Company remains in compliance with all other covenants. BJs has no credit rating triggers that would accelerate the maturity date of debt if borrowings were outstanding under its credit agreement. On August 13, 2002, the agreement was amended to change the minimum net worth requirement, thereby providing the Company additional capacity to repurchase its common stock. The Company was in compliance with the covenants and other requirements set forth in its credit agreement at February 1, 2003 and for all fiscal periods throughout the year.
In addition to the credit agreement, the Company maintains a separate $50 million facility for letters of credit, primarily to support the purchase of inventories, of which $19.2 million was outstanding at February 1, 2003, and also maintains a $25 million uncommitted credit line for short-term borrowings.
There were no bank borrowings outstanding at February 1, 2003 and February 2, 2002.
Increases in inventories and accounts payable from February 2, 2002 to February 1, 2003 were due mainly to the addition of new clubs. The average inventory per club at February 1, 2003 was 4.7% higher than it was a year earlier, due in part to lower than planned inventory turns.
18
During the third quarter of 2002, the Company established reserves for its liability related to leases for three clubs which closed on November 9, 2002. (See Note C of Notes to Consolidated Financial Statements for additional information.) BJs recorded liabilities are based on the present value of rent liabilities under the three leases, including estimated real estate taxes and common area maintenance charges, reduced by estimated income from the subleasing of these properties. An annual discount rate of 6% was used to calculate the present value of these lease obligations. This rate was based on estimated borrowing rates for the Company that took into consideration the weighted-average period of time over which these obligations are expected to be paid.
A considerable amount of judgment was involved in determining BJs net liability related to the closed club leases, particularly in estimating potential sublease income. Based on its knowledge of real estate conditions in the local markets and its experience in those markets, the Company assumed an average period of time it would take to sublease the properties and the amount of potential sublease income for each property. Net payments that the Company makes to settle its lease obligations will reduce operating cash flows in varying amounts over the remaining terms of the leases, which expire at various times up to 2019. Instead of subleasing the properties, the Company may satisfy its obligations through lump sum settlements, which could result in accelerated cash outflows. As of February 1, 2003, the Company has reserved a total of $17.5 million associated with its liabilities for the closed club leases, $13.7 million of which is included in other noncurrent liabilities, with the remainder included in accrued expenses and other current liabilities on the balance sheet. The Company believes payments it will make in connection with these leases will not have a material effect on its future financial condition or cash flows and that the liabilities recorded in the balance sheet adequately provide for its obligations. However, there can be no assurance that the Companys actual liability under the leases will not vary materially from amounts recorded in the financial statements due to a number of factors, including future economic factors which may affect the ability to successfully sublease or assign the properties. The Company considers its maximum reasonably possible undiscounted pretax exposure with respect to the leases for the three closed clubs to be approximately $51 million at February 1, 2003.
During 2002 the Company made payments totaling $49.8 million in connection with its indemnification obligations for House2Home leases. The payments included lump sum settlements for 23 leases. Four additional House2Home properties (for which BJs remains contingently liable) were assigned to third parties. Based on the Companys continuing evaluation of its remaining obligations and the progress it has made in settling House2Home leases, the Company reduced its estimated obligations by recording a $20 million pretax gain in 2002. Because the vast majority of House2Home settlements to date have been made through lump sum payments and because the Company believes that most of the remaining 14 leases will be settled in the same manner, the Company has based the determination of its liability as of February 1, 2003 on estimated lump sum settlements instead of the previous assumption that the properties would be subleased. An evaluation was made of each remaining property and some of the Companys estimates were based on negotiations in progress. Although the terms of the remaining House2Home leases expire at various times up to 2016, the Company believes that it can settle its obligations on a more accelerated schedule than previously assumed, and this is reflected in the contractual cash obligations table shown below. As of February 1, 2003, the present value of the Companys obligations for the remaining House2Home leases totaled $40.8 million, including $22.1 million classified as current liabilities. The Company may still satisfy its obligations by subleasing properties, which could change the timing of cash outflows. The Company believes that remaining payments will not have a material impact on its future financial condition or cash flows and that the liabilities recorded in the financial statements adequately provide for its indemnification obligations. However, there can be no assurance that BJs actual liability under the TJX indemnification agreement will not differ materially from amounts recorded in the financial statements due to a number of factors, including future economic factors which may affect the Companys ability to successfully settle its House2Home obligations. The Company considers its maximum reasonably possible undiscounted pretax exposure for its House2Home lease obligations to be approximately $67 million at February 1, 2003.
19
The Company has filed proofs of claim against House2Home, Inc. for claims arising under certain agreements between BJs and House2Home in connection with the Companys spin-off from Waban Inc. in July 1997. These claims arise primarily from BJs indemnification of TJX with respect to TJXs guarantee of House2Home leases and from the Tax Sharing Agreement dated July 28, 1997 between BJs and House2Home. BJs has filed proofs of claim totaling approximately $70 million. BJs intends to amend its claims as it makes future payments for House2Home leases. House2Home has indicated that it intends to contest at least a portion of BJs claims. The Company is unable to determine the amount, if any, of future recoveries under the claims and, therefore, has not recognized such claims in its financial statements. In early December 2002, the Official Committee of Creditors of House2Home, Inc. filed an objection in the United States Bankruptcy Court, Central District of California, Santa Ana Division, to House2Homes motion to approve the Disclosure Statement in connection with its bankruptcy proceeding. In that objection, the creditors committee stated that discussions are taking place between the committee and House2Home regarding the investigation of potential claims that may exist against certain entities related to House2Home, including BJs. On April 11, 2003, House2Home filed its Second Amended Plan of Liquidation and a related Disclosure Statement. In these documents, House2Home indicated that unless it was successful in settling BJs claims informally, it was likely to object to both BJs lease indemnification claims and BJs claims under the Tax Sharing Agreement.
The following summarizes the Companys contractual cash obligations as of February 1, 2003 and the effect these obligations are expected to have on its liquidity and cash flows in future periods:
Payments Due by Period |
Total |
Operating Leases |
Contingent Lease Obligations |
Closed Club Lease Obligations | ||||||||
(Dollars in Thousands) | ||||||||||||
February 2003 to January 2004 |
$ |
126,958 |
$ |
101,001 |
$ |
22,093 |
$ |
3,864 | ||||
February 2004 to January 2006 |
|
222,035 |
|
204,408 |
|
12,566 |
|
5,061 | ||||
February 2006 to January 2008 |
|
203,130 |
|
194,839 |
|
6,161 |
|
2,130 | ||||
After January 2008 |
|
1,052,975 |
|
1,046,515 |
|
|
|
6,460 | ||||
$ |
1,605,098 |
$ |
1,546,763 |
$ |
40,820 |
$ |
17,515 | |||||
Cash and cash equivalents totaled $32.7 million as of February 1, 2003 and no borrowings were outstanding on that date. The Company believes that its current resources, together with anticipated cash flow from operations, will be sufficient to finance its operations through the term of its credit agreement, which expires June 13, 2005. However, the Company may from time to time seek to obtain additional financing.
Factors Which Could Affect Future Operating Results
This report contains a number of forward-looking statements, including statements regarding factors discussed in Outlook for 2003 above; statements regarding planned capital expenditures, planned club and gas station openings, lease obligations under the Companys indemnification agreement with TJX, lease obligations in connection with three closed clubs, the effects of implementing SFAS No. 143 in 2003, sales penetration of private label products, pharmacy testing and other information with respect to the Companys plans and strategies. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, estimates, expects and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause actual events or the Companys actual results to differ materially from those indicated by such forward-looking statements, including, without limitation, the factors set forth below and other factors noted elsewhere in this Managements Discussion and Analysis of Financial Condition and Results of Operations, particularly those noted under Critical Accounting Policies and Estimates. In addition, any forward-looking statements represent the Companys estimates only as of the day this annual report was first filed with the Securities and Exchange Commission and should not be relied upon as representing the
20
Companys estimates as of any subsequent date. While the Company may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so, even if its estimates change.
BJs warehouse clubs are located in the eastern United States, primarily in the Northeast. The Companys business may be adversely affected from time to time by economic downturns in its markets. In addition, the Company may be impacted by state and local regulation in its markets and temporarily impacted by weather conditions prevailing in its markets.
The Company competes with national, regional and local retailers and wholesalers, including national chains in the warehouse merchandising business, some of which have significantly greater financial and marketing resources than the Company, which could adversely affect the Companys business, operating results and financial condition.
In connection with the spin-off in 1997, Waban received a letter ruling from the Internal Revenue Service to the effect that, for federal income tax purposes, the distribution of the Companys stock to Wabans stockholders (the Distribution) and related asset transfers would be tax-free to Wabans stockholders. Certain future events not within the control of the Company or House2Home, including, for example, certain dispositions of the Companys common stock or House2Homes common stock, could cause the Distribution not to qualify for tax-free treatment. If this occurred, the related tax liability would be payable by House2Home, although the Company has agreed to indemnify House2Home under certain circumstances for all or a portion of such tax liability.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company believes that its potential exposure to market risk as of February 1, 2003 is not material because of the short contractual maturities of its cash and cash equivalents on that date. No bank debt was outstanding at February 1, 2003. The Company has not used derivative financial instruments. See Summary of Accounting PoliciesDisclosures about Fair Value of Financial Instruments and Note D in Notes to Consolidated Financial Statements.
21
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page | ||
Consolidated Statements of Income for the fiscal years ended February 1,
2003, |
23 | |
Consolidated Balance Sheets as of February 1, 2003 and February 2, 2002 |
24 | |
Consolidated Statements of Cash Flows for the fiscal years ended February 1,
2003, |
25 | |
Consolidated Statements of Stockholders Equity for the fiscal years ended February
1, 2003, |
26 | |
Notes to Consolidated Financial Statements |
27 | |
Selected Quarterly Financial Data (Unaudited) |
42 | |
Report of Independent Accountants |
43 | |
Report of Management |
43 |
22
BJS WHOLESALE CLUB, INC.
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended |
||||||||||||
February 1, 2003 |
February 2, 2002 |
February 3, 2001 |
||||||||||
(53 weeks) |
||||||||||||
(Dollars in Thousands except Per Share Amounts) |
||||||||||||
Net sales |
$ |
5,728,955 |
|
$ |
5,105,912 |
|
$ |
4,766,612 |
| |||
Membership fees and other |
|
130,747 |
|
|
117,394 |
|
|
102,514 |
| |||
Total revenues |
|
5,859,702 |
|
|
5,223,306 |
|
|
4,869,126 |
| |||
Cost of sales, including buying and occupancy costs |
|
5,231,001 |
|
|
4,632,117 |
|
|
4,316,460 |
| |||
Selling, general and administrative expenses |
|
397,186 |
|
|
345,785 |
|
|
334,768 |
| |||
Preopening expenses |
|
11,735 |
|
|
10,343 |
|
|
8,471 |
| |||
Operating income |
|
219,780 |
|
|
235,061 |
|
|
209,427 |
| |||
Interest income, net |
|
293 |
|
|
4,137 |
|
|
6,180 |
| |||
Gain (loss) on contingent lease obligations |
|
15,607 |
|
|
(106,359 |
) |
|
|
| |||
Income from continuing operations before income taxes |
|
235,680 |
|
|
132,839 |
|
|
215,607 |
| |||
Provision for income taxes |
|
89,871 |
|
|
49,068 |
|
|
83,009 |
| |||
Income from continuing operations |
|
145,809 |
|
|
83,771 |
|
|
132,598 |
| |||
Loss from discontinued operations, net of income tax benefit of $9,849, $883 and $687 |
|
(14,943 |
) |
|
(1,423 |
) |
|
(1,097 |
) | |||
Net income |
$ |
130,866 |
|
$ |
82,348 |
|
$ |
131,501 |
| |||
Basic earnings per share: |
||||||||||||
Income from continuing operations |
$ |
2.07 |
|
$ |
1.16 |
|
$ |
1.82 |
| |||
Loss from discontinued operations |
|
(0.21 |
) |
|
(0.02 |
) |
|
(0.02 |
) | |||
Net income |
$ |
1.86 |
|
$ |
1.14 |
|
$ |
1.80 |
| |||
Diluted earnings per share: |
||||||||||||
Income from continuing operations |
$ |
2.05 |
|
$ |
1.13 |
|
$ |
1.78 |
| |||
Loss from discontinued operations |
|
(0.21 |
) |
|
(0.02 |
) |
|
(0.01 |
) | |||
Net income |
$ |
1.84 |
|
$ |
1.11 |
|
$ |
1.77 |
| |||
Number of common shares for earnings per share computations: |
||||||||||||
Basic |
|
70,321,078 |
|
|
72,519,032 |
|
|
72,870,668 |
| |||
Diluted |
|
71,120,706 |
|
|
73,981,148 |
|
|
74,380,544 |
|
The accompanying notes are an integral part of the financial statements.
23
BJS WHOLESALE CLUB, INC.
CONSOLIDATED BALANCE SHEETS
February 1, 2003 |
February 2, 2002 |
|||||||
(Dollars in Thousands) |
||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ |
32,683 |
|
$ |
87,158 |
| ||
Accounts receivable |
|
63,129 |
|
|
61,654 |
| ||
Merchandise inventories |
|
631,535 |
|
|
560,001 |
| ||
Current deferred income taxes |
|
20,697 |
|
|
27,226 |
| ||
Prepaid expenses |
|
19,026 |
|
|
17,406 |
| ||
Total current assets |
|
767,070 |
|
|
753,445 |
| ||
Property at cost: |
||||||||
Land and buildings |
|
474,451 |
|
|
449,619 |
| ||
Leasehold costs and improvements |
|
96,768 |
|
|
74,647 |
| ||
Furniture, fixtures and equipment |
|
423,114 |
|
|
369,671 |
| ||
|
994,333 |
|
|
893,937 |
| |||
Less: accumulated depreciation and amortization |
|
303,306 |
|
|
259,562 |
| ||
|
691,027 |
|
|
634,375 |
| |||
Property under capital leases |
|
|
|
|
3,319 |
| ||
Less: accumulated amortization |
|
|
|
|
2,447 |
| ||
|
|
|
|
872 |
| |||
Deferred income taxes |
|
|
|
|
12,571 |
| ||
Other assets |
|
22,860 |
|
|
21,248 |
| ||
Total assets |
$ |
1,480,957 |
|
$ |
1,422,511 |
| ||
LIABILITIES |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ |
420,368 |
|
$ |
380,996 |
| ||
Accrued expenses and other current liabilities |
|
182,599 |
|
|
166,926 |
| ||
Accrued federal and state income taxes |
|
24,968 |
|
|
33,352 |
| ||
Obligations under capital leases due within one year |
|
|
|
|
285 |
| ||
Contingent lease obligations due within one year |
|
22,093 |
|
|
44,068 |
| ||
Total current liabilities |
|
650,028 |
|
|
625,627 |
| ||
Obligations under capital leases, less portion due within one year |
|
|
|
|
1,558 |
| ||
Contingent lease obligations, less portion due within one year |
|
18,727 |
|
|
62,142 |
| ||
Other noncurrent liabilities |
|
58,000 |
|
|
46,617 |
| ||
Deferred income taxes |
|
13,399 |
|
|
|
| ||
Commitments and contingencies |
|
|
|
|
|
| ||
STOCKHOLDERS EQUITY |
||||||||
Preferred stock, par value $.01, authorized 20,000,000 shares, no shares issued |
|
|
|
|
|
| ||
Common stock, par value $.01, authorized 180,000,000 shares, issued |
|
744 |
|
|
744 |
| ||
Additional paid-in capital |
|
62,218 |
|
|
68,574 |
| ||
Retained earnings |
|
861,692 |
|
|
730,851 |
| ||
Treasury stock, at cost, 5,125,517 and 2,816,753 shares |
|
(183,851 |
) |
|
(113,602 |
) | ||
Total stockholders equity |
|
740,803 |
|
|
686,567 |
| ||
Total liabilities and stockholders equity |
$ |
1,480,957 |
|
$ |
1,422,511 |
| ||
The accompanying notes are an integral part of the financial statements.
24
BJS WHOLESALE CLUB, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended |
||||||||||||
February 1, 2003 |
February 2, 2002 |
February 3, 2001 |
||||||||||
(53 weeks) |
||||||||||||
(Dollars in Thousands) |
||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||||||
Net income |
$ |
130,866 |
|
$ |
82,348 |
|
$ |
131,501 |
| |||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
(Gain) loss on contingent lease obligations |
|
(15,607 |
) |
|
106,359 |
|
|
|
| |||
Provision for store closing costs and asset impairment losses |
|
23,234 |
|
|
|
|
|
|
| |||
Depreciation and amortization of property |
|
73,113 |
|
|
61,680 |
|
|
54,953 |
| |||
Loss on property disposals |
|
854 |
|
|
447 |
|
|
654 |
| |||
Other noncash items (net) |
|
287 |
|
|
130 |
|
|
115 |
| |||
Deferred income taxes |
|
32,499 |
|
|
(40,015 |
) |
|
(2,149 |
) | |||
Tax benefit from exercise of stock options |
|
2,817 |
|
|
17,831 |
|
|
10,705 |
| |||
Increase (decrease) in cash due to changes in: |
||||||||||||
Accounts receivable |
|
(1,475 |
) |
|
(6,169 |
) |
|
(3,410 |
) | |||
Merchandise inventories |
|
(71,534 |
) |
|
(64,716 |
) |
|
(48,514 |
) | |||
Prepaid expenses |
|
(1,620 |
) |
|
(1,439 |
) |
|
(485 |
) | |||
Other assets |
|
(1,844 |
) |
|
(7,138 |
) |
|
(2,804 |
) | |||
Accounts payable |
|
30,784 |
|
|
29,112 |
|
|
(8,481 |
) | |||
Accrued expenses |
|
9,829 |
|
|
12,781 |
|
|
9,222 |
| |||
Accrued income taxes |
|
(8,384 |
) |
|
1,545 |
|
|
11,001 |
| |||
Contingent lease obligations |
|
(49,783 |
) |
|
(149 |
) |
|
|
| |||
Other noncurrent liabilities |
|
(2,693 |
) |
|
2,164 |
|
|
6,022 |
| |||
Net cash provided by operating activities |
|
151,343 |
|
|
194,771 |
|
|
158,330 |
| |||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||||||
Purchase of marketable securities |
|
|
|
|
|
|
|
(5,001 |
) | |||
Sale of marketable securities |
|
|
|
|
|
|
|
5,001 |
| |||
Property additions |
|
(134,826 |
) |
|
(166,312 |
) |
|
(98,680 |
) | |||
Proceeds from property disposals |
|
144 |
|
|
2 |
|
|
301 |
| |||
Net cash used in investing activities |
|
(134,682 |
) |
|
(166,310 |
) |
|
(98,379 |
) | |||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||||||
Repayment of capital lease obligations |
|
(197 |
) |
|
(225 |
) |
|
(202 |
) | |||
Cash dividends paid on preferred stock of subsidiary |
|
(25 |
) |
|
(25 |
) |
|
(25 |
) | |||
Proceeds from issuance of common stock |
|
3,967 |
|
|
17,243 |
|
|
9,659 |
| |||
Purchase of treasury stock |
|
(83,469 |
) |
|
(95,774 |
) |
|
(64,346 |
) | |||
Changes in book overdrafts |
|
8,588 |
|
|
17,086 |
|
|
(2,653 |
) | |||
Net cash used in financing activities |
|
(71,136 |
) |
|
(61,695 |
) |
|
(57,567 |
) | |||
Net increase (decrease) in cash and cash equivalents |
|
(54,475 |
) |
|
(33,234 |
) |
|
2,384 |
| |||
Cash and cash equivalents at beginning of year |
|
87,158 |
|
|
120,392 |
|
|
118,008 |
| |||
Cash and cash equivalents at end of year |
$ |
32,683 |
|
$ |
87,158 |
|
$ |
120,392 |
| |||
Supplemental cash flow information: |
||||||||||||
Interest paid, net of capitalized interest |
$ |
301 |
|
$ |
(96 |
) |
$ |
(21 |
) | |||
Income taxes paid |
|
55,907 |
|
|
86,655 |
|
|
74,470 |
| |||
Noncash financing and investing activities: |
||||||||||||
Treasury stock issued for compensation plans |
|
13,219 |
|
|
42,112 |
|
|
30,762 |
|
The accompanying notes are an integral part of the financial statements.
25
BJS WHOLESALE CLUB, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Treasury Stock |
Total Stockholders Equity |
||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
|||||||||||||||||||||
(In Thousands) |
||||||||||||||||||||||||
Balance, January 29, 2000 |
74,410 |
$ |
744 |
$ |
85,958 |
|
$ |
517,052 |
|
(867 |
) |
$ |
(26,356 |
) |
$ |
577,398 |
| |||||||
Net income |
|
|
|
|
|
|
|
131,501 |
|
|
|
|
|
|
|
131,501 |
| |||||||
Sale and issuance of common stock |
|
|
|
|
(10,375 |
) |
|
|
|
1,008 |
|
|
30,762 |
|
|
20,387 |
| |||||||
Cash dividends on preferred stock of subsidiary |
|
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
(25 |
) | |||||||
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
(2,088 |
) |
|
(64,346 |
) |
|
(64,346 |
) | |||||||
Balance, February 3, 2001 |
74,410 |
|
744 |
|
75,583 |
|
|
648,528 |
|
(1,947 |
) |
|
(59,940 |
) |
|
664,915 |
| |||||||
Net income |
|
|
|
|
|
|
|
82,348 |
|
|
|
|
|
|
|
82,348 |
| |||||||
Sale and issuance of common stock |
|
|
|
|
(7,009 |
) |
|
|
|
1,276 |
|
|
42,112 |
|
|
35,103 |
| |||||||
Cash dividends on preferred stock of subsidiary |
|
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
(25 |
) | |||||||
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
(2,146 |
) |
|
(95,774 |
) |
|
(95,774 |
) | |||||||
Balance, February 2, 2002 |
74,410 |
|
744 |
|
68,574 |
|
|
730,851 |
|
(2,817 |
) |
|
(113,602 |
) |
|
686,567 |
| |||||||
Net income |
|
|
|
|
|
|
|
130,866 |
|
|
|
|
|
|
|
130,866 |
| |||||||
Sale and issuance of common stock |
|
|
|
|
(6,356 |
) |
|
|
|
340 |
|
|
13,219 |
|
|
6,863 |
| |||||||
Cash dividends on preferred stock of subsidiary |
|
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
(25 |
) | |||||||
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
(2,649 |
) |
|
(83,468 |
) |
|
(83,468 |
) | |||||||
Balance, February 1, 2003 |
74,410 |
$ |
744 |
$ |
62,218 |
|
$ |
861,692 |
|
(5,126 |
) |
$ |
(183,851 |
) |
$ |
740,803 |
| |||||||
The accompanying notes are an integral part of the financial statements.
26
BJS WHOLESALE CLUB, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Accounting Policies
Basis of Presentation
The consolidated financial statements of BJs Wholesale Club, Inc. (the Company) include the financial statements of all of the Companys subsidiaries, all of whose common stock is wholly owned by the Company.
Fiscal Year
The Companys fiscal year ends on the Saturday closest to January 31. The fiscal years ended February 1, 2003 and February 2, 2002 included 52 weeks. The fiscal year ended February 3, 2001 included 53 weeks.
Cash Equivalents and Marketable Securities
The Company considers highly liquid investments with a maturity of three months or less at time of purchase to be cash equivalents. Investments with maturities exceeding three months are classified as marketable securities.
Accounts Receivable
Accounts receivable consist primarily of credit card receivables and vendor rebates and allowances and are stated net of allowances for doubtful accounts of $814,000 at February 1, 2003 and $116,000 at February 2, 2002. The determination of the allowance for doubtful accounts is based on the Companys historical experience applied to an aging of accounts and a review of individual accounts with a known potential for write-off.
Merchandise Inventories
Inventories are stated at the lower of cost, determined under the average cost method, or market. The Company recognizes the write-down of slow-moving or obsolete inventory in cost of sales when such write-downs are probable and estimable. The Company recognizes a reserve for inventory shrinkage for the period between physical inventories based on historical results of previous physical inventories, shrinkage trends or other judgments management believes to be reasonable under the circumstances.
Property and Equipment
Property is depreciated by use of the straight-line method for financial reporting purposes. Buildings are depreciated over 33 1/3 years. Leasehold costs and improvements are amortized over the lease term or their estimated useful life, whichever is shorter. Furniture, fixtures and equipment are depreciated over three to ten years. Interest related to the development of owned facilities is capitalized.
Normal repairs and maintenance are expensed as incurred.
Impairment of Long-lived Assets
The Company reviews the realizability of its long-lived assets annually and whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Current and expected operating results and cash flows and other factors are considered in connection with the Companys reviews. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows of individual clubs and consolidated net cash flows for long-lived assets not identifiable to individual clubs. Impairment losses are measured as the difference between the carrying amount and the fair value of the impaired assets.
27
The Company recorded pretax asset impairment charges of $1,847,000 in 2002 to write down leasehold improvements and certain fixtures and equipment to fair value at an underperforming club that was projected to have future operating losses. The fair value of the assets was based primarily on past experience in disposing of similar assets. Asset impairment charges are included in selling, general and administrative expenses.
Self-Insurance Reserves
The Company is primarily self-insured for workers compensation and general liability 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.
Revenue Recognition
The Company recognizes revenue from the sale of merchandise, net of estimated returns, at the time of purchase by the customer in the club. In 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. Membership fee revenue is recognized on a straight-line basis over the life of the membership, which is typically twelve months.
In determining comparable club information, the Company includes 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. However, if a club is in the process of closing, it is excluded from comparable clubs. The Company includes relocated clubs and expansions in comparable clubs. The Company reports comparable club sales information on a same-week basis whenever it is comparing sales between two fiscal years having 52 weeks in one year and 53 weeks in another. Sales for the 52 weeks ended February 2, 2002 were compared with sales for the last 52 weeks of the fiscal year ended February 3, 2001 to have a proper comparison for comparable sales reporting.
Food accounted for 61% of total food and general merchandise sales in 2002 and 2001. Food accounted for 60% of total food and general merchandise sales in 2000.
Vendor Rebates and Allowances
The Company receives various types of cash consideration from vendors, principally in the form of rebates based on purchasing or selling certain volumes of product; time-based rebates or allowances, which may include product placement allowances or exclusivity arrangements covering a predetermined period of time; price protection rebates and allowances for retail reductions on certain merchandise; and salvage allowances for product that is damaged, defective or becomes out-of-date. The Company recognizes such vendor rebates and allowances based on a systematic and rational allocation of the cash consideration offered to the underlying transaction that results in progress by the Company 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. Vendor rebates and allowances are typically realized as a reduction of cost of sales when the merchandise is sold or otherwise disposed of.
The Company also receives cash consideration from vendors for demonstrating their products in the clubs or for advertising their products, particularly in the BJs Journal, a publication sent to BJs members several times a year. Cash consideration for product demonstrations is recognized as a reduction of selling, general and administrative (SG&A) expenses in the period during which the demonstrations are performed. Cash consideration for advertising vendors products is recognized as a reduction of SG&A expenses in the period in which the advertising takes place. In both cases, cash consideration represents a reimbursement of specific, incremental and identifiable SG&A costs incurred by the Company to sell the vendors products.
Preopening Costs
Preopening costs consist of direct incremental costs of opening or relocating a facility and are charged to operations as incurred.
28
Advertising Costs
Advertising costs generally consist of promoting new memberships and new store openings and also include television and radio advertising (some of which is vendor-funded) during the holiday season. The Company expenses advertising costs as incurred.
Stock-Based Compensation
At February 1, 2003, the Company had three stock-based employee compensation plans, which are described more fully in Note G. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost for stock options is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant. The Company does include stock-based employee compensation cost for restricted stock in net income. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
Fiscal Year Ended |
||||||||||||
February 1, 2003 |
February 2, 2002 |
February 3, 2001 |
||||||||||
(Dollars in Thousands except Per Share Amounts) |
||||||||||||
Net income, as reported |
$ |
130,866 |
|
$ |
82,348 |
|
$ |
131,501 |
| |||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects |
|
50 |
|
|
18 |
|
|
14 |
| |||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
(8,777 |
) |
|
(7,730 |
) |
|
(5,354 |
) | |||
Pro forma net income |
$ |
122,139 |
|
$ |
74,636 |
|
$ |
126,161 |
| |||
Earnings per share: |
||||||||||||
Basicas reported |
$ |
1.86 |
|
$ |
1.14 |
|
$ |
1.80 |
| |||
Basicpro forma |
$ |
1.74 |
|
$ |
1.03 |
|
$ |
1.73 |
| |||
Dilutedas reported |
$ |
1.84 |
|
$ |
1.11 |
|
$ |
1.77 |
| |||
Dilutedpro forma |
$ |
1.73 |
|
$ |
1.01 |
|
$ |
1.70 |
| |||
Disclosures about Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximates fair value because of the short maturity of these instruments.
Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) issued the following standards which became effective in the fourth quarter of 2002 or will become effective in 2003:
| Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that the Company recognize future costs for asset retirements to be incurred primarily in connection with removal of gasoline tanks from its gasoline stations. The Company will recognize a liability for existing |
29
asset retirement obligations, adjusted for cumulative accretion, and an asset retirement cost capitalized as an increase to the carrying amount of associated long-lived assets, adjusted for accumulated depreciation, upon initial application of SFAS No. 143. As of the beginning of fiscal 2003, the Company will recognize the cumulative effect of applying this statement as a change in accounting principle, which the Company expects will result in a post-tax charge of approximately $1.0 to $1.4 million. The Company estimates that the post-tax charge for the ongoing impact of SFAS No. 143 for the full 2003 fiscal year will be approximately $0.6 to $0.8 million. |
| SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, addresses financial accounting and reporting for costs associated with such activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of an entitys commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002. In accordance with the transition provisions of SFAS No. 146, the Company will continue to apply the provisions of EITF Issue 94-3 for the three clubs it closed in November 2002. |
| SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This standard becomes effective for financial statements for fiscal years ending after December 15, 2002 and for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. As noted above, the Company accounts for stock-based compensation under the principles of APB 25. The disclosure provisions of SFAS No. 148 have been applied in this report on Form 10-K and will be applied in interim periods beginning with the Companys first quarter of fiscal 2003. |
| FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The disclosure provisions of this Interpretation have been applied in this report on Form 10-K and will be applied in interim periods beginning with the Companys first quarter of fiscal 2003. |
| FASB Interpretation No. 46, Consolidation of Variable Interest Entities addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: |
1) | The equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity. |
2) | The equity investors lack one or more of certain essential characteristics of a controlling financial interest as stated in this Interpretation. |
This Interpretation applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an
30
enterprise holds a variable interest that it acquired before February 1, 2003. The Company believes that the adoption of this Interpretation will result in no material change from its existing reporting. |
Emerging Issues Task Force Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received by a Vendor, (EITF 02-16) addresses how a reseller should account for cash consideration received from a vendor. The first issue of EITF 02-16 became effective for arrangements entered into or modified after December 31, 2002. Under this issue, there is a presumption that cash consideration received by a customer from a vendor should be characterized as a reduction of cost of sales. That presumption is overcome when the consideration is a reimbursement of costs incurred by the customer to sell the vendors products, in which case the cash consideration should be characterized as a reduction of that cost. If the amount of cash consideration exceeds the cost being reimbursed, that excess amount should be characterized as a reduction of cost of sales. Beginning in fiscal 2003, the Company will classify any cash consideration in excess of expenses being reimbursed, should such an excess occur, as a reduction of cost of sales.
The second issue of EITF 02-16, which became effective for arrangements entered into after November 21, 2002, addresses the recognition and classification of cash consideration that is payable pursuant to a binding arrangement only if the customer completes a specified cumulative level of purchases or remains a customer for a specified period of time. The adoption of this issue resulted in no change from the Companys existing accounting.
Estimates Included in Financial Statements
The preparation of 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. Actual results could differ from those estimates.
Other
Certain amounts in the prior years financial statements have been reclassified for comparative purposes.
A. Spin-off of the Company from Waban Inc. and Related Party Transactions
The Company, which previously had been a wholly owned subsidiary of Waban Inc. (Waban), became a separate and independent public entity on July 28, 1997, when Waban distributed to its stockholders on a pro rata basis all of the Companys outstanding common stock (the spin-off).
Pursuant to the spin-off, the Company and Waban entered into a Tax Sharing Agreement to provide for the payment of taxes and the entitlement to tax refunds for periods prior to the spin-off date. Each party has agreed to indemnify the other in specified circumstances if certain events occurring after July 28, 1997 cause the spin-off or certain related transactions to become taxable.
After the spin-off, the Company provided certain services to Waban (which has since changed its name to House2Home, Inc. (formerly HomeBase, Inc.)) at rates negotiated in accordance with a Services Agreement entered into between the Company and House2Home. The amounts received by the Company for these services were not material.
B. Loss on Contingent Lease Obligations
In connection with the spin-off of Waban by The TJX Companies, Inc. (TJX) in 1989, Waban and TJX entered into an agreement pursuant to which Waban agreed to indemnify TJX against any liabilities that TJX might incur with respect to 41 House2Home leases as to which TJX was either a lessee or guarantor. Pursuant to a subsequent agreement, BJs agreed to indemnify TJX for 100% of House2Homes lease liabilities through January 31, 2003 and for 50% of any such liabilities thereafter.
31
House2Home filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code on November 7, 2001. In the third quarter of 2001, the Company recorded a pretax charge of $105.0 million for its estimated loss associated with House2Home leases. This loss was based on the present value of rent liabilities under these leases, including estimated real estate taxes and common area maintenance charges, reduced by estimated income from the subleasing of these properties. An annual discount rate of 6% was used to calculate the present value of these lease obligations.
Based on the Companys continuing evaluation of its remaining obligations and the significant progress made in settling liabilities for House2Home leases, the Company recorded a $20.0 million pretax gain in the third quarter of 2002 to reduce its estimated liability related to its contingent lease obligations.
The following is a summary of activity relating to the Companys obligations for House2Home leases:
Fiscal Year Ended |
||||||||
February 1, 2003 |
February 2, 2002 |
|||||||
(Dollars in Thousands) |
||||||||
Contingent lease obligations, beginning of year |
$ |
106,210 |
|
$ |
|
| ||
Provision for increase (decrease) to reserve |
|
(20,000 |
) |
|
105,000 |
| ||
Interest accretion charges |
|
4,393 |
|
|
1,359 |
| ||
Cash payments |
|
(49,783 |
) |
|
(149 |
) | ||
Contingent lease obligations, end of year |
$ |
40,820 |
|
$ |
106,210 |
| ||
The cash payments referenced above included lump-sum settlements for 23 leases in 2002. Four additional House2Home properties (for which BJs remains contingently liable) have been assigned to third parties. As of February 1, 2003, the Company has reserved a total of $40,820,000 associated with its obligations for the remaining House2Home leases. The Company believes that the liabilities recorded in the financial statements adequately provide for these lease obligations. However, there can be no assurance that the Companys actual liability for its House2Home-related obligations will not differ materially from amounts recorded in the financial statements due to a number of factors, including future economic factors which may affect the ability to successfully sublease, assign or otherwise settle liabilities related to the House2Home properties. The Company considers its maximum reasonably possible undiscounted pretax exposure for its House2Home lease obligations to be approximately $67 million at February 1, 2003.
C. Discontinued Operations
On October 10, 2002, the Company announced that it would close both of its clubs in the Columbus, Ohio, market and an older non-prototypical club in North Dade, Florida. Each of these clubs closed for business on November 9, 2002. The operating results of these clubs are presented in discontinued operations in the statements of income for all periods presented. Loss from discontinued operations in 2002 consisted of pretax club closing costs of $21,387,000 ($12,832,000 post-tax) and pretax operating losses of $3,405,000 ($2,111,000 post-tax). Loss from discontinued operations in 2001 and 2000 represents the operating losses of the three closed clubs. Total revenues of these closed clubs were $42.1 million in 2002, $56.4 million in 2001 and $63.0 million in 2000.
The pretax loss of $21,387,000 in 2002 to close the three clubs consisted mainly of lease obligation costs of $18,322,000, including accretion charges of $177,000. The remainder of the club closing costs consisted of $2,498,000 for the write-down of long-lived assets, $419,000 for employee termination benefits and $148,000 for other exit costs. The charges for lease obligations were based on the present value of rent liabilities under the three leases, including estimated real estate taxes and common area maintenance charges, reduced by estimated income from the subleasing of these properties. An annual discount rate of 6% was used to calculate the present value of the obligations. As of February 1, 2003, the Company has reserved a total of $17,515,000 associated with its liabilities for the closed club leases, $13,651,000 of which is included in other noncurrent liabilities, with
32
the remainder included in accrued expenses and other current liabilities on the balance sheet. The Company believes that the liabilities recorded in the financial statements adequately provide for these lease obligations. However, there can be no assurance that the Companys actual liability for its closed club obligations will not differ materially from amounts recorded in the financial statements due to a number of factors, including future economic factors which may affect the ability to successfully sublease, assign or otherwise settle liabilities related to these properties. The Company considers its maximum reasonably possible undiscounted pretax exposure for its closed club lease obligations to be approximately $51 million at February 1, 2003.
D. Debt
On June 12, 2002, the Company entered into a new $200 million unsecured credit agreement with a group of banks which expires June 13, 2005. The agreement includes a $50 million sub-facility for letters of credit, of which $2.3 million was outstanding at February 1, 2003. The Company is required to pay an annual facility fee which is currently 0.125% of the total commitment. Interest on borrowings is payable at the Companys option either at (a) the Eurodollar rate plus a margin which is currently 0.45% or (b) a rate equal to the higher of the sum of the Federal Funds Effective Rate plus 0.50% or the agent banks prime rate. The Company is also required to pay a usage fee in any calendar quarter during which the average daily amount of loans and undrawn or unreimbursed letters of credit outstanding exceeds 33% of the total commitment. The usage fee, if applicable, would currently be at an annual rate of 0.05% of the average daily amount of credit used under the facility during the calendar quarter. The facility fee, Eurodollar margin and usage fee are subject to change based upon the Companys fixed charge coverage ratio. The agreement contains covenants which, among other things, include minimum net worth and fixed charge coverage requirements and a maximum funded debt-to-capital limitation. The Company is required to comply with these covenants on a quarterly basis. Under the credit agreement, the Company may pay dividends or repurchase its own stock in any amount so long as the Company remains in compliance with all other covenants. On August 13, 2002, the agreement was amended to change the minimum net worth requirement, thereby providing the Company additional capacity to repurchase its common stock. The Company was in compliance with the covenants and other requirements set forth in its credit agreement at February 1, 2003 and for all fiscal periods throughout the year.
In addition to the credit agreement, the Company maintains a separate $50 million facility for letters of credit, primarily to support the purchase of inventories, of which $19.2 million was outstanding at February 1, 2003, and also maintains a $25 million uncommitted credit line for short-term borrowings.
There were no bank borrowings outstanding at February 1, 2003 and February 2, 2002.
E. Commitments and Contingencies
The Company is obligated under long-term leases for the rental of real estate and equipment. In addition, the Company is generally required to pay insurance, real estate taxes and other operating expenses and, in some cases, additional rentals based on a percentage of sales or other factors. Some of the Companys leases require escalating payments during the lease term. Rent expense for such leases is recognized on a straight-line basis over the lease term. The real estate leases range up to 45 years and have varying renewal options. The equipment leases range up to 5 years. Future minimum lease payments as of February 1, 2003 were:
Fiscal Years Ending |
Dollars in Thousands | ||
January 31, 2004 |
$ |
101,001 | |
January 29, 2005 |
|
102,787 | |
January 28, 2006 |
|
101,621 | |
February 3, 2007 |
|
98,934 | |
February 2, 2008 |
|
95,905 | |
Later years |
|
1,046,515 | |
Total minimum lease payments |
$ |
1,546,763 | |
33
Total minimum operating lease payments above have not been reduced by minimum sublease rentals of $1,639,000 due in all future years under noncancelable subleases of BJs properties. The payments above do not include future payments due under leases for three BJs clubs which were closed in November 2002. Rent liabilities for the closed clubs are included in the balance sheet (See Note C of Notes to Consolidated Financial Statements.)
Rental expense under operating leases (including contingent rentals, which were not material) amounted to $89,183,000, $76,895,000 and $68,906,000 in 2002, 2001 and 2000, respectively.
The Company is involved in various legal proceedings that are typical of a retail business. Although it is not possible to predict the outcome of these proceedings or any related claims, the Company believes that such proceedings or claims will not, individually or in the aggregate, have a material adverse effect on its financial condition or results of operations.
The Company has filed proofs of claim against House2Home, Inc. for claims arising under certain agreements between BJs and House2Home in connection with the Companys spin-off from Waban Inc. in July 1997. These claims arise primarily from BJs indemnification of TJX with respect to TJXs guarantee of House2Home leases and from the Tax Sharing Agreement dated July 28, 1997 between BJs and House2Home. BJs has filed proofs of claim totaling approximately $70 million. BJs intends to amend its claims as it makes future payments for House2Home leases. House2Home has indicated that it intends to contest at least a portion of BJs claims. The Company is unable to determine the amount, if any, of future recoveries under the claims and, therefore, has not recognized such claims in its financial statements. In early December 2002, the Official Committee of Creditors of House2Home, Inc. filed an objection in the United States Bankruptcy Court, Central District of California, Santa Ana Division, to House2Homes motion to approve the Disclosure Statement in connection with its bankruptcy proceeding. In that objection, the creditors committee stated that discussions are taking place between the committee and House2Home regarding the investigation of potential claims that may exist against certain entities related to House2Home, including BJs. On April 11, 2003, House2Home filed its Second Amended Plan of Liquidation and a related Disclosure Statement. In these documents, House2Home indicated that unless it was successful in settling BJs claims informally, it was likely to object to both BJs lease indemnification claims and BJs claims under the Tax Sharing Agreement.
Pursuant to an agreement with TJX, BJs agreed to indemnify TJX for 100% of House2Homes lease liabilities through January 31, 2003 and for 50% of any such liabilities thereafter. See Note B of Notes to Consolidated Financial Statements.
As permitted by Delaware law, the Company has entered into indemnification agreements whereby it indemnifies its directors and officers for certain events or occurrences while the director or officer is, or was, serving at the Companys request, in such capacity. The maximum potential amount of future payments that the Company could be required to make under these agreements is not limited. However, the Company does carry directors and officers insurance that covers its exposure up to certain limits. As a result of its insurance coverage, the Company believes that the estimated fair value of the Companys indemnification agreements with directors and officers is minimal. No liabilities have been recorded for these agreements as of February 1, 2003.
In 2002, the Company began to offer an extended warranty on tires sold at its clubs, under which BJs customers receive tire repair services or tire replacement in certain circumstances. BJs has insured this liability through a third party and, therefore, retains no liability in connection with the tire warranty program other than for the premiums paid to the third-party carrier.
F. Capital Stock
During 2002, the Board of Directors authorized the repurchase of an additional $100 million of the Companys common stock in addition to the $300 million previously authorized. In 2002, the Company repurchased 2,648,700 shares of common stock for $83,469,000, or an average price of $31.51 per share. The
34
Company repurchased 2,145,700 shares for $95,774,000 in 2001 and 2,088,200 shares for $64,346,000 in 2000. As of February 1, 2003, the Companys remaining repurchase authorization was $90,457,000.
The Company has a shareholder rights plan, originally adopted in 1997 and amended in 1999, pursuant to which shareholders are issued one-half of a Right for each share of common stock. Each Right entitles the holder to purchase from the Company 1/1000 share of Series A Junior Participating Preferred Stock (Series A Preferred Stock) at a price of $120. The Company has designated 100,000 shares of Series A Preferred Stock for issuance under the shareholder rights plan; none has been issued to date. Generally, the terms of the Series A Preferred Stock are designed so that 1/1000 share of Series A Preferred Stock is the economic equivalent of one share of the Companys common stock. The Rights are exercisable only if a person acquires 20% or more of the Companys common stock or commences a tender offer that would result in such person owning 30% or more of the Companys common stock. In addition, in general, if after a person has become a 20% owner, the Company is involved in a business combination transaction in which it is not the surviving corporation or in connection with which the Companys common stock is changed, or the Company disposes of 50% or more of its assets or earning power, each Right that has not previously been exercised or voided will entitle its holder to purchase that number of shares of common stock of such other person which equals $120 divided by one-half of the then current market price of such common stock. The Company will generally be entitled to redeem the Rights at $.01 per Right at any time until the tenth business day following public announcement that a person has become a 20% owner. The Rights expire on July 10, 2007, unless earlier redeemed or exchanged.
The Company has authorized 20,000,000 shares of preferred stock, $.01 par value, of which no shares have been issued.
In December 1997, one of the Companys subsidiaries issued 126 shares of non-voting preferred stock to individual stockholders at $2,200 per share. These shares are each entitled to receive ongoing annual dividends of $200 per share. The minority interest in this subsidiary is equal to the preferred shares preference in an involuntary liquidation of $277,200 and is included in other noncurrent liabilities in the Companys consolidated balance sheets at February 1, 2003 and February 2, 2002.
G. Stock Incentive Plans
Under its 1997 Stock Incentive Plan, the Company has granted certain key employees options to purchase common stock at prices equal to 100% of market price on the grant date. These options, which expire ten years from the grant date, are generally exercisable 25% per year starting one year after the grant date. At the Companys Annual Meeting of Stockholders in May 2002, an amendment to increase the maximum number of shares issuable under the 1997 Stock Incentive Plan by 2,000,000 shares was approved. The maximum number of shares of common stock issuable under this plan is now 7,249,402 shares, plus shares subject to awards granted under the BJs Wholesale Club, Inc. 1997 Replacement Stock Incentive Plan (the Replacement Plan) which are not actually issued because such awards expire or are canceled. Under the Replacement Plan, BJs employees who held Waban stock options and restricted stock were granted replacement BJs options and restricted stock, which preserved the same inherent value, vesting terms and expiration dates as the Waban awards they replaced in connection with the spin-off. No new options could be granted under the Replacement Plan after January 28, 1998.
Under its 1997 Director Stock Option Plan, BJs external directors are granted options to purchase common stock at prices equal to 100% of market price on the grant date. These options expire ten years from the grant date and are exercisable in three equal annual installments beginning on the first day of the month which includes the first anniversary of the date of grant. A maximum of 300,000 shares may be issued under the 1997 Director Stock Incentive Plan.
As of February 1, 2003 and February 2, 2002, respectively, 1,363,550 and 633,570 shares were reserved for future stock awards under the Companys stock incentive plans.
35
The Company applies APB 25 and related Interpretations in accounting for its stock-based compensation. Total pretax compensation cost recognized in the statements of income for stock-based employee compensation awards was $80,000 in 2002, $29,000 in 2001 and $23,000 in 2000, and consisted entirely of restricted stock expense, which is charged to income ratably over the periods during which the restrictions lapse. 5,500 shares of restricted stock were issued during 2002 at a weighted-average grant-date fair value of $36.19 and 2,000 shares of restricted stock were issued during 2000 at a weighted-average grant-date fair value of $37.06. No restricted stock was issued in 2001. No compensation cost has been recognized under APB 25 for the Companys stock options because the exercise price equaled the market price of the underlying stock on the date of grant.
The table that follows illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation, including stock options. The fair value for stock options was estimated at the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rates of 3.03%, 4.00% and 6.12% in 2002, 2001 and 2000, respectively; volatility factor of the expected market price of the Companys common stock of .43 in 2002, .40 in 2001 and .42 in 2000; and expected life of the options of 5 years in 2002, 2001 and 2000. No dividends were expected. The weighted-average fair value of options granted was $9.69 in 2002, $18.75 in 2001 and $16.21 in 2000. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options vesting period.
Fiscal Year Ended |
||||||||||||
February 1, 2003 |
February 2, 2002 |
February 3, 2001 |
||||||||||
(Dollars in Thousands except Per Share Amounts) |
||||||||||||
Net income, as reported |
$ |
130,866 |
|
$ |
82,348 |
|
$ |
131,501 |
| |||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects |
|
50 |
|
|
18 |
|
|
14 |
| |||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
(8,777 |
) |
|
(7,730 |
) |
|
(5,354 |
) | |||
Pro forma net income |
$ |
122,139 |
|
$ |
74,636 |
|
$ |
126,161 |
| |||
Earnings per share: |
||||||||||||
Basicas reported |
$ |
1.86 |
|
$ |
1.14 |
|
$ |
1.80 |
| |||
Basicpro forma |
$ |
1.74 |
|
$ |
1.03 |
|
$ |
1.73 |
| |||
Dilutedas reported |
$ |
1.84 |
|
$ |
1.11 |
|
$ |
1.77 |
| |||
Dilutedpro forma |
$ |
1.73 |
|
$ |
1.01 |
|
$ |
1.70 |
| |||
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Companys employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
36
Presented below is a summary of the status of stock option activity and weighted-average exercise prices for the last three fiscal years (number of options in thousands):
Fiscal Year Ended | ||||||||||||||||||
February 1, 2003 |
February 2, 2002 |
February 3, 2001 | ||||||||||||||||
Options |
Exercise Price |
Options |
Exercise Price |
Options |
Exercise Price | |||||||||||||
Outstanding, beginning of year |
4,860 |
|
$ |
26.08 |
5,421 |
|
$ |
20.47 |
5,143 |
|
$ |
14.45 | ||||||
Granted |
1,378 |
|
|
23.24 |
758 |
|
|
45.33 |
1,361 |
|
|
35.21 | ||||||
Exercised |
(334 |
) |
|
11.86 |
(1,276 |
) |
|
13.51 |
(1,006 |
) |
|
9.60 | ||||||
Forfeited |
(113 |
) |
|
35.95 |
(43 |
) |
|
30.82 |
(77 |
) |
|
21.48 | ||||||
Outstanding, end of year |
5,791 |
|
|
26.03 |
4,860 |
|
|
26.08 |
5,421 |
|
|
20.47 | ||||||
Exercisable, end of year |
3,284 |
|
|
22.45 |
2,609 |
|
|
17.72 |
2,757 |
|
|
12.69 | ||||||
Additional information related to stock options outstanding at February 1, 2003 is presented below (number of options in thousands):
Options Outstanding |
Options Exercisable | |||||||||||
Range of Exercise Prices |
Number Outstanding |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Life (yrs.) |
Number Exercisable |
Weighted- Average Exercise Price | |||||||
$ 5.53 $ 9.45 |
484 |
$ |
8.91 |
3.2 |
484 |
$ |
8.91 | |||||
$10.22 $15.06 |
687 |
|
13.85 |
4.3 |
687 |
|
13.85 | |||||
$17.08 $27.94 |
2,216 |
|
21.29 |
8.0 |
842 |
|
18.59 | |||||
$29.75 $41.33 |
1,673 |
|
33.86 |
7.3 |
1,088 |
|
33.03 | |||||
$44.12 $47.60 |
731 |
|
45.33 |
8.6 |
183 |
|
45.37 | |||||
$ 5.53 $47.60 |
5,791 |
|
26.03 |
7.0 |
3,284 |
|
22.45 | |||||
H. Earnings Per Share
The following details the calculation of earnings per share for the last three fiscal years:
Fiscal Year Ended | |||||||||
February 1, 2003 |
February 2, 2002 |
February 3, 2001 | |||||||
(Dollars in Thousands except Per Share Amounts) | |||||||||
Income from continuing operations |
$ |
145,809 |
$ |
83,771 |
$ |
132,598 | |||
Less: Preferred stock dividends |
|
25 |
|
25 |
|
25 | |||
Income available to common stockholders |
$ |
145,784 |
$ |
83,746 |
$ |
132,573 | |||
Weighted-average number of common shares outstanding, used for basic computation |
|
70,321,078 |
|
72,519,032 |
|
72,870,668 | |||
Plus: Incremental shares from assumed conversion of stock options |
|
799,628 |
|
1,462,116 |
|
1,509,876 | |||
Weighted-average number of common and dilutive potential common shares outstanding |
|
71,120,706 |
|
73,981,148 |
|
74,380,544 | |||
Basic earnings per share |
$ |
2.07 |
$ |
1.16 |
$ |
1.82 | |||
Diluted earnings per share |
$ |
2.05 |
$ |
1.13 |
$ |
1.78 | |||
Options to purchase 1,610,650 shares at a weighted-average exercise price of $40.82 and 942,800 shares at an exercise price of $37.06 were outstanding at February 1, 2003 and February 3, 2001, respectively, but were
37
not included in the computation of diluted earnings per share because the options exercise price was greater than the average market price of the common shares for the years then ended. All outstanding options were included in the computation of diluted earnings per share in the fiscal year ended February 2, 2002.
I. Income Taxes
The provision for income taxes includes the following:
Fiscal Year Ended |
||||||||||||
February 1, 2003 |
February 2, 2002 |
February 3, 2001 |
||||||||||
(Dollars in Thousands) |
||||||||||||
Federal: |
||||||||||||
Current |
$ |
40,340 |
|
$ |
77,063 |
|
$ |
73,526 |
| |||
Deferred |
|
27,965 |
|
|
(32,478 |
) |
|
(1,094 |
) | |||
State: |
||||||||||||
Current |
|
7,183 |
|
|
11,137 |
|
|
10,945 |
| |||
Deferred |
|
4,534 |
|
|
(7,537 |
) |
|
(1,055 |
) | |||
Total income tax provision |
$ |
80,022 |
|
$ |
48,185 |
|
$ |
82,322 |
| |||
Components of income tax provision: |
||||||||||||
Continuing operations |
$ |
89,871 |
|
$ |
49,068 |
|
$ |
83,009 |
| |||
Discontinued operations |
|
(9,849 |
) |
|
(883 |
) |
|
(687 |
) | |||
$ |
80,022 |
|
$ |
48,185 |
|
$ |
82,322 |
| ||||
The following is a reconciliation of the statutory federal income tax rates and the effective income tax rates:
Fiscal Year Ended |
|||||||||
February 1, 2003 |
February 2, 2002 |
February 3, 2001 |
|||||||
Statutory federal income tax rates |
35 |
% |
35 |
% |
35 |
% | |||
State income taxes, net of federal tax benefit |
3 |
|
2 |
|
4 |
| |||
Effective income tax rates |
38 |
% |
37 |
% |
39 |
% | |||
Significant components of the Companys deferred tax assets and liabilities as of February 1, 2003 and February 2, 2002 were as follows:
February 1, 2003 |
February 2, 2002 | |||||
(Dollars in Thousands) | ||||||
Deferred tax assets: |
||||||
Contingent lease obligations |
$ |
16,328 |
$ |
42,484 | ||
Self-insurance reserves |
|
13,666 |
|
14,046 | ||
Rental step liabilities |
|
5,221 |
|
5,104 | ||
Compensation and benefits |
|
6,198 |
|
6,556 | ||
Closed store liabilities |
|
7,006 |
|
| ||
Other |
|
8,888 |
|
7,411 | ||
Total deferred tax assets |
|
57,307 |
|
75,601 | ||
Deferred tax liabilities: |
||||||
Accelerated depreciationproperty |
|
43,551 |
|
30,840 | ||
Real estate taxes |
|
2,866 |
|
2,391 | ||
Other |
|
3,592 |
|
2,573 | ||
Total deferred tax liabilities |
|
50,009 |
|
35,804 | ||
Net deferred tax assets |
$ |
7,298 |
$ |
39,797 | ||
38
The Company has not established a valuation allowance because its deferred tax assets can be realized by offsetting deferred tax liabilities and future taxable income, which management believes will more likely than not be earned, based on the Companys historical earnings record and projected future earnings.
J. Retirement Plans
Under the Companys 401(k) Savings plans, participating employees may make pretax contributions up to 50% of covered compensation, beginning in 2002. Before 2002, the limit was 15% of covered compensation. The Company matches employee contributions at 100% of the first one percent of covered compensation and 50% of the next four percent. The Companys expense under these plans was $3,528,000, $3,245,000 and $3,166,000 in 2002, 2001 and 2000, respectively.
The Company has a non-contributory defined contribution retirement plan for certain key employees. Under this plan, the Company funds annual retirement contributions for the designated participants on an after-tax basis. For the last three years, the Companys contributions equaled 5% of the participants base salary. Participants become fully vested in their contribution accounts at the end of the fiscal year in which they complete four years of service. The Companys pretax expense under this plan was $1,119,000, $991,000 and $990,000 in 2002, 2001 and 2000, respectively.
K. Postretirement Medical Benefits
The Company has a defined benefit postretirement medical plan which covers employees and their spouses who retire after age 55 with at least 10 years of service, who are not eligible for Medicare, and who participated in a Company-sponsored medical plan. Amounts contributed by retired employees under this plan are based on years of service prior to retirement. The plan is not funded.
Net periodic postretirement medical benefit cost included the following components:
Fiscal Year Ended |
||||||||||||
February 1, 2003 |
February 2, 2002 |
February 3, 2001 |
||||||||||
(Dollars in Thousands) |
||||||||||||
Service cost |
$ |
307 |
|
$ |
225 |
|
$ |
185 |
| |||
Interest cost |
|
134 |
|
|
91 |
|
|
67 |
| |||
Amortization of unrecognized (gain) loss |
|
21 |
|
|
|
|
|
(6 |
) | |||
Net periodic postretirement benefit cost |
$ |
462 |
|
$ |
316 |
|
$ |
246 |
| |||
Discount rate used to determine cost |
|
6.75 |
% |
|
7.00 |
% |
|
7.75 |
% |
The following table sets forth the funded status of the Companys postretirement medical plan and the amount recognized in the balance sheets at February 1, 2003 and February 2, 2002:
February 1, 2003 |
February 2, 2002 |
|||||||
(Dollars in Thousands) |
||||||||
Unfunded accumulated postretirement benefit obligation (APBO) |
$ |
2,537 |
|
$ |
1,955 |
| ||
Unrecognized net loss |
|
(490 |
) |
|
(369 |
) | ||
Accrued postretirement benefit cost included in balance sheets |
$ |
2,047 |
|
$ |
1,586 |
| ||
Discount rate used to value APBO |
|
6.25 |
% |
|
6.75 |
% | ||
Weighted-average health care cost trend rate for valuing year-end obligations: |
||||||||
Initial trend rate |
|
11.00 |
% |
|
11.00 |
% | ||
Ultimate trend rate |
|
5.00 |
% |
|
5.00 |
% | ||
Year ultimate trend rate to be attained |
|
2008 |
|
|
2008 |
|
39
The following tables present reconciliations of the APBO and plan assets for the fiscal years ended February 1, 2003 and February 2, 2002:
Fiscal Year Ended |
||||||||
February 1, 2003 |
February 2, 2002 |
|||||||
(Dollars in Thousands) |
||||||||
Reconciliation of APBO: |
||||||||
APBO at beginning of year |
$ |
1,955 |
|
$ |
1,309 |
| ||
Service cost |
|
307 |
|
|
225 |
| ||
Interest cost |
|
134 |
|
|
91 |
| ||
Contributions by plan participants |
|
10 |
|
|
9 |
| ||
Actuarial losses |
|
142 |
|
|
333 |
| ||
Benefits paid |
|
(11 |
) |
|
(12 |
) | ||
APBO at end of year |
$ |
2,537 |
|
$ |
1,955 |
| ||
Reconciliation of plan assets: |
||||||||
Fair value of plan assets at beginning of year |
$ |
|
|
$ |
|
| ||
Employer contributions |
|
1 |
|
|
3 |
| ||
Contributions by plan participants |
|
10 |
|
|
9 |
| ||
Benefits paid |
|
(11 |
) |
|
(12 |
) | ||
Fair value of plan assets at end of year |
$ |
|
|
$ |
|
| ||
The following table sets forth the impact of changes in the assumed health care cost trend rates for the fiscal year ended February 1, 2003:
Dollars in Thousands |
||||
Impact of 1% increase in health care cost trend on: |
||||
Aggregate of service and interest costs |
$ |
49 |
| |
APBO at end of year |
|
261 |
| |
Impact of 1% decrease in health care cost trend on: |
||||
Aggregate of service and interest costs |
$ |
(45 |
) | |
APBO at end of year |
|
(241 |
) |
L. Interest
The following details the components of interest income, net for the last three fiscal years:
Fiscal Year Ended |
||||||||||||
February 1, 2003 |
February 2, 2002 |
February 3, 2001 |
||||||||||
(Dollars in Thousands) |
||||||||||||
Interest income |
$ |
663 |
|
$ |
3,945 |
|
$ |
6,028 |
| |||
Capitalized interest |
|
581 |
|
|
509 |
|
|
454 |
| |||
Interest expense on debt |
|
(951 |
) |
|
(317 |
) |
|
(302 |
) | |||
Interest income, net |
$ |
293 |
|
$ |
4,137 |
|
$ |
6,180 |
| |||
The table above excludes interest expense in discontinued operations of $137,000 in 2002, $203,000 in 2001 and $225,000 in 2000.
40
M. Accounts Payable
The Companys banking arrangements provide for the daily replenishment of vendor payable bank accounts as checks are presented. The balances of checks outstanding in these bank accounts totaling $80,592,000 at February 1, 2003 and $72,004,000 at February 2, 2002, which represent book overdrafts, are included in accounts payable on the balance sheets, and the changes in these balances are reflected in financing activities in the statements of cash flows.
N. Accrued Expenses and Other Current Liabilities
The major components of accrued expenses and other current liabilities are as follows:
February 1, 2003 |
February 2, 2002 | |||||
(Dollars in Thousands) | ||||||
Employee compensation |
$ |
25,658 |
$ |
28,342 | ||
Deferred membership fee income |
|
56,251 |
|
54,973 | ||
Sales and use taxes, self-insurance reserves, rent, utilities, advertising and other |
|
100,690 |
|
83,611 | ||
$ |
182,599 |
$ |
166,926 | |||
The following table summarizes membership fee activity for each of the last three fiscal years:
Fiscal Year Ended |
||||||||||||
February 1, 2003 |
February 2, 2002 |
February 3, 2001 |
||||||||||
(Dollars in Thousands) |
||||||||||||
Deferred membership fee income, beginning of year |
$ |
54,973 |
|
$ |
47,368 |
|
$ |
40,632 |
| |||
Cash received from members |
|
119,594 |
|
|
114,283 |
|
|
98,048 |
| |||
Revenue recognized in earnings |
|
(118,316 |
) |
|
(106,678 |
) |
|
(91,312 |
) | |||
Deferred membership fee income, end of year |
$ |
56,251 |
|
$ |
54,973 |
|
$ |
47,368 |
| |||
41
O. Selected Quarterly Financial Data (Unaudited)
First Quarter |
Second Quarter |
Third |
Fourth Quarter | |||||||||||
(Dollars in Thousands except Per Share Amounts) | ||||||||||||||
Fiscal year ended February 1, 2003: |
||||||||||||||
Net sales (a) |
$ |
1,246,369 |
$ |
1,439,947 |
$ |
1,361,445 |
$ |
1,681,194 | ||||||
Total revenues (a) |
|
1,277,711 |
|
1,472,236 |
|
1,394,714 |
|
1,715,041 | ||||||
Gross earnings (a)(b) |
|
133,215 |
|
161,254 |
|
142,671 |
|
191,561 | ||||||
Net income |
|
23,054 |
|
35,899 |
|
23,423 |
(d) |
|
48,490 | |||||
Per common share, diluted |
|
0.32 |
|
0.50 |
|
0.33 |
(d) |
|
0.70 | |||||
Fiscal year ended February 2, 2002: |
||||||||||||||
Net sales (a) |
$ |
1,121,134 |
$ |
1,263,573 |
$ |
1,225,315 |
$ |
1,495,890 | ||||||
Total revenues (a) |
|
1,148,603 |
|
1,291,870 |
|
1,255,454 |
|
1,527,379 | ||||||
Gross earnings (a)(b) |
|
120,375 |
|
144,464 |
|
137,188 |
|
189,162 | ||||||
Net income (loss) |
|
22,963 |
|
36,497 |
|
( 33,464) |
(c) |
|
56,352 | |||||
Per common share, diluted |
|
0.31 |
|
0.49 |
|
( 0.46) |
(c) |
|
0.77 |
(a) | The Company closed three clubs on November 9, 2002. Beginning with the fourth quarter of the fiscal year ended February 1, 2003, the results of operations and the costs of closing the three clubs were reported in discontinued operations. All prior periods were recast to report the results of the closed clubs in discontinued operations. Consequently, net sales, total revenues and gross earnings for all periods preceding the fourth quarter of the fiscal year ended February 1, 2003 in the table above are different from results previously reported on Forms 10-Q and 10-K. Differences are due solely to the inclusion of the closed clubs results in discontinued operations. Amounts previously reported were as follows: |
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter | ||||||||||
(Dollars in Thousands except Per Share Amounts) | |||||||||||||
Fiscal year ended February 1, 2003: |
|||||||||||||
Net sales |
$ |
1,260,108 |
$ |
1,453,483 |
$ |
1,375,065 |
|
|
N/A | ||||
Total revenues |
|
1,291,805 |
|
1,486,009 |
|
1,408,601 |
|
|
N/A | ||||
Gross earnings |
|
133,649 |
|
161,591 |
|
142,534 |
|
|
N/A | ||||
Net income |
|
23,054 |
|
35,899 |
|
23,423 |
|
|
N/A | ||||
Per common share, diluted |
|
0.32 |
|
0.50 |
|
0.33 |
|
|
N/A | ||||
Fiscal year ended February 2, 2002: |
|||||||||||||
Net sales |
$ |
1,134,172 |
$ |
1,277,176 |
$ |
1,238,414 |
|
$ |
1,511,402 | ||||
Total revenues |
|
1,162,033 |
|
1,305,710 |
|
1,268,851 |
|
|
1,543,136 | ||||
Gross earnings |
|
120,872 |
|
144,868 |
|
137,602 |
|
|
189,959 | ||||
Net income (loss) |
|
22,963 |
|
36,497 |
|
(33,464 |
) |
|
56,352 | ||||
Per common share, diluted |
|
0.31 |
|
0.49 |
|
(0.46 |
) |
|
0.77 |
(b) | Gross earnings equals total revenues less cost of sales, including buying and occupancy costs. |
(c) | The third quarter of the fiscal year ended February 2, 2002 included a net loss on contingent lease obligations of $63.0 million, or $0.87 per diluted share. |
(d) | The third quarter of the fiscal year ended February 1, 2003 included a net loss for the closing costs of the three clubs noted in (a) above of $12.6 million, or $0.18 per diluted share, offset by a net gain from the reduction of contingent lease obligations of $12.0 million, or $0.17 per diluted share. |
42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of BJs Wholesale Club, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of BJs Wholesale Club, Inc. and its subsidiaries at February 1, 2003 and February 2, 2002, and the results of their operations and their cash flows for each of the three years in the period ended February 1, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companys management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 3, 2003
REPORT OF MANAGEMENT
The financial statements and related financial information in this annual report have been prepared by and are the responsibility of management. The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and necessarily include amounts which are based upon judgments and estimates made by management.
The Company maintains a system of internal controls designed to provide, at appropriate cost, reasonable assurance that assets are safeguarded, transactions are executed in accordance with managements authorization and the accounting records may be relied upon for the preparation of financial statements. The accounting and control systems are continually reviewed by management and modified as necessary in response to changing business conditions and the recommendations of the Companys internal auditors and independent public accountants.
The Audit Committee, comprised of members of the Board of Directors who are neither officers nor employees, meets periodically with management, the internal auditors and the independent public accountants to review matters relating to the Companys financial reporting, the adequacy of internal accounting control and the scope and results of audit work. The internal auditors and the independent public accountants have free access to the Committee.
The financial statements have been audited by PricewaterhouseCoopers LLP, whose opinion as to their fair presentation in accordance with accounting principles generally accepted in the United States of America appears above.
Michael T. Wedge
|
Frank D. Forward
| |
/s/ Michael T. Wedge |
/s/ Frank D. Forward | |
President and |
Executive Vice President and | |
Chief Executive Officer |
Chief Financial Officer |
March 3, 2003
43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Company will file with the Securities and Exchange Commission (SEC) a definitive Proxy Statement no later than 120 days after the close of its fiscal year ended February 1, 2003 (the Proxy Statement). The information required by this Item and not given in Item 4A, Executive Officers of the Registrant, is incorporated by reference from the Proxy Statement under Election of Directors and Section 16(a) Beneficial Ownership Reporting Compliance.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the Proxy Statement. However, information under Executive Compensation Committees Report on Executive Compensation in the Proxy Statement is not so incorporated.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated by reference from the Proxy Statement under Beneficial Ownership of Common Stock and Equity Compensation Plan Information.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference from the Proxy Statement under Relationship with House2Home; Conflicts of Interest.
Item 14. Controls and Procedures
(a) | Evaluation of disclosure controls and procedures. Based on their evaluation of the Companys disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Annual Report on Form 10-K, the Companys chief executive officer and chief financial officer have concluded that the Companys disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and are operating in an effective manner. |
(b) | Changes in internal controls. There were no significant changes in the Companys internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation. |
44
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
A. The Financial Statements filed as part of this report are listed and indexed on page 22. Schedules have been omitted because they are not applicable or the required information has been included elsewhere in this report.
B. Listed below are all Exhibits filed as part of this report.
Exhibit |
Exhibit | |
3.1 |
Amended and Restated Certificate of Incorporation (1) | |
3.2 |
Amended and Restated By-Laws (7) | |
4.1 |
Rights Agreement, dated as of July 10, 1997, between the Company and First Chicago Trust Company of New York (2) | |
4.1a |
Amendment dated as of February 4, 1999 to Rights Agreement dated July 10, 1997 (6) | |
4.2 |
Specimen Certificate of Common Stock, $.01 par value per share (5) | |
10.1 |
Separation and Distribution Agreement, dated as of July 10, 1997 between the Company and Waban Inc. (3) | |
10.2 |
Services Agreement, dated as of July 28, 1997, between the Company and Waban Inc. (3) | |
10.3 |
Tax Sharing Agreement, dated as of July 28, 1997, between the Company and Waban Inc. (3) | |
10.4 |
Employee Benefits Agreement, dated as of July 28, 1997, between the Company and Waban Inc. (3) | |
10.5 |
BJs Wholesale Club, Inc. Management Incentive Plan* (4) | |
10.6 |
BJs Wholesale Club, Inc. Growth Incentive Plan* (4) | |
10.7 |
BJs Wholesale Club, Inc. 1997 Director Stock Option Plan, as amended* (8) | |
10.8 |
BJs Wholesale Club, Inc. Executive Retirement Plan, as amended* (9) | |
10.9 |
BJs Wholesale Club, Inc. 1997 Replacement Stock Incentive Plan* (4) | |
10.10 |
BJs Wholesale Club, Inc. 1997 Stock Incentive Plan, as amended* (11) | |
10.11 |
BJs Wholesale Club, Inc. General Deferred Compensation Plan* (4) | |
10.12 |
Employment Agreement, dated as of July 28, 1997 with Herbert J. Zarkin* (4) | |
10.12a |
Amendment effective September 14, 2000 to July 28, 1997 Employment Agreement with Herbert J. Zarkin*(10) | |
10.13 |
Employment Agreement, dated as of July 28, 1997 with John J. Nugent* (4) | |
10.13a |
Amended and Restated Change of Control Severance Agreement between the Company and John J. Nugent* (8) | |
10.13b |
Severance Agreement and General Release dated as of September 27, 2002 between the Company and John J. Nugent* (13) | |
10.14 |
Employment Agreement, dated as of July 28, 1997 with Frank D. Forward* (4) | |
10.15 |
Employment Agreement, dated as of July 28, 1997 with Michael T. Wedge* (4) | |
10.15a |
Amendment dated as of September 9, 2002 to February 4, 1999 Change of Control Agreement between the Company and Michael T. Wedge* (13) | |
10.16 |
Employment Agreement, dated as of July 28, 1997 with Laura J. Sen* (4) | |
10.16a |
Severance Agreement and General Release, dated as of April 16, 2003 between the Company and Laura J. Sen* | |
10.17 |
Employment Agreement, dated as of December 1, 2000 with Edward F. Giles* | |
10.18 |
Amended and Restated Form of Change of Control Severance Agreement between the Company and officers of the Company* (8) | |
10.19 |
Form of Indemnification Agreement between the Company and officers of the Company* (4) | |
10.20 |
BJs Wholesale Club, Inc. Change of Control Severance Benefit Plan for Key Employees, as amended* (9) | |
10.21 |
Credit Agreement, dated June 12, 2002, among the Company and certain banks (11) | |
10.21a |
Amendment No. 1, dated as of August 13, 2002 to Credit Agreement dated June 12, 2002 among the Company and certain banks (12) | |
10.22 |
Indemnification Agreement, dated as of April 18, 1997, between the Company and The TJX Companies, Inc. (5) | |
21 |
Subsidiaries of the Company | |
23 |
Consent of Independent Accountants | |
99 |
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
45
* | Management contract or other compensatory plan or arrangement. |
(1) | Incorporated herein by reference to the Companys Registration Statement on Form S-8, (Commission File No. 333-31015) |
(2) | Incorporated herein by reference to the Companys Registration Statement on Form 8-A, dated July 10, 1997 (Commission File No. 001-13143) |
(3) | Incorporated herein by reference to the Current Report on Form 8-K, dated July 28, 1997, of HomeBase, Inc. (Commission File No. 001-10259) |
(4) | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended July 26, 1997 (Commission File No. 001-13143) |
(5) | Incorporated herein by reference to the Companys Registration Statement on Form S-1 (Commission File No. 333-25511) |
(6) | Incorporated herein by reference to the Companys Amendment No. 1 to Registration Statement on Form 8-A/A, dated March 5, 1999 (Commission File No. 001-13143) |
(7) | Incorporated herein by reference to the Companys Current Report on Form 8-K, dated as of April 7, 1999 (Commission File No. 001-13143) |
(8) | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended October 30, 1999 (Commission File No. 001-13143) |
(9) | Incorporated herein by reference to the Companys Annual Report on Form 10-K for the fiscal year ended January 29, 2000 (Commission File No. 001-13143) |
(10) | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended October 28, 2000 (Commission File No. 001-13143) |
(11) | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended May 4, 2002 (Commission File No. 001-13143) |
(12) | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended August 3, 2002 (Commission File No. 001-13143) |
(13) | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended November 2, 2002 (Commission File No. 001-13143) |
C. The Registrant did not file any reports on Form 8-K during the last quarter of the period covered by this Report.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BJS WHOLESALE CLUB, INC. | ||||||||
Dated: April 21, 2003 |
/s/ MICHAEL T. WEDGE | |||||||
Michael T. Wedge President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/ MICHAEL T. WEDGE |
/s/ HERBERT J. ZARKIN | |||||||
Michael T. Wedge Chief Executive Officer and Director (Principal Executive Officer) |
Herbert J. Zarkin, Chairman of the Board and Director | |||||||
/s/ FRANK D. FORWARD |
/s/ S. JAMES COPPERSMITH | |||||||
Frank D. Forward, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
S. James Coppersmith, Director | |||||||
/s/ RONALD R. DION |
/s/ BERT N. MITCHELL | |||||||
Ronald R. Dion, Director |
Bert N. Mitchell, Director | |||||||
/s/ THOMAS J. SHIELDS |
/s/ LORNE R. WAXLAX | |||||||
Thomas J. Shields, Director |
Lorne R. Waxlax, Director | |||||||
/s/ EDWARD J. WEISBERGER |
||||||||
Edward J. Weisberger, Director |
Dated: April 21, 2003
47
CERTIFICATIONS
I, Michael T. Wedge, certify that:
1. |