BJ’s Wholesale Club, operator of 215 warehouse clubs across 16 states largely along the U.S.’s eastern seaboard, is planning an initial public offering, returning to the public markets after a seven-year spell as a private company.
The company BJ, +0.00% is offering 37.5 million shares priced at $17 each, which would raise about $637 million. It is planning to use the proceeds to pay down debt. It is slated to be listed on the New York Stock Exchange starting Thursday under the ticker symbol “BJ.”
BJ’s was taken private in 2011 by private-equity firms Leonard Green & Partners L.P. and CVC Capital Partners in an all-cash deal valued at about $2.8 billion that saddled the company with more than $2 billion in debt. And while its prospectus boasts of operating improvements made since then, the numbers are less than glowing. BJ’s had $12.5 billion in sales in fiscal 2018 through Feb. 3, but net income totaled just $50.3 million.
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The company was an early adopter of the warehouse-club model and today counts more than 5 million members who pay annual fees of up to $110 to access its selection of groceries, consumables, general merchandise, gasoline and other services, according to its prospectus. BJ’s claims to offer 25% or more in savings on a basket of branded groceries as compared with traditional supermarkets and targets customers with annual income of about $75,000.
“In our core New England markets, which have high population density and generate a disproportionate part of U.S. GDP, we operate almost three times the number of clubs compared with the next largest warehouse club competitor,” says the prospectus.
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The warehouse clubs and supercenters segment of the retail industry had 2017 revenue of $456.8 billion, according to IbisWorld data, with food and beverages making up 40.8% of sales, home and appliances constituting 25.7% of revenue, and 17.6% of revenue coming from health, beauty and wellness sales.
Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs and JPMorgan are lead underwriters on the deal. Morgan Stanley, Citigroup, Jefferies and Wells Fargo are co-bookrunners, while Nomura, Baird, Guggenheim, Natixis, William Blair and Siebert Cisneros Shank & Co. are co-managers.
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Here are five things to know about BJ’s ahead of its IPO:
The existing owners will retain controlBJ’s is currently 98% owned by its private-equity sponsors, and they will retain a stake of about 69% once the deal is completed. That means that they will have the ability to elect all the members of the board and control management and strategy.
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“You should consider that the interests of the Sponsors may differ from your interests in material respects and they may vote in a way with which you disagree and that may be adverse to your interests,” the prospectus cautions.
There will be no dividendBJ’s is not only not planning to pay dividends any time soon; it is expressly barred from doing so by covenants in its loan agreements. Loan covenants also restrict the company’s ability to make certain acquisitions or investments and transfer or sell assets, limiting the company’s flexibility in operating its business. It also means that shareholders must rely on price appreciation for returns on their investment in the stock.
It is heavily indebtedBJ’s has $2.4 billion in debt, according to the prospectus, much of it taken on as part of the going-private transaction from 2011. As is typical of private-equity deals, the sponsors have paid themselves generous dividends over the years in the form of dividend recaps, under which they borrow using the company as collateral and use the funds raised to reward their investors.
In 2017, for example, the company paid $735.5 million to its shareholders, including funds affiliated with the sponsors, according to the prospectus. In the original deal, the sponsors invested about $600 million in cash. They made a $643 million distribution in 2012 and did another $450 million dividend recap in 2013.
Its margins lag rivalsThe company has invested in recent years in IT and data analytics in an effort to build out its omnichannel capabilities, speed up delivery times and improve customer service.
The company’s net income margin has improved in the last three years but remains well below rival Costco COST, -0.03% , as MarketWatch’s Philip van Doorn reported last month. BJ’s had a net income margin of 0.39% in fiscal 2018, compared with Costco’s 2.08%, according to his analysis. Costco had annual sales of more than $126 billion in fiscal 2017, the last year for which numbers are available. Walmart’s WMT, +1.06% Sam’s Club had net sales of $59 billion, also dwarfing BJ’s.
It is highly exposed to New YorkWhile it has its roots in suburban Boston and is headquartered in Worcester County, Mass., BJ’s is highly dependent on the New York metropolitan area, where 39 of its clubs accounted for 25% of overall net sales in fiscal 2017.
“Any substantial slowing or sustained decline in these operations could materially adversely affect our business and financial results,” says the prospectus, listing such potential issues as declining same-store sales, rising labor, health care and energy costs and cannibalization of existing locations by new clubs.
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The New York retail market has become more competitive in recent years following the acquisition last year of Whole Foods by Amazon.com Inc. and its unrelenting push for business via its Prime Member program.
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It is vulnerable to any change in the food-stamp programBJ’s says about 5% of its net sales during fiscal years 2015 to 2017 were through food stamps, or the Supplemental Nutrition Assistance Program.
“Changes in state and federal laws governing the SNAP program, including rules on where and for what EBT cards may be used, could reduce sales at our clubs,” BJ’s said.
Costco shares have gained 11% in 2018, while Walmart is up 24%. The Dow Jones Industrial Average DJIA, -0.68% has gained 1% and the S&P 500 SPX, -0.86% is up 4%.
