BJ's Wholesale Club Holdings, Inc. - Quarter Report: 2021 May (Form 10-Q)

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

_________________

 

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 1, 2021

OR

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-38559

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BJ’S WHOLESALE CLUB HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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Delaware	45-2936287
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
25 Research Drive
Westborough, Massachusetts	01581
(Address of principal executive offices)	(Zip Code)

 

(774) 512-7400

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01	BJ	New York Stock Exchange

 

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  ☒    No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

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

 

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

As of May 21, 2021, the registrant had 137,133,779 shares of common stock, $0.01 par value per share, outstanding.

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q should be considered forward-looking statements, including, without limitation, statements regarding our future results of operations and financial position, business strategy, transformation, strategic priorities and future progress, including expectations regarding deferred revenue, lease commencement dates, impact of infrastructure investments on our operating model and selling, general and administrative expenses, sales of gasoline and gross profit margin rates, and new club and gas station openings, as well as statements that include terms such as "may", "will", "should", "expect", "plan", "anticipate", "could", "intend", "project", "believe", "estimate", "predict", "continue", "forecast", "would", or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to:

Given these uncertainties, you should not place undue reliance on any forward-looking statements.  Except as required by applicable law, we assume no obligation to update these forward-looking statements, even if new information becomes available in the future, and you should not rely upon these forward-looking statements after the date of this Quarterly Report on Form 10-Q.

TRADEMARKS

BJ’s Wholesale Club^®, BJ’s^®, Wellesley Farms^®, Berkley Jensen^®, My BJ’s Perks^®, BJ’s Easy Renewal^®, BJ’s Gas^®, BJ’s Perks Elite^®, BJ’s Perks Plus^®, Inner Circle^® and BJ’s Perks Rewards^® are all registered trademarks of BJ’s Wholesale Club, Inc. Other trademarks, tradenames and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. We do not intend our use or display of those other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties. Solely for convenience, trademarks, trade names and service marks referred to in this Quarterly Report on Form 10-Q may appear without the ^®, ^™ or ^SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks.

DEFINED TERMS

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires:

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

BJ’S WHOLESALE CLUB HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

BJ’S WHOLESALE CLUB HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Amounts in thousands, except per share amounts)

(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

BJ’S WHOLESALE CLUB HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Amounts in thousands)

(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

BJ’S WHOLESALE CLUB HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

BJ’s Wholesale Club Holdings, Inc. and its wholly-owned subsidiaries is a leading warehouse club operator primarily on the east coast of the United States. As of May 1, 2021, the Company operated 221 warehouse clubs and 151 gas stations in 17 states.

The Company follows, and reports based on the National Retail Federation’s fiscal calendar. The thirteen week periods ended  May 1, 2021 and May 2, 2020 are referred to as the "first quarter of fiscal year 2021" and the "first quarter of fiscal year 2020," respectively.

The novel coronavirus ("COVID-19") pandemic has severely impacted the economies of the U.S. and other countries around the world. In the preparation of these financial statements and related disclosures we have assessed the impact that COVID-19 has had on our estimates, assumptions and accounting policies and made additional disclosures, as necessary.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim financial statements of BJ’s Wholesale Club Holdings, Inc. are unaudited and, in the opinion of management, reflect all normal recurring adjustments considered necessary for a fair statement of the Company’s financial statements in accordance with generally accepted accounting principles in the United States of America ("GAAP").

The consolidated balance sheet as of  January 30, 2021 is derived from the audited consolidated balance sheet as of that date. The unaudited results of operations for the first quarter of fiscal year 2021 are not necessarily indicative of future results or results to be expected for fiscal year 2021. The Company’s business, in common with the business of retailers generally, is subject to seasonal influences. The Company’s sales and operating income have typically been highest in the fourth quarter holiday season and lowest in the first quarter of each fiscal year.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year 2020, as filed with the Securities and Exchange Commission on March 19, 2021.

Recently Adopted Accounting Pronouncements

The accounting policies the Company follows are set forth in its audited financial statements for fiscal year 2020. There have been no material changes to these accounting policies, except as noted below for new accounting pronouncements adopted at the beginning of fiscal year 2021.

Income Taxes (ASU 2019-12)

In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Accounting Standards Codification 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted this standard as of January 31, 2021. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

3. Revenue Recognition

Performance Obligations

The Company identifies each distinct performance obligation to transfer goods (or bundle of goods) or services. The Company recognizes revenue as it satisfies a performance obligation by transferring control of the goods or services to the customer.

Net sales—The Company recognizes net sales at clubs and gas stations when the customer takes possession of the goods and tenders payment. Point of sale transactions at the Company’s clubs and gas stations, excluding sales taxes, represented approximately 93% of the Company’s net sales and approximately 91% of the Company’s total revenues for the thirteen weeks ended May 1, 2021. Sales taxes are recorded as a liability at the point of sale. Revenue is recorded at the point of sale based on the transaction price on the shelf sign, net of any applicable discounts, sales taxes and expected refunds. For e-commerce sales, the Company recognizes sales when control of the merchandise is transferred to the customer, which is typically at the shipping point.

BJ’s Perks Rewards and My BJ's Perks programs—The Company’s BJ’s Perks Rewards^® membership program allows participating members to earn 2% cash back, up to a maximum of $500 per year, on qualified purchases made at BJ’s. The Company also offers a co-branded credit card program, the My BJ’s Perks^® program, which allows My BJ's Perks^® Mastercard credit card holders to earn up to 5% cash back on eligible purchases made at BJ’s and up to 2% cash back on purchases made with the card outside of BJ’s. Cash back has been in the form of electronic awards issued in $10 increments that may be used online or in-club at the register and expire six months from the date issued. 

Earned awards may be redeemed on future purchases made at the Company. The Company recognizes revenue for earned awards when customers redeem such awards as part of a purchase at one of the Company’s clubs or the Company’s website. The Company accounts for these transactions as multiple element arrangements and allocates the transaction price to separate performance obligations using their relative fair values. The Company includes the fair value of award dollars earned in deferred revenue at the time the award dollars are earned. This liability was $24.8 million at May 1, 2021, $25.5 million at January 30, 2021 and $28.6 million at May 2, 2020.

Royalty revenue received in connection with the My BJ's Perks co-brand credit card program is variable consideration and is considered deferred until the card holder makes a purchase. The Company’s total deferred royalty revenue related to the outstanding My BJ’s Perks Rewards was $18.0 million, $13.5 million and $14.8 million at May 1, 2021, January 30, 2021 and May 2, 2020, respectively. The timing of revenue recognition of these awards dollars is driven by actual customer activities, such as redemptions and expirations. As of May 1, 2021, the Company expects to recognize $12.8 million of the deferred revenue in fiscal year 2021 and expects the remainder to be recognized in the years thereafter.

Membership—The Company charges a membership fee to its customers. That fee allows customers to shop in the Company’s clubs, shop on the Company’s website and purchase gasoline at the Company’s gas stations for the duration of the membership, which is generally 12 months. Because the Company has the obligation to provide access to its clubs, website and gas stations for the duration of the membership term, the Company recognizes membership fees on a straight-line basis over the life of the membership. The Company’s deferred revenue related to membership fees was $167.8 million, $155.6 million and $157.6 million at May 1, 2021, January 30, 2021 and May 2, 2020, respectively.

Gift Card Program—The Company sells BJ’s gift cards in both physical and digital format, which allow customers to redeem the card for future purchases equal to the amount of the original purchase price of the gift card. Revenue from gift card sales is recognized in proportion to its rate of gift card redemptions because the Company’s performance obligation to redeem the gift card for merchandise is satisfied when the gift card is redeemed. The Company also recognizes breakage in proportion to its rate of gift card redemptions. Deferred revenue related to gift cards was $9.6 million, $10.3 million and $9.8 million at May 1, 2021, January 30, 2021 and May 2, 2020, respectively. The Company recognized $8.8 million and $10.2 million of revenue from gift card redemptions in the first quarter of fiscal year 2021 and first quarter of fiscal year 2020, respectively.

Disaggregation of Revenue

The Company’s club retail operations, which represent substantially all of its consolidated total revenues, are the Company’s only reportable segment. All the Company’s identifiable assets are in the United States. The Company does not have significant sales outside the United States, nor does any customer represent more than 10% of total revenues for any period presented.

The following table summarizes the Company's percentage of net sales disaggregated by category:

4. Debt and Credit Arrangements

The following table summarizes the Company's debt (in thousands):

ABL Facility

The ABL Facility is comprised of a $950.0 million revolving credit facility and a $50.0 million term loan. The ABL Facility is secured on a senior basis by certain "liquid assets" of the Company and secured on a junior basis by certain "fixed assets" of the Company. The $50.0 million term loan payment terms are restricted in that the term loan cannot be repaid unless all loans outstanding under the revolving credit facility are repaid, and once repaid, cannot be re-borrowed. The availability under the $950.0 million revolving credit facility is restricted based on eligible monthly merchandise inventories and receivables, as defined in the agreement governing the ABL Facility (the "ABL Facility Agreement"). As amended, interest on the revolving credit facility is calculated either at LIBOR plus a range of 125 to 175 basis points or a base rate plus a range of 25 to 75 basis points; and interest on the term loan is calculated at LIBOR plus a range of 200 to 250 basis points or a base rate plus a range of 100 to 150 basis points, in all cases based on excess availability. The applicable spread of LIBOR and base rate loans at all levels of excess availability steps down by 12.5 basis points upon achieving total net leverage of 3.00 to 1.00. The ABL Facility also provides a sub-facility for issuances of letters of credit subject to certain fees defined in the ABL Facility Agreement. The ABL Facility is subject to various commitment fees during the term of the facility based on utilization of the revolving credit facility, which is scheduled to mature on August 17, 2023. On April 30, 2021, the Company used $50.0 million of cash and cash equivalents to pay down amounts outstanding on the ABL Facility.

At May 1, 2021, there was $ 260.0 million outstanding in loans under the ABL Facility and $15.5 million in outstanding letters of credit. As of May 1, 2021, the interest rate on the revolving credit facility was 1.24%, the interest rate of the term loan loan was 2.11% and unused capacity was $650.4 million.

At January 30, 2021, there was $310.0 million outstanding in loans under the ABL Facility and $15.0 million in outstanding letters of credit. The ABL Facility Agreement provides for a stepdown in the interest rate upon the achievement of certain debt ratings upgrades, which were achieved in July 2020. As of January 30, 2021, the interest rate on the revolving credit facility was 1.25%, the interest rate of the term loan loan was 2.14% and unused capacity was $641.1 million.

At May 2, 2020, there was $50.0 million outstanding in loans under the ABL Facility and $22.1 million in outstanding letters of credit. As of May 2, 2020, the interest rate on the revolving credit facility was 1.45%, the interest rate of the term loan loan was 2.98% and unused capacity was $770.6 million.

First Lien Term Loan

The Company's First Lien Term Loan matures on February 3, 2024. Voluntary prepayments are permitted. Principal payments must be made on the First Lien Term Loan pursuant to an annual excess cash flow calculation when the net leverage ratio exceeds 3.50 to 1.00. The First Lien Term Loan is subject to certain affirmative and negative covenants but no financial covenants. It is secured on a senior basis by certain "fixed assets" of the Company and on a junior basis by certain "liquid" assets of the Company. 

On January 29, 2020, the Company amended its First Lien Term Loan to reduce the applicable interest rates. As amended, the First Lien Term Loan had an initial principal amount of $1,315.2 million and interest is calculated either at LIBOR plus 225 basis points or a base rate plus 125 basis points, and provided for a 25 basis point step down in the interest rate upon the achievement of certain debt ratings upgrades. Total fees associated with the refinancing were approximately $1.7 million. The Company expensed $0.1 million of previously capitalized debt issuance costs and original issue discount and expensed $1.7 million of new third-party fees.

On July 13, 2020, the Company paid $150.0 million of the principal amount due on the First Lien Term Loan. In connection with the payment, the Company expensed $1.3 million of previously capitalized deferred debt issuance costs and original issue discount. On  July 29, 2020, upon the achievement of certain credit ratings upgrades, the base rate was reduced to LIBOR plus 200 basis points.

On October 30, 2020, the Company borrowed $260.0 million from the ABL Facility. The proceeds from the Company's borrowing and $100.0 million of the Company's cash and cash equivalents were used to pay $360.0 million of the principal amount due on the First Lien Term Loan. In connection with the payment, the Company expensed $2.8 million of previously capitalized debt issuance costs and original issue discount.

On April 30, 2021, the Company used $100.0 million of cash and cash equivalents to pay $100.0 million of the principal amount due on the First Lien Term Loan. In connection with the payment, the Company expensed $0.7 million of previously capitalized debt issuance costs and original issue discount.

There was $701.9 million, $801.9 million and $1,311.9 million outstanding on the First Lien Term Loan at May 1, 2021, January 30, 2021 and May 2, 2020, respectively. Interest rates for the First Lien Term Loan were 2.11%, 2.13% and 3.08% at May 1, 2021, January 30, 2021 and May 2, 2020, respectively.

5. Interest Expense, net

The following details the components of interest expense for the periods presented (in thousands):

Interest expense decreased due to lower debt balances outstanding and lower interest rates, partially offset by a $4.7 million loss on our cash flow hedge and a $0.7 million loss on the debt extinguishment in the first quarter of fiscal year 2021.

6. Commitments and Contingencies

The Company is involved in various legal proceedings that are typical of a retail business. In accordance with applicable accounting guidance, an accrual will be established for legal proceedings if and when those matters present loss contingencies that are both probable and estimable. The Company does not believe the resolution of any current proceedings will result in a material loss to the consolidated financial statements.

7. Stock Incentive Plans

On June 13, 2018, the Company’s board of directors adopted, and its stockholders approved, the BJ's Wholesale Club Holdings, Inc. 2018 Incentive Award Plan (the "2018 Plan"). The 2018 Plan provides for the grant of stock options, restricted stock, dividend equivalents, stock payments, restricted stock units, performance shares, other incentive awards, stock appreciation rights, and cash awards. Prior to the adoption of the 2018 Plan, the Company granted stock-based compensation to employees and non-employee directors, respectively, under the Fourth Amended and Restated 2011 Stock Option Plan of BJ's Wholesale Club, Inc. (f/k/a Beacon Holding Inc.), as amended (the "2011 Plan") and the 2012 Director Stock Option Plan of BJ’s Wholesale Club Holdings, Inc. (f/k/a Beacon Holding, Inc.), as amended (the "2012 Director Plan"). No further grants will be made under the 2011 Plan or the 2012 Director Plan.

The 2018 Plan authorizes the issuance of 13,148,058 shares, including 985,369 shares that were reserved but not issued under the 2011 Plan and the 2012 Director Plan. If an award under the 2018 Plan, the 2011 Plan or the 2012 Director Plan is forfeited, expires or is settled for cash, any shares subject to such award may, to the extent of such forfeiture, expiration or cash settlement, be used again for new grants under the 2018 Plan. Additionally, shares tendered or withheld to satisfy grant or exercise price, or tax withholding obligations associated with an award under the 2018 Plan, the 2011 Plan or the 2012 Director Plan will be added to the shares authorized for grant under the 2018 Plan. The following shares may not be used again for grant under the 2018 Plan: (1) shares subject to a stock appreciation right ("SAR") that are not issued in connection with the stock settlement of the SAR upon its exercise and (2) shares purchased on the open market with the cash proceeds from the exercise of options under the 2018 Plan, 2011 Plan or 2012 Director Plan. As of  May 1, 2021, there were 5,470,034 shares available for future issuance under the 2018 Plan.

On April 16, 2021, the Compensation Committee approved a modification to the equity awards agreements under the 2011 Plan, 2012 Director Plan and 2018 Plan. In the event that an employee is terminated due to death, or disability, the modified equity award agreements provide for: (i) full vesting of all time-based awards, including restricted stock awards and stock options, (ii) pro-rata vesting of all performance-based awards, including performance share units, based on actual performance as of the end of the applicable performance period, pro-rated based on the period of employment during the applicable performance period, and (iii) the extension of the post-termination exercise window for vested stock options.

The following table summarizes the Company’s stock award activity during the thirteen weeks ended May 1, 2021 (shares in thousands):

Stock-based compensation expense was $27.3 million and $5.5 million for the thirteen weeks ended May 1, 2021 and May 2, 2020, respectively. Stock-based compensation expense in the thirteen weeks ended May 1, 2021 included $17.5 million of stock-based compensation expense related to the modification of stock awards associated with the passing of the former President and Chief Executive Officer (CEO), Lee Delaney.

On June 14, 2018, the Company’s board of directors adopted, and its stockholders approved, the BJ's Wholesale Club Holdings, Inc. Employee Stock Purchase Plan (the "ESPP"), which became effective the day prior to the first day of public trading of the Company’s equity securities. The aggregate number of shares of common stock that were to be reserved for issuance under the ESPP was to be equal to the sum of (i) 973,014 shares and (ii) an annual increase on the first day of each calendar year beginning in 2019 and ending in 2028 equal to the lesser of (A) 486,507 shares, (B) 0.5% of the shares outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (C) such smaller number of shares as determined by the board of directors. The offering under the ESPP commenced on January 1, 2019. The amount of expense recognized for the thirteen weeks ended May 1, 2021 and May 2, 2020 was $0.1 million and $0.1 million, respectively. As of May 1, 2021, remaining shares available for issuance under the ESPP were 2,236,366.

Treasury Shares Acquired

The Company reacquired 226,404 shares to satisfy employees’ tax withholding obligations upon the vesting of restricted stock awards in the thirteen weeks ended May 1, 2021 and 83,353 shares in the thirteen weeks ended May 2, 2020. These reacquired shares were recorded as $10.0 million and  $2.1 million of treasury stock for the thirteen weeks ended May 1, 2021 and  May 2, 2020, respectively.

Share Repurchase Program

On December 19, 2019, the Company's board of directors authorized the repurchase of up to $250.0 million of the Company's outstanding common stock from time to time as market conditions warrant (the "Program"). The Program expires at the end of fiscal year 2021. The Company initiated the Program to mitigate potentially dilutive effects of stock options and shares of restricted stock granted by the Company, in addition to enhancing shareholder value. As of May 1, 2021, $136.4 million remained available to purchase under the Program. The Company repurchased 315,000 shares for $14.0 million during the thirteen weeks ended May 1, 2021.

8. Income Taxes

The effective income tax rate is based on estimated income from continuing operations for the fiscal year, as well as discrete adjustments, if any, in the applicable quarterly periods. The Company projects the estimated annual effective tax rate for fiscal year 2021 to be 26.7%, excluding the tax effect of discrete events, such as excess tax benefits from stock-based compensation, changes in tax legislation, settlements of tax audits and changes in uncertain tax positions, among others.

The Company’s effective income tax rate from continuing operations was 23.7% and 21.5% for the thirteen weeks ended May 1, 2021 and May 2, 2020, respectively. The increase in the effective tax rate is due to lower excess tax benefits from stock-based compensation in the first quarter of fiscal year 2021 and favorable, permanent true-ups in the first quarter of fiscal year 2020.

We are subject to taxation in the U.S. federal and various state taxing jurisdictions. In general, the Company’s tax years from 2016 forward remain open and subject to examination by the Internal Revenue Service and various state taxing authorities; however, certain ongoing state audits and appeals relate to periods prior to 2016.

9. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date or “exit price.” The inputs used to measure fair value are generally classified into the following hierarchy:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not observable for the asset or liability.

Level 3: Unobservable inputs for the asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair values of the Company’s derivative instruments are based on quotes received from third-party banks and represent the estimated amount the Company would pay to terminate the agreements taking into consideration current interest rates as well as the creditworthiness of the counterparties. These inputs are considered to be Level 2.

Financial Assets and Liabilities

The gross carrying amount and fair value of the Company’s debt at  May 1, 2021 are as follows (in thousands):

The gross carrying amount and fair value of the Company’s debt at  January 30, 2021 are as follows (in thousands):

The gross carrying amount and fair value of the Company’s debt at  May 2, 2020 are as follows (in thousands):

The fair value of debt was based on quoted market prices and on borrowing rates available to the Company as of May 1, 2021, January 30, 2021 and May 2, 2020. These inputs are considered to be Level 2.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The Company measures certain non-financial assets and liabilities, including long-lived assets, at fair value on a non-recurring basis.

The Company believes that the carrying amounts of its other financial instruments, including cash, accounts receivable, and accounts payable, approximates their carrying value due to the short-term maturities of these instruments.

10. Earnings Per Share

The table below reconciles basic weighted-average common shares outstanding to diluted weighted-average common shares outstanding for the thirteen weeks ended May 1, 2021 and May 2, 2020:

112,759 restricted shares and no options were excluded from the computation of diluted earnings for the thirteen weeks ended May 1, 2021 as their inclusion would have been anti-dilutive. Similarly, 875,894 and 780,256 stock options and restricted shares, respectively, were excluded from the computation of diluted earnings for the thirteen weeks ended May 2, 2020.

11. Derivative Financial Instruments

Interest Rate Swaps

On November 13, 2018, the Company entered into three forward starting interest rate swaps (the "interest rate swaps"), which became effective on February 13, 2019. The Company had fixed the LIBOR component of $1.2 billion of its floating rate debt at a rate of approximately 3.0% from February 13, 2019 to February 13, 2022.

On  October 30, 2020, the Company borrowed $260.0 million from the ABL Facility. The proceeds from the Company's borrowing, as well as $100.0 million of the Company's cash and cash equivalents, were used to pay $360.0 million of the principal amount due on the First Lien Term Loan. Due to the payment of debt principal on the First Lien Term Loan, the Company determined that certain interest payments are no longer probable and that a portion of one of the interest rate swap agreements would be ineffective as a result of the payment of debt, and as such, reclassified $3.7 million of losses recorded in other comprehensive income to interest expense, net of tax.

On  November 10, 2020, the Company terminated one of the interest rate swaps, which fixed $360.0 million of its floating rate debt at a rate of approximately 3.0%. An additional interest rate swap, which fixed $240.0 million of its floating rate debt at a rate of 3.0%, was determined to be ineffective. Gains and losses on the ineffective interest rate swap agreement will be recorded as interest expense.

On April 30, 2021, the Company used $150.0 million of its cash and cash equivalents to pay $100.0 million of the principal amount due on the First Lien Term Loan and $50.0 million of the outstanding amounts on the ABL Facility. The Company accelerated the release of unrealized losses to earnings on the ineffective interest rate swap agreements and reclassified $4.7 million of losses recorded in other comprehensive income to interest expense, net of tax.

The interest rate swaps were recorded as a liability of $20.2 million and $26.4 million at May 1, 2021 and January 30, 2021, respectively, with the net of tax amount for the effective and ineffective interest rate swaps recorded in other comprehensive income and interest expense, respectively. The interest rate swaps are recorded as a liability of $59.8 million at May 2, 2020, with the net of tax amount recorded in other comprehensive loss.

The Company elected hedge accounting for the interest rate swap agreements, and as such, the effective portion of the gains or losses was recorded as a component of other comprehensive income (loss) and the ineffective portion of gains or losses were recorded as interest expense. There were $4.4 million of gains and $19.4 million of losses recorded in other comprehensive loss for the thirteen weeks ended May 1, 2021 and May 2, 2020, respectively. The ineffective portion of gains in the first quarter of fiscal year 2021 of $1.8 million was recorded in interest expense. In the first quarter of fiscal year 2020, all interest rate swap agreements were effective.

The fair values of derivative instruments included on the consolidated balance sheets are as follows (in thousands):

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and the related notes thereto in our Annual Report on Form 10-K for the fiscal year 2020. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause such differences are discussed in the sections of this Quarterly Report on Form 10-Q titled "Forward-Looking Statements" and in Part I. "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year 2020.

We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to the last day of January. Accordingly, references herein to "fiscal year 2021" relate to the 52 weeks ending January 29, 2022, and references herein to "fiscal year 2020" relate to the 52 weeks ended January 30, 2021. The first quarter of fiscal year 2021 ended on May 1, 2021, and the first quarter of fiscal year 2020 ended on May 2, 2020, and both include thirteen weeks.

Overview

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

Since pioneering the warehouse club model in New England in 1984, we have grown our footprint to 221 large-format, high volume warehouse clubs spanning 17 states. In our core New England markets, which have high population density and generate a disproportionate part of U.S. gross domestic product, we operate almost three times the number of clubs compared to the next largest warehouse club competitor. In addition to shopping in our clubs, members are able to shop when and how they want through our website, www.bjs.com; our buy-online-pickup-in-club ("BOPIC") service, our highly-rated mobile app and our integrated same-day delivery offering.

Over the last five years, we have made multiple senior management hires and changes, adding consumer packaged goods, digital and consulting experience to our leadership team. Most recently, due to the unexpected passing of our former President and Chief Executive Officer (CEO) Lee Delaney, Bob Eddy was appointed Chief Executive Officer and President, assuming the day-to-day leadership of the Company and joining the Board of Directors. Mr. Eddy had been serving as our Executive Vice President, Chief Financial and Administrative Officer at the time of his appointment. Accordingly, Laura Felice has been appointed Executive Vice President, Chief Financial Officer, replacing Mr. Eddy in this role. The Company also announced additional appointments to further strengthen its management team and accelerate its growth. Paul Cichocki was named Executive Vice President, Chief Commercial Officer, and oversees merchandising, membership, marketing, and analytics and Bill Werner was promoted to the office of Executive Vice President, Strategy and Development and leads the Company’s market expansion and key strategic initiatives to create value for members and for shareholders.

Our leadership team, has implemented significant cultural and operational changes to our business, including transforming how we use data to improve member experience, instilling a culture of cost discipline, adopting a more proactive approach to growing our membership base and building an omnichannel offering oriented towards making shopping at BJ's more convenient.

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

Factors Affecting Our Business

COVID-19 Impact. As the impact of the COVID-19 pandemic has evolved, we have continued to experience strong sales at a rate reflective of the national trend. In the first quarter of fiscal year 2021 we saw increased demand in our general merchandise and services divisions, driven by sales in seasonal categories, apparel and home-related categories such as furniture and electronics. Demand decreased for our grocery products such as paper products, cleaning essentials, packaged goods and beverages, which were at an all-time high in the first quarter of fiscal year 2020, due to the onset of the COVID-19 pandemic. The COVID-19 pandemic is unprecedented and demand may change in the future if consumer purchasing behavior changes as the COVID-19 pandemic continues to evolve, and the long-term impacts to our financial condition and results of operations are still uncertain.

The COVID-19 pandemic may impact many of the factors discussed in this section, including, among others, overall economic trends, consumer preferences and demand, product mix, quarterly fluctuations and sourcing, which in turn could adversely affect our business, financial condition and results of operations.

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

Size and loyalty of membership base. The membership model is a critical element of our business. Members drive our results of operations through their membership fee income and their purchases. The majority of members renew within six months following their renewal date. Therefore, our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. We have grown our membership fee income each year for the past two decades. Our membership fee income totaled $333.1 million in fiscal year 2020. Our membership renewal rate, a key indicator of membership engagement, satisfaction and loyalty, was 88% at the end of fiscal year 2020.

Consumer preferences and demand. Our ability to maintain our appeal to existing customers and attract new customers primarily depends on our ability to originate, develop and offer a compelling product assortment responsive to customer preferences. If we misjudge the market for our products, fail to adjust to changes in our member needs, or there is otherwise a decrease in consumer spending and confidence, including in response to the COVID-19 pandemic, we may be faced with excess inventories for some products and may be required to become more promotional in our selling activities, which would impact our net sales and gross profit.

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

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

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

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

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

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

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

Tariffs. We are implementing a variety of mitigation measures in order to reduce the risk associated with our direct exposure to tariffs. We have diversified our global supply chain to reduce our reliance on China by sourcing high-quality products from other markets in both Asia and Africa. Chinese-sourced goods represent approximately 3% of our cost of sales during the first quarter of fiscal year 2021.

How We Assess the Performance of Our Business

In assessing our performance, we consider a variety of performance and financial measures. The key generally accepted accounting principles in the United States of America ("GAAP") measures include net sales, membership fee income, cost of sales, SG&A and net income. In addition, we also review other important metrics such as Adjusted EBITDA, comparable club sales and merchandise comparable club sales.

Net sales

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

Comparable club sales

Comparable club sales, also known as same-store sales, is an important measure throughout the retail industry. In determining comparable club sales, we include all clubs that were open for at least thirteen months at the beginning of the period and were in operation during the entirety of both periods being compared, including relocated clubs and expansions. There may be variations in the way in which some of our competitors and other retailers calculate comparable club or same store sales. As a result, data in this Quarterly Report on Form 10-Q regarding our comparable club sales may not be comparable to similar data made available by other retailers.

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

Merchandise comparable club sales

Merchandise comparable club sales represents comparable club sales from all merchandise other than our gasoline operations for the applicable period.

Membership fee income

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

Cost of sales

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

Selling, general and administrative expenses ("SG&A")

SG&A consists of various expenses related to supporting and facilitating the sale of merchandise in our clubs, including the following: 

SG&A includes both fixed and variable components and, therefore, is not directly correlated with net sales. In addition, the components of our SG&A may not be comparable to those of other retailers. We expect that our SG&A will increase in future periods due to investments to spur comparable club sales growth and our continuing club growth. In addition, any increase in future stock option or other stock-based grants or modifications will increase our stock-based compensation expense included in SG&A.

Net Income

Net income reflects the Company's net sales, less cost of sales, SG&A, interest, taxes and other expenses.

Adjusted EBITDA

Adjusted EBITDA is defined as income from continuing operations before interest expense, net, provision for income taxes and depreciation and amortization, adjusted for the impact of certain other items, including stock-based compensation expense; pre-opening expenses; non-cash rent; severance and other adjustments. For a reconciliation of Adjusted EBITDA to income from continuing operations, the most directly comparable GAAP measure, see "Non-GAAP Financial Measures."

Non-GAAP Financial Measures

Adjusted EBITDA

We present Adjusted EBITDA, which is not a recognized financial measure under GAAP, because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, including pre-opening expenses. The amount and timing of pre-opening expenses are dependent on, among other things, the size and number of new clubs opening during any given period. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be considered as an alternative to any other performance measures derived in accordance with GAAP and should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA in the future, and any such modification may be material. In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries. Further, Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for any analysis of our results as reported under GAAP.

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

The following is a reconciliation of our income from continuing operations to Adjusted EBITDA and Adjusted EBITDA as a percentage of net sales for the periods presented:

(a) Represents total stock-based compensation expense.

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

(c) Consists of an adjustment to remove the non-cash portion of rent expense.

(d) Represents severance charges associated with labor reductions that resulted from the realignment of our field operations.

(e) Other non-cash items, including non-cash accretion on asset retirement obligations and obligations associated with our post-retirement medical plan.

Free cash flow

We present free cash flow, which is not a recognized financial measure under GAAP, as we believe it assists investors and analysts in evaluating our liquidity. Free cash flow should not be considered as an alternative to cash flows from operations as a liquidity measure. We define free cash flow as net cash provided by operating activities less additions to property and equipment, net of disposals, plus proceeds from sale leaseback transactions.

Our presentation of free cash flow should not be considered as an alternative to any other measure derived in accordance with GAAP and should not be construed as an inference that the Company’s future results will be unaffected by unusual or non-recurring items. In addition, free cash flow may not be comparable to similarly titled measures used by other companies in our industry or across different industries. Further, free cash flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.

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

Thirteen Weeks Ended May 1, 2021 (First Quarter of Fiscal Year 2021) Compared to Thirteen Weeks Ended May 2, 2020 (First Quarter of Fiscal Year 2020)

Results of Operations

The following table summarizes key components of our results of operations for the periods indicated:

Net Sales

Net sales for the first quarter of fiscal year 2021 were $3,781.8 million, a 1.7% increase from net sales reported for the first quarter of fiscal year 2020 of $3,718.0 million. The increase was due primarily to a 0.3% increase in comparable club sales with gasoline sales increasing 63% year-over-year.

Comparable club sales 

Merchandise comparable club sales decreased by 5.0% in the first quarter of fiscal year 2021 due to a decline in our grocery division of approximately 10% offset by growth in our general merchandise and services division of approximately 32%. In grocery, sales declined, as demand for paper products, cleaning essentials, packaged goods and beverages have normalized compared to the first quarter of fiscal year 2020, at the onset of the pandemic. In general merchandise and services, sales were strongest in seasonal categories such as patio sets, apparel and home-related categories such as furniture and consumer electronics.  

Membership fee income

Membership fee income was $86.4 million in the first quarter of fiscal year 2021, compared to $79.6 million in the first quarter of fiscal year 2020, reflecting an 8.6% increase. The increase in membership fee income was primarily driven by growth in members, membership renewals and increased penetration of higher tier membership levels. 

Cost of sales

Cost of sales was $3,141.5 million, or 83.1% of net sales, in the first quarter of fiscal year 2021, compared to $3,060.9, or 82.3% of net sales, in the first quarter of fiscal year 2020. The increase as a percentage of net sales was driven by the increase in gasoline sales, which contributed at a higher cost per gallon, partially offset by an 80 basis point increase in merchandise margin due to continued progress in our category profitability improvement program, general merchandise sales and private label penetration.

Selling, general and administrative expenses

SG&A increased by 1.6% to $599.9 million in the first quarter of fiscal year 2021 from $590.4 million in the first quarter of fiscal year 2020. The year-over-year increase in SG&A was primarily driven by $17.5 million of stock-based compensation expense related to the modification of stock awards associated with the passing of our former President and CEO, Lee Delaney. In addition, SG&A included $2.3 million of severance charges associated with labor reductions that resulted from the realignment of our field operations. The increases were partially offset by lower advertising and supplies expenses in the first quarter of fiscal year 2021. 

Pre-opening expenses

Pre-opening expenses were $0.6 million in the first quarter of fiscal year 2021, compared to $2.6 million in the first quarter of fiscal year 2020. Pre-opening expenses decreased due to the timing of club and gas station openings year-over-year.

Interest expense

Interest expense was $19.3 million for the first quarter of fiscal year 2021, compared to $21.8 million for the first quarter of fiscal year 2020. The decrease is due to lower debt balances outstanding and lower interest rates, partially offset by $4.7 million of losses on our cash flow hedge and a $0.7 million loss on the debt extinguishment.

Provision for income taxes

The Company’s effective income tax rate from continuing operations was 23.7% and 21.5% for the thirteen weeks ended May 1, 2021 and May 2, 2020, respectively. The increase in the effective tax rate is due to lower excess tax benefits from stock-based compensation in the first quarter of fiscal year 2021 and favorable, permanent true-ups in the first quarter of fiscal year 2020.

Liquidity and Capital Resources

Historically, the strength and stability of our operations, supplemented with our debt borrowings under the ABL Facility, have been sufficient to fund our operations while allowing us to invest in activities that support the long-term growth of our operations. In the first quarter of fiscal year 2021, $14.0 million of available cash flow was used to repurchase shares under our share repurchase program. As of May 1, 2021, cash and cash equivalents totaled $63.0 million and we had $650.4 million of unused capacity under our ABL Facility. In the current environment, we believe our sources of liquidity will continue to be adequate to fund operations, meet our current debt obligations and finance investment and expansion activities for the foreseeable future.

Summary of Cash Flows

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

Net Cash from Operating Activities

Net cash provided by operating activities was $249.0 million for the first quarter of fiscal year 2021, compared to $469.9 million for the first quarter of fiscal year 2020. The decrease in operating cash flow was primarily due to the impact of the lag in payments for merchandise related to increased sales at the beginning of the COVID-19 pandemic in 2020.

Net Cash from Investing Activities

Cash used for capital expenditures was $58.1 million for the first quarter of fiscal year 2021, compared to $35.2 million for the first quarter of fiscal year 2020. The increase is primarily due to the timing of property, plant and equipment additions, offset by proceeds from a sale-leaseback transaction for one of our clubs in the first quarter of fiscal year 2021.

Net Cash from Financing Activities

Net cash used in financing activities for the first quarter of fiscal year 2021 was $171.5 million, compared to $332.0 million for the first quarter of fiscal year 2020. The decrease is due primarily to lower repayments of outstanding borrowings on our First Lien Term Loan and ABL Facility, offset by higher payments to acquire treasury shares in the first quarter of fiscal year 2021.

Debt and Borrowing Capacity 

On January 29, 2020, we amended the First Lien Term Loan to reduce the applicable interest rates. As amended, the First Lien Term Loan had an initial principal amount of $1,315.2 million and interest is calculated either at LIBOR plus 225 basis points or a base rate plus 125 basis points. Total fees associated with the refinancing were approximately $1.7 million. The Company expensed $0.1 million of previously capitalized debt issuance costs and original issue discount and expensed $1.7 million of new third-party fees.

On July 13, 2020, the Company paid $150.0 million of the principal amount due on the First Lien Term Loan. In connection with the payment, the Company expensed $1.3 million of previously capitalized deferred debt issuance costs and original issue discount. On July 29, 2020, upon the achievement of certain debt ratings upgrades, the base rate was reduced to LIBOR plus 200 basis points.

On October 30, 2020, the Company borrowed $260.0 million from the ABL Facility. The proceeds from the Company's borrowing, as well as $100.0 million of the Company's cash and cash equivalents, were used to pay $360.0 million of the principal amount due on the First Lien Term Loan. In connection with the payment, the Company expensed $2.8 million of previously capitalized deferred debt issuance costs and original issue discount.

On November 10, 2020, the Company terminated one of the interest rate swaps, which fixed $360.0 million of its floating rate debt at a rate of approximately 3.0%. An additional interest rate swap, which fixed $240.0 million of its floating rate debt at a rate of 3.0% was determined to be ineffective. Gains and losses on the ineffective interest rate swap agreement will be recorded as interest expense.

On April 30, 2021, the Company used $150.0 million of cash and cash equivalents on hand to pay $100.0 million of the principal amount due on the First Lien Term Loan and $50.0 million of the principal amount due on the ABL Facility. In connection with the payment, the Company expensed $0.7 million of previously capitalized debt issuance costs and original issue discount.

At May 1, 2021, the interest rate for the First Lien Term Loan before the effect of interest rate swaps was 2.11% and there was $701.9 million outstanding. See Note 4, "Debt and Credit Arrangements" of our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.

Contractual Obligations

Our contractual obligations consist primarily of long-term debt obligations, interest payments, operating leases and purchase orders for merchandise inventory. These contractual obligations impact our short-term and long-term liquidity and capital needs. As of May 1, 2021, other than those items related to the ordinary course of operations of our business such as inventory purchases, and lease amendments, there were no material changes to our contractual obligations from those described in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Use of Estimates

This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with GAAP. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. Our critical accounting policies are described under the heading "Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the fiscal year 2020. For a full discussion of our significant accounting policies, see Note 2 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. 

Recent Accounting Pronouncements

There were no recently issued accounting pronouncements which had an impact on the Company's financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to changes in market interest rates and these changes in rates will impact our net interest expense and our cash flow from operations. Substantially all of our borrowings carry variable interest rates. There have been no material changes in our market risk from the disclosure included in Part II. "Item 7A. Quantitative and Qualitative Disclosures of Market Risk" in the Annual Report on Form 10-K for the fiscal year 2020.

Item 4. Controls and Procedures.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 1, 2021.

Changes in Internal Control

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are subject to various litigations, claims and other proceedings that arise from time to time in the ordinary course of business. We believe these actions are routine and incidental to the business. While the outcome of these actions cannot be predicted with certainty, we do not believe that any will have a material adverse impact on our business, financial condition or results of operations.

Item 1A. Risk Factors.

There have been no material changes to the risk factors relating to the Company set forth under the caption "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended January 30, 2021

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table sets forth information regarding our purchases of shares of our common stock during the first quarter of fiscal year 2021.

(1) On December 19, 2019, our board of directors authorized the repurchase of up to $250.0 million of our outstanding common stock from time to time as market conditions warrant. The share repurchase program expires at the end of fiscal year 2021 and may be suspended or discontinued at any time without notice.

(2) Includes 207,875 shares of common stock surrendered to the Company by employees to satisfy their tax withholding obligations in connection with the vesting of restricted stock awards. See Note 7 "Stock Incentive Plans" in the Notes to Unaudited Consolidated Financial Statements included in this report.

(3) Includes 18,529 shares of common stock surrendered to the Company by employees to satisfy their tax withholding obligations in connection with the vesting of restricted stock awards. See Note 7 "Stock Incentive Plans" in the Notes to Unaudited Consolidated Financial Statements included in this report.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable

Item 5. Other Information.

None.

Item 6. Exhibits. 

# Represents management compensation plan, contract or arrangement.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.