Buy BJ's Wholesale Club

23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Deutsche Bank Research

Rating Company Date Buy BJ's Wholesale Club 23 July 2018 Initiation of Coverage North America United States Reuters Bloomberg Exchange Ticker Price at 19 Jul 2018 (USD) 25.70 Consumer BJ.N BJ US NYS BJ Price target 30.00 Retailing / Department Stores & Broadlines 52-week range 27.05 - 22.00 BJ’s is Back and Better than Ever

Valuation & Risks Mike Baker, CFA Initiating coverage with a Buy rating and $30 price target We are initiating coverage with a Buy rating and $30 target. Positive investment Research Analyst themes include: (1) unique positioning in a favorable industry supports improving +1-617-217-6253 top line; (2) improved processes and platform to drive sales and margin opportunities; (3) growing membership fee income the backbone to future profit Stock & option liquidity data Market Cap (USDm) 3,593.5 gains; and (4) a new club opportunity is also additive to sales. Each of these Shares outstanding (m) 139.8 themes contribute to a compelling long-term financial model, including solid sales Free float (%) 100 from comps, store growth and membership, mid-single-digit profitability gains Volume (19 Jul 2018) 96,880 and mid-double-digit EPS growth. Our price target is based on a target multiple Option volume (und. shrs., 1M avg.) 79,277 that is at a slight premium to peers, with scenario analysis pointing to 2x upside Source: Deutsche Bank versus downside.

We see four positive investment themes 1. Unique positioning in a favorable industry supports improving top line: We believe the club industry has among the best fundamentals in retailing and BJ’s is well positioned within the club channel to drive top- line growth. The club sector is taking share from traditional retailers, particularly in grocery, due to a compelling consumer oﬀering, featuring prices 15% to 40% below other channels. Within the club vertical, BJ’s, under new management, has refocused its customer segmentation to increase focus on a more moderate-income family relative to competitor positioning. In addition, BJ’s goes to market with a diﬀerentiated mix compared to other club models, skewing more towards grocery and fresh food in an attempt to take share from traditional grocery. Each of these help support a nascent improvement in comp sales.

2. Improved processes and platform to drive sales and margin opportunities: We see a number of areas in which BJ’s, under new management, has revamped its processes, platforms and procedures to operate more efficiently and drive improved comparable store sales, higher profitability or both. These include its "category profitability improvement" program, which has already achieved hundreds of basis points of procurement cost savings, with more to come. In addition, BJ’s still has room to run on its improved private label strategy, and we believe is in the early innings of seeing the benefits of enhanced pricing, promotional and product-assortment strategies, which should contribute to EBITDA margin expansion.

Deutsche Bank Securities Inc. Distributed on: 23/07/2018 05:33:09 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 091/04/2018. 7T2se3r0Ot6kwoPa 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

3. Growing MFI the backbone to future proﬁt gains: The hallmark of the club industry, in our view, is the consistency of the membership fee income (MFI), which supports BJ’s go-to-market strategy and the ability to take market share. Like others in the space, the MFI revenue drops right to the bottom line, enabling the clubs to take share through lower prices and compelling value to customers, while still maintaining visibility into a stable annual cash ﬂow stream, which accounts for about 50% of annual EBITDA. For BJ’s in particular, through our proprietary membership model, we quantify a number of initiatives to improve its membership metrics and drive higher MFI growth. These include programs aimed at growing renewal and retention rates and increasing penetration of higher- tiered memberships, where the company lags competitors.

4. New club opportunity also additive to sales: BJ’s has a leading position in the club channel on the East Coast and particularly in the Northeast, with an opportunity to reinvigorate a new club opening plan that has paused. This should help augment top-line growth, in our view. Similar to other initiatives, we believe a revamped new store opening strategy, implemented by the new management team, should enable low-single- digit square-footage growth annually over the next ﬁve years. Sam’s closure of 20 clubs within BJ’s operating states increases our conﬁdence in BJ’s ability to reaccelerate store growth. We believe it will not only lead to top-line growth directly, but should help support comps as new locations mature.

Financial outlook shows comp improvement, EBITDA and EPS growth After 3+ years of negative comps, BJ’s has returned to positive growth over the past three quarters and we see that continuing in the 1%-2% range over the next few years. Combined with new club openings and MFI increases, as well as increasing gas sales, we model 4% top-line growth and 6% EBITDA growth over the next ﬁve years. Current post IPO leverage is 3.7x, but should drop 0.5x a year, driving EPS growth of 15% annually, making for a solid and consistent earnings algorithm.

Price target based on 10x, a slight premium to peer average - sensitivity analysis suggesting 2x upside versus downside BJ’s is trading at 9.8x and 9.2x our 2018 and 2019 adjusted EBITDA estimates of $554mm and $592mm. This compares to the peer average of 10.1x and 9.6x. Our $30 price target is based on 10x our 2019 estimates, a slight premium to the peer average. We believe this is justiﬁed based on BJ's higher EPS growth rate. This translates into a P/E of 24.6x and 21.3x our 2018 and 2019 EPS forecasts. Our sensitivity analysis shows $35 to the upside in our bull case and $21 to the downside in our bear case, or up 37% versus down 17%.

Some risks to be aware of We see several risks to BJ achieving our target price, as noted in more detail later in this report. These include: (1) comps have underperformed Costco and others; (2) tougher compares ahead; (3) potential margin pressures; and (4) above- average leverage.

Page 2 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Table Of Contents

Overview...... 4 Executive Summary...... 5 Unique positioning in a favorable industry supports improving top...... 5 Improved processes and platform to drive sales and margin opportu...... 5 Growing MFI the backbone to future profit gains...... 5 New club opportunity also additive to sales...... 5 Financial outlook shows comp improvement, EBITDA and EPS growth...... 6 About The Company...... 7 Background...... 7 What has changed?...... 8 Positive investment themes driving sales and margi...... 10 Unique positioning in favorable industry supports improving top l...... 10 Improved processes and platform to drive sales and margin opportu...... 14 Growing MFI the backbone to future profit gains...... 19 New club opportunity...... 23 Risks...... 27 Comps have underperformed Costco and others...... 27 Tougher compares ahead...... 27 Potential margin pressures...... 27 Above-average leverage...... 28 Lock up expiration 180 days post the mid-June S1 filing...... 29 Financial Outlook Shows Comp Improvement, EBITDA a...... 30 A look back at what went wrong and what went right...... 30 A look ahead to what we expect...... 33 Long-term earnings algorithm shows solid EBITDA and above-average...... 39 A quick look at sensitivity, both positive and negative...... 41 Initiating with a Buy rating and a $30 price targe...... 42 Current valuation reflects big move post IPO...... 42 Our thoughts on the most relevant peer group...... 42 Price target derivation based on 10x multiple...... 44 Valuation sensitivity analysis shows 37% to the upside, 17% to th...... 44 DCF valuation alternative...... 45 Historical valuation spread not overly relevant but perhaps inter...... 46 BJ’s Membership Model Discussion...... 48 The impact of gas on BJ’s model...... 50 Overview of Gas Business...... 50 Impact to top line...... 50 Impact to margins...... 50 Impact to our model...... 51 Appendix: Financial Statements and Comparisons...... 53

Deutsche Bank Securities Inc. Page 3 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club Overview

BJ’s Wholesale Club (BJ) is a leading East-Coast warehouse club operator with 215 locations and over five million members. The clubs span 16 states with the greatest concentration in New England (50% market share) and the Northeast (39% market share). The U.S. warehouse club market has posted a 4.5% CAGR over the last 10 years and has taken share from supermarkets and other retailers. Over the next five years, the Warehouse Club Intelligence Center projects the market to continue to grow at a 4% CAGR due to its strong value proposition. As a warehouse club operator, BJ’s generally sells in bulk at low prices and with very thin margins, but customers pay an annual membership fee starting at $55 for access to the clubs, which drives loyalty and also enhances the highly resilient business model. In addition to the $55 base membership, BJ's offers a $110 Perks Rewards membership, along with two private label credit cards as well.

Summary of the call We are initiating coverage with a Buy rating and $30 target. Positive investment themes include

1. Unique positioning in a favorable industry supports improving top line;

2. Improved processes and platform to drive sales and margin opportunities;

3. Growing membership fee income the backbone to future proﬁt gains;

4. New club opportunity also additive to sales.

We believe these factors will oﬀset risks, including comps, which underperformed Costco and others, tougher compares ahead, potential margin pressures and above-average leverage.

As our positive investment themes play out, we believe BJ’s can continue its recent run of positive comps and we see that continuing in the 1%-2% range over the next few years. Combined with new club openings and MFI increases, as well as increasing gas sales, we model 4% top-line growth and 6% EBITDA growth over the next ﬁve years. Current post-IPO leverage is 3.7x, but should drop 0.5x a year, driving EPS growth of 15% annually, making for a solid and consistent earnings algorithm.

As this occurs, we believe BJ’s valuation multiple can expand from 9.2x currently against our 2019 adjusted EBITDA estimate of $592mm to 10x, leading to our target price of $30. As we run bull and bear cases through our ﬁnancial model, we see potential for upside to $35, with support in the $21, making for 2x more upside than downside.

Page 4 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club Executive Summary

Unique positioning in a favorable industry supports improving top line:

We believe the club industry has among the best fundamentals in retailing and BJ’s is well positioned within the club channel to drive top-line growth. The club sector is taking share from traditional retailers, particularly in the area of grocery, due to a compelling consumer oﬀering featuring prices 15% to 40% below other channels. Within the club vertical, BJ’s, under new management, has refocused its customer segmentation to increase focus on a more moderate- income family relative to competitor positioning. In addition, BJ’s goes to market with a diﬀerentiated mix compared to other club models, skewing more towards grocery and fresh food in an attempt to take share from traditional grocery. Each of these help support a nascent improvement in comp sales.

Improved processes and platform to drive sales and margin opportunities

We see a number of areas in which BJ’s, under new management, has revamped its processes, platforms and procedures to operate more efficiently and drive improved comparable store sales, higher profitability or both. These include its “category profitability improvement” program, which has already achieved hundreds of basis points of procurement cost savings, but with more to come. In addition, BJ’s still has room to run on its improved private-label strategy, and we believe it is in the early innings of seeing the benefits of enhanced pricing, promotional and product-assortment strategies that should contribute to EBITDA margin expansion.

Growing MFI the backbone to future proﬁt gains

The hallmark of the club industry, in our view, is the consistency of the membership fee income (MFI), which supports BJ’s go-to-market strategy and the ability to take market share. Like others in its space, the MFI revenue drops right to the bottom line, enabling the clubs to take share through lower prices and compelling values to customers, while still maintaining visibility into a stable annual cash ﬂow stream, which accounts for about 50% of annual EBITDA. For BJ’s in particular, through our proprietary membership model, we quantify a number of initiatives to improve membership metrics and drive higher MFI growth. These include programs aimed at growing renewal and retention rates and increasing penetration of higher-tiered memberships, where the company lags competitors.

New club opportunity also additive to sales

BJ’s has a leading position in the club channel on the East Coast and particularly in the Northeast, with an opportunity to reinvigorate a new club opening plan that has paused. This should help augment top-line growth, in our view. Similar to other initiatives, we believe a revamped new store opening strategy implemented by the new management team should enable low-single-digit square footage growth annually over the next five years. Sam’s closure of 20 clubs within BJ’s operating states offers increased confidence in BJ’s ability to reaccelerate store

Deutsche Bank Securities Inc. Page 5 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club growth, which will not only lead to top-line growth directly, but should help support comps as new locations mature.

Financial outlook shows comp improvement, EBITDA and EPS growth

After 3+ years of negative comps, BJ’s has returned to positive growth over the past three quarters and we see that continuing in the 1%-2% range over the next several years. Combined with new club openings and MFI increases, as well as increasing gas sales, we model 4% top-line growth and 6% EBITDA growth over the next ﬁve years. Current post IPO leverage is 3.7x, but should drop 0.5x a year, driving EPS growth of 15% annually, making for a solid and consistent earnings algorithm.

We see several risks to BJ achieving our target price, as noted in more detail earlier in this report. These include comps, which have underperformed Costco and others, tougher compares ahead, potential margin pressures and above average leverage.

Page 6 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club About The Company

Background

BJ’s Wholesale Club (BJ) is a leading East Coast warehouse club operator with 215 locations and over five million paid members. The clubs span 16 states with the greatest concentration in New England (50% market share) and the Northeast (39% market share). The U.S. warehouse club market has grown at a 4.5% CAGR over the last 10 years and has taken share from both supermarkets and other retailers. Over the next five years, the Warehouse Club Intelligence Center projects the market to continue to grow at a 4% CAGR due to its strong value proposition. As a warehouse club operator, BJ’s generally sells in bulk at low prices and with very thin margins, but customers pay an annual membership fee starting at $55 for access to the clubs, which drives loyalty and also enhances the highly resilient business model. In addition to the $55 base membership, the company offers a $110 Perks Rewards membership along with two private label credit cards.

BJ’s offers groceries at roughly a 25% discount to traditional supermarket competitors and 15% below mass retailers such as Walmart and Target. In addition to grocery, the company also sells general merchandise (apparel, electronics, home goods and seasonal merchandise), fuel and ancillary services such as tire installation and optical, all at discounted prices. The company’s two private label brands, Wellsley Farms and Berkley Jensen, comprise 19% of total sales. BJ’s has 134 gasoline stations in operation, generally priced below the average prices in each market, which further helps to drive traffic and loyalty. To differentiate itself from other club competitors, BJ’s offers a wider selection of SKUs (especially in fresh foods), smaller pack sizes and a smaller club format. Fresh food comprises 27% of the mix at BJ’s as compared to 14% at Costco and 17% at Sam’s Club. As such, BJ’s intends to be the one-stop shop for its member’s weekly grocery needs and supplements this with a “treasure-hunt” experience in shopping the general merchandise offering. The average customer shops BJ’s 22x per year, which compares to 21x per year at Sam’s Club and 19x per year at Costco. In addition to shopping the clubs, members have access to bjs.com, a personalized mobile app and same-day delivery through Instacart for a small additional fee.

Figure 1: U.S. Warehouse Clubs - By The Numbers BJ's Costco Sam's Club Number of Clubs (domestic) 215 522* 597 Number of SKUs 7,200 3,600 5,200 Fresh Food SKUs 950 400 600 Fresh Food % mix 27% 14% 17% Base Membership Fee $55 $60 $45 Premium Membership fee $110 $120 $100 Core Customer Smart saving, price sensitive Price aware, more premium seeking Fair price and conveniece Sales per Club $57mm $180mm $90mm Sales per Square Foot $530 $1,200 $675 Base annual membership cost $55 $60 $45 *As per June sales result

Source: Company Data, Deutsche Bank

Deutsche Bank Securities Inc. Page 7 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 2: Club Mixes

BJ's Costco Sam's Club

Perishables 17% 21% 21% 12% Edible grocery 6% 12% 29% 6% 58% 14% 20% Non-Edible Grocery 9% 14% General Merchandise 16% 21% 24% Grocery & Consumables Home and Apparel Gasoline & Other Ancillary Tech, Office and Entertainment Health and Wellness Food Sundries Hardlines Fresh Food Softlines Ancillary Fuel and Other

Source: Company Data, Deutsche Bank

Figure 3: Map of Current Locations Figure 4: BJ's Financial Summary ($mm) Total y/y % y/y % Adj. y/y % Sales change MFI change ex-gas EBITDA change

$12,468 $247 (2.1%) $406.0

$12,351 (0.9%) $255 3.2% (2.3%) $457.3 12.6%

$12,515 1.3% $258 1.2% (0.9%) $519.0 13.5%

$12,974 3.7% $284 9.9% 1.6% $553.9 6.7%

$13,422 3.5% $306 7.9% 2.0% $591.8 6.8%

$13,899 3.6% $318 3.8% 2.0% $626.7 5.9%

Source: Company Data, Deutsche Bank Source: Company Data, Deutsche Bank

What has changed?

BJ’s was taken private by Leonard Green and CVC Capital for $2.8b or 7x EV/ EBITDA in 2011. Post the IPO, we believe the sponsors will own about 70% of the company. While the company began making several changes during this period, the most notable inflection point came with some key management changes in 2016 when Chris Baldwin was named CEO and Lee Delaney was subsequently hired as Chief Commercial Officer. Under their leadership, BJ’s has implemented a series of initiatives, resulting in enhanced profitability, better comps and a path to continued operational improvement. As part of this process, BJ's carved out its own niche, separate from COST, with a sharpened focus on its core customer, which it refers to as “smart saving families”. Smart saving families typically have household incomes of $50,000-100,000 and are price sensitive, savvy shoppers who seek out great value. Having defined its core customer, BJ’s has focused on optimizing the merchandise through a simpler assortment, increased private label penetration and higher space productivity. Further, it has been able to leverage Chris Baldwin’s CPG background to unlock significant cost savings through improved procurement and vendor negotiations. BJ’s has also implemented several technology-driven improvements in omnichannel, membership acquisition, targeted marketing and data analytics around pricing

Page 8 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club and promotions. After 20 years at Bain analyzing consumer companies, Lee Delaney came to BJ’s with a lot of experience in best practices across consumer retail. Lastly, there has been a renewed focus on enterprise-wide cost discipline. Many of these initiatives are still in the early innings, which gives management conﬁdence in its longer-term outlook of 2-3.5% sales growth and 5-7% adjusted EBITDA growth.

Deutsche Bank Securities Inc. Page 9 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club Positive investment themes driving sales and margin growth

■ Unique positioning in a favorable industry supports improving top line

■ Improved processes and platform to drive sales and margin opportunities

■ Growing MFI the backbone to future proﬁt gains

■ New club opportunity also additive to sales

Unique positioning in favorable industry supports improving top line

We believe the club industry has among the best fundamentals in retailing and BJ’s is well positioned within the club channel to drive top-line growth.

Opportunity for clubs to take share from traditional grocery The U.S. grocery landscape, which was about a $700b industry in 2017, remains very fragmented, enabling better-positioned channels to take market share from traditional retailers, in our view. We’ve seen this play out over the past five years as traditional grocery retailers have lost market share at the expense of alternative channels, including the club sector (see Figure 5). We believe clubs should continue to take share due to a business model that, simply put, offers customers better value. With profitability largely supported by membership fees, the club retailers are therefore able to operate at much lower merchandise margins than traditional retailers, including mass merchants and dollars stores, as well as grocery retailers. In addition, the clubs limited assortment and low-service model, aspects of the shopping trip that have been embraced by consumers as evidenced by the $166b in domestic total sales, generated by the three major club retailers in 2017 (see Figure 6), also supports the low merchandise mark ups taken by the clubs as they have a smaller cost base to support. This all enables BJ’s, Costco and Sam’s to price product significantly below other retailers, typically offering items at 15% below mass retailers, 25% below grocery retailers and as much as 40% below online retailers, including Amazon Fresh.

Page 10 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 5: US Grocery Landscape - Key Players ($b) Figure 6: Club Channel Domestic Revenues $b % of total Clubs 2012 2012 2017 2017 CAGR BJ's $7.5 1% $8.1 1% 2% BJ's $12.5 7.5% Sam's Club $31.0 5% $34.3 5% 2% COST $24.4 4% $32.9 5% 6% Costco $93.9 56.7% Subtotal $62.9 11% $75.3 11% 4% Traditional Sam's Club $59.2 35.7% KR $83.1 14% $100.9 14% 4% Albertsons N/A $51.1 7% Total $165.6 Publix $23.4 4% $29.0 4% 4% Ahold USA $25.8 4% $26.0 4% 0% H-E-B $19.4 3% $23.1 3% 4% Meijer $14.6 2% $18.9 3% 5% Wakefern $13.6 2% $16.3 2% 4% Whole Foods $11.3 2% $15.5 2% 7% Trader Joe's $10.5 2% $13.6 2% 5% Southeastern $10.0 2% $9.9 1% 0% Giant Eagle $9.9 2% $8.9 1% -2% Hy-Vee $7.7 1% $10.0 1% 5% Wegmans $6.6 1% $8.5 1% 5% Delhaize America $18.8 3% $17.4 2% -2% SVU $8.8 1% $2.6 0% -22% SWY $33.4 6% Acquired by Albertsons Subtotal $296.9 50% $351.7 49% 3% Big Box (ex Clubs) Walmart US $151.0 26% $178.3 25% 3% TGT $14.3 2% $14.4 2% 0% Subtotal $165.3 28% $192.7 27% 3% Other DG $11.8 2% $18.1 3% 9% 7-Eleven $11.4 2% $16.9 2% 8% Aldi $7.9 1% $16.8 2% 16% Walgreens $7.9 1% $9.6 1% 4% CVS $9.8 2% $8.6 1% -3% Family Dollar $6.4 1% $8.3 1% 5% Rite-Aid $4.4 1% $4.0 1% -2% Dollar Tree $3.7 1% $5.5 1% 8% Amazon N/A $2.0 0% Big Lots $1.6 0% $1.6 0% 0% Blue Apron N/A $0.9 0% Subtotal $64.9 11% $92.3 13% 7% Grand Total $590.0 100% $712.0 100% 4%

Source: Company Data, Deutsche Bank, Supermarket News; Represents Fiscal Years, Estimates Where Source: Company Data, Deutsche Bank Unavailable

Although pricing is the most important share driver for the channel versus other retailers, we do think that clubs augment that value through strong general merchandising assortments that enhance the customer shopping trip through a “treasure hunt” experience, which can be additive to both basket size and margins. Moreover, clubs have increased their penetration of ancillary services including gas, tire installation, travel, pharmacy and vision care to name a few, which accounted for 12%-20% of each of the club retailers’ sales in 2017, which act as traffic drivers. This is especially so for gas, which is currently available at 62% of BJ's and 72% of COSTs and likely a similar percent of Sam’s Clubs, offering. Pricing is generally 1-2c below local competition and in line with Sam’s and Costco. Members who fill up with a BJ’s credit card also receive an additional 10 cents per gallon discount.

Greater focus on fresh food enables niche positioning versus COST Within the club space, BJ’s is the smallest of the three domestic players, but has carved out a differentiated competitive niche, in our view. This includes focusing on a different customer to COST, a strategy perhaps borne out of necessity due to the difficulties of trying to “out Costco, Costco”. In other words, competing head to head with one of the best retailers in the world would likely prove challenging. Instead, BJ’s has pivoted its business to target a different customer to the club-industry leader, focusing on what management refers to as “smart saving families”. This customer is a price-sensitive family, typically with average annual household incomes of $75,000, which cares about value but also likes “affordable luxuries”, is willing to stock up to save and has a strong sense of quality in their purchases, which we think either requires a brand name product or an equivalent private label. This differs somewhat from a Costco customer,

Deutsche Bank Securities Inc. Page 11 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club which we believe is typically from a higher-end demographic, and is more “price aware” than “price sensitive”. On the other hand, while a Sam’s Club customer is probably as equally price sensitive as BJ’s, we think BJ’s customer has more of a bent towards better product, including fresh grocery.

This diﬀerentiated positioning informs BJ’s merchandising strategy, which we see as having three particular aspects that separate it from other club competitors. These include:

■ Smaller pack sizes – this helps BJ’s win with customers that are seeking great value but may not be in the position to stock up due to limited weekly incomes. Also, customers seeking perishables product would typically not want to stock up weeks in advance as this would limit freshness.

■ Higher SKU count – BJ’s merchandises about 7,200 SKUs compared to 4,600 at Sam’s and 3,200 at Costco, oﬀering customers a greater selection.

■ Focus on food / fresh – Not only does BJ’s stock more SKUs in general, but within that SKU count, BJ’s has a greater emphasis on perishables and edible grocery, which accounts for 53% of sales, compared to food and fresh food, excluding sundries, accounting for 35% of COST’s mix. We believe that fresh accounts for 13% or 950 of BJ’s SKUs compared to 600 or 12% for Sam’s and 400 or 11% for Costco (see Figure 7). And because these are higher volume SKUs, we believe fresh food for BJ’s has nearly 2x the penetration of COST, which was 14% in its latest 10-K.

Figure 7: Club SKU Comparisons

8,000

7,000 950 6,000

5,000 600 4,000 400 3,000 6,250

2,000 4,600 3,200 1,000

0 Costco Sam's Club BJ's

Other SKUs Fresh SKUs

Source: Company Data, Deutsche Bank

By focusing on a greater assortment of products, both fresh and general merchandising, with a leaning towards smaller pack sizes, we believe this enables BJ’s to act more like a grocery store than other club competitors. This, in turn, helps BJ’s serve its target customer better by oﬀering moderate-income families an assortment of quality products that households require on a weekly basis at a deeply discounted price. In this way, we believe BJ’s is able to increase its relevancy with this demographic, driving higher annual trip frequency compared to competitors at 22x versus 21x for Sam’s and 19x for COST. Through these

Page 12 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club trips, we believe that BJ’s average customer spends $315 per year on perishables, 64% more than the $190 average annual perishable spend per member at COST and 40% more than the $225 for Sam’s (see Figure 8). We think this plays into BJ’s overall strategy of trying to become its focus customers' weekly grocery trip, replacing the need to ever visit the traditional food retailing channel.

Figure 8: Club Metrics Comparison

Average annual perishable spend per member Average annual trips per member

$350 23 $315 22 22 $300 22 21 $250 $225 21 $190 21 $200 20 $150 20 19 $100 19 19 $50 18 $0 18 Costco Sam's Club BJ's Costco Sam's Club BJ's

We believe that BJ's mix, which skews towards fresh and grocery, drives more frequent trips.

Source: Company Data, Deutshce Bank

Solid start to omnichannel BJ’s is relatively early in its omnichannel strategy but we think it is oﬀ to a good start with a solid technology backbone that will help it meet customers' evolving demands for online grocery shopping. We believe that online accounts for about 1% of BJ’s compared to 4% for COST. Clubs in general are underpenetrated online compared to other mass / grocery retailers like Wal-Mart at 3% in total and Target at 5.5%. And of course there is Amazon, which both through its Whole Foods acquisition as well as more organic eﬀorts like Amazon Fresh, is going full steam ahead into online grocery. Thus, although online accounts for only a single-digit percent of total U.S. grocery purchases, which is underpenetrated versus online sales as a percent of total retail sales at about 10%, it is certainly imperative for retailers competing in the grocery world to have a well thought out online strategy.

To that end, under the leadership of its new Chief Digital Officer Rafeh Masood, we believe BJ’s is making the right investments in the channel. In fact, in some ways, BJ’s is ahead of its main competitors. For instance, BJ’s now offers buy online, pick up in club (BOPIC) in all its clubs on 1,800 non-fresh products. This compares to COST, which offers the service on only a handful of higher value items that customers are reluctant to ship. In general, we believe consumers like BOPIS/BOPIC options as most retailers speak to the favorable customer uptake of the service. Thus, we see BJ’s ability to provide the option as an incremental positive.

BJ’s has also just completed the rollout of its mobile app, which we think, based on download data, has been well received, and now, like COST, BJ’s has partnered with Instacart to offer same-day delivery on 2,200 of its 7,200 SKU’s, including grocery. This does come with a $14.99 fee, but no additional product mark- up. This compares to COST, where the delivery fee is $5.99, but there is also an additional mark-up to the product. In total, BJ’s offers 11,000 items online, including products not available in club. This is lower than the 25K-30K offered

Deutsche Bank Securities Inc. Page 13 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club on Costco.com and the 30K-40K through Sam’s online offering. But, under the leadership of Masood, who started with BJ’s in mid-2017 from a similar leadership role at DKS, where online grew to 12.5% of sales in 2017, and was up 14% for the year, we believe BJ’s offering and omnichannel penetration will continue to grow over time. This will enable BJ’s to compete adequately for those customers that prefer the online model as that channel continues to gain acceptance from U.S. consumers. To further help capture that customer, BJ’s, unlike COST, will offer an “online only” membership of $10, with the hope of introducing customers to BJ’s value proposition and eventually moving towards full membership.

Improved processes and platform to drive sales and margin opportunities

"Category profitability improvement” driving merchandise margin gains Launched in 2015, BJ’s category profitability improvement (CPI) program is aimed at lowering product procurement costs from vendors. In doing so, BJ’s can improve margins while also improving the value offered to customers, driving both better comp sales and profits.

Already, BJ’s has seen strong success from this program, we think due to the leadership of new CEO Chris Baldwin. In our view, the company has been able to take advantage of Baldwin’s background in the consumer products industry to improve its negotiating strategies with vendors. Basically, Baldwin was sitting across the table from retailers as a vendor for the previous 30+ years, so knows the true costs for vendors and what an account like BJ’s is worth to them. This has helped inform a change in dialogue with vendors, highlighting BJ’s value to them as a growing retailer and the beneﬁts of BJ’s limited assortment strategy, which oﬀers ongoing partners further growth opportunities at the expense of vendors that have products that BJ’s chooses not to stock.

BJ’s has also been able to better utilize its data collection to oﬀer more value to vendors. Through the membership card aspect of BJ’s business, the company essentially has perfect information on customer buying habits, which can be used in negotiating with suppliers. In addition, BJ’s has made signiﬁcant investments in improved data analytics, further helping them in the negotiating process.

Through the CPI initiative, BJ’s has already sourced $250mm in product-cost savings in 2016 and 2017, with $200mm having already flowed through the P&L and another $60mm expected to hit the bottom line in 2018. This accounts for a 190 bps improvement in merchandise margins. Looking ahead, we believe BJ’s continues to have opportunities. True, BJ’s gross margin looks to be close to 400 bps higher than COST at 15.9% in FY17 versus 11.3% (excluding MFI). But, we believe much of the difference is due to a few differences in what is included in merchandise margins. For instance, COST includes its very low- margin café business, which for BJ’s is outsourced and essentially a high-margin pass through. Also, COST includes costs related to in store food prep, which further lowers its margins. On a comparable basis, we believe BJ’s is at or lower than COST, suggesting more room to go.

Page 14 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

For the CPI initiative speciﬁcally, while BJ’s has been at it for 2+ years, the company still has opportunity for more line reviews as the company typically sees compounding success after multiple looks at a category. BJ’s has done two or more reviews on only 11% of categories, with another 22% not yet touched at all. The remaining 66% have gone through just one line review, leaving opportunity for more cost savings, in our view (see Figure 9).

Figure 9: CPI Program Savings

$600 $ millions Still a big opportunity with 22% of products still Merchandise gross margins improved ~190 bps ??? unadressed and another 66% only reviewed once $500 as a direct result of CPI 100% 17.50% 17.3% 90% $400 80% 17.00% 70% 16.50% $300 $260 60% Reviewed Twice 50% 16.00% $200 40% Reviewed Once 15.4% $150 15.50% 30% Unaddressed 20% 15.00% $100 10% 14.50% 0% $0 Non-Edibles Edibles Perishables General 14.00% Initial Plan Sourced in FY16 and 17 LT Potential Merchandise FY15 FY17

Source: Company Data, Deutsche Bank

Private label strategy has room to grow Under new leadership, BJ’s has also recalibrated its private label strategy to act as both a sales and margin driver. Key changes included a consolidation from 13 brands to two main go-to-market brands, including “Wellsley Farms” and “Berkley Jensen”. Private label now represents 19% of sales, which is up from 10% in 2012, but still lower than COST’s roughly 25% for its Kirkland Signature brand. We think BJ’s can get to a penetration closer to COST’s as customers have shown they like BJ’s exclusive brands. In fact, 94% of club members bought at least one private label product in 2017. If BJ’s increases its penetration to 25% over the next five years, this implies 60 bps of benefit to gross margin. Each 1% increase in private label, which typically has 1,000 bps better merchandise margins, directly helps profitability by 10 bps. Indirectly, private label benefits margins as BJ’s can use the threat of increased penetration in its negotiation with national brands. If BJ’s and vendors cannot agree on terms for a specific product program, BJ’s now has a credible and profitable alternative that consumers appreciate (see Figure 10). Sam’s private label penetration is over $10b of its $59b in sales, so at least 17%.

Deutsche Bank Securities Inc. Page 15 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 10: BJ's Private Label Penetration

30%

25% 25%

20% 19%

15%

10% 10%

0% 2012 2017 2022E

We believe COST's privatel label penetration, excluding gas, is closer to 25% while Sam's is at least 17%

Source: Company Data, Deutsche Bank

Pricing and promotional strategies support top line and margin growth: Over the past few years, BJ’s has implemented several new technology platforms, including Revionics and SAP modules. These systems, along with increased expertise within the management ranks from the likes of Lee Delaney, Chief Growth Officer, have enabled BJ’s to take a more thoughtful and disciplined approach to areas like pricing and promotional effectiveness. Again, this not only helps drive margins, but also sales due to better offers to members and improved communication of those benefits.

With help from the SAP systems for instance, BJ’s has targeted a $100mm topline opportunity through improved promotions. For the most part, we view improvements like this as largely “low hanging fruit” that many retailers already do, but that BJ’s did not implement in the past – thus the opportunity. Examples include enhancements to several promotional vehicles:

■ Big Brand Mailer (BBM): Analogous to COST’s “multi-vendor mailer” (MVM), the BBM is a coupon book that in the past was mailed every 3 to 4 weeks. Now, under the new platforms and procedures, BJ’s has expanded the reach and frequency of the books and taken a more scientific approach to analyzing the most compelling offers by focusing on ROI of the items in the books. While largely vendor funded in the past, BJ’s has been able to increase its funding by showcasing a more focused product offering in the mailing.

■ Postcard mailings: This semi-monthly mailing used limited targeting in the past, based only on recent purchase history and was sent to most customers. Now, BJ’s is working towards using more advanced analytics to improve segmentation and deliver more personalized oﬀerings.

■ Vendor funded in-store promotions: BJ’s has been able to introduce new vendor funded promotions that members value, including programs oﬀering $0.25 per gallon oﬀ of gas with certain branded product

Page 16 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

purchases and vendor funded “bounce back” awards for multiple purchases from certain vendors.

Along with speciﬁc oﬀerings, we believe BJ’s has been able to use its new Revionics systems to improve its value perception to get credit among customers for its industry-leading pricing. This includes more dynamic local pricing and optimized markdowns.

Product assortment improvement a new focus BJ’s has also taken a more scientific approach to its space allocation and product assortment, supported not only by new SAP systems that have allowed better local assorting, but also by the addition of a team of full-time analysts dedicated to defining assortments across the store based on data analytics. Again, not revolutionary in retail, but processes that the company did not optimize in the past. Examples include creating showroom-type setups in seasonal areas like patio and snow removal, and differentiating by market. Since starting this initiative in 2Q17, seasonal sales have improved and are ahead of company average growth rates in 2018.

BJ’s has also improved its apparel assortment and footprint, putting the product in the front of the store, improving the seasonality of the assortment and upgrading the brand portfolio. Again, since implementing in 2Q17, sales have improved, running up in the double-digit range.

Cost savings based on new discipline Like many aspects of its business, BJ’s is taking a more disciplined approach to cost management than was the case under past management. This includes plans to drive growth with relatively ﬂat corporate G&A costs. We also see opportunity for other cost savings in BJ’s in-club labor model. Although BJ’s operates with far fewer employees per club due to lower average sales volumes, we estimate that BJ’s SG&A per employee is 36% higher than COST. One area of opportunity could be in BJ’s full-time versus part-time mix, which stands at 48% for club level employees. This is actually lower than COST’s full-time mix of 58%, but that is for total company employees, not just club level, although even looking at just club level, it is likely that COST has a higher full-time mix. That said, BJ’s management is working on initiatives to increase its part-time in-club labor mix, which could help lower costs per employee (see Figure 11). In addition, BJ’s has a number of smaller cost-saving opportunities across a myriad of operational areas like temperature control, cash counters and other day to day procedures.

Deutsche Bank Securities Inc. Page 17 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 11: BJ versus COST Employee Metrics BJ's Cost Employees* 26,520 231,000

Full time 12,730 133,000 Full time mix 48% 58%

Part time 13,790 98,000 Part time mix 52% 42%

Clubs 215 741 Employee per club 123.3 311.7

SG&A ($mm) $2,018 $12,950 SG&A ($mm) per club $9.4 $17.5 SG&A per employee $76,087 $56,061

*Club level employees only Based on 2017 reported data, including an extra week for both BJ and COST

Source: Company Data, Deutsche Bank

Much of the investment to drive growth initiatives are vendor funded and over time, BJ’s should be able to grow expenses at half the rate of sales. But, over the next few years, we expect less leverage as BJ’s will naturally incur some costs associated with investments in growth and operational improvements. Nonetheless, through the initiatives described above, we expect BJ’s to show improved top-line trends, as well as higher EBITDA margins and dollars (see Figure 12).

Figure 12: Adjusted EBITDA and Adj. EBITDA Margins

$700 5.0% $ millions $592 4.8% $600 $554 $519 4.6% $500 $457 4.4% $406 4.2% $400 4.0% $300 3.8%

$200 3.6% 3.4% $100 3.2% $0 3.0% 2015 2016 2017 2018E 2019E

2017 data is based on 52 weeks. On a 53 week basis 2017 adjusted EBITDA was $534mm and 4.2% of sales Adj. EBITDA EBITDA Margin % Data includes MFI

Source: Company Data, Deutsche Bank

Page 18 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Growing MFI the backbone to future proﬁt gains

The hallmark of the club industry in our view is the consistency of the membership fee income (MFI), which supports BJ’s go to market strategy and the ability to take market share.

EBITDA from MFI consistent and growing BJ’s membership fee income has risen every year since 1997, including during the 2007-2009 ﬁnancial crisis, at an average CAGR of 8%. Over the last 10 years, the CAGR has been 4.1%. Currently MFI, which was $259mm in 2017, represents 50% of that year’s adjusted EBITDA and 2.1% of total revenues, excluding the extra week. This is consistent with the penetration across the industry (see Figure 13) and thus illustrates one of the key positive attributes of the club business… that approximately half of the company’s EBITDA is essentially locked in at the beginning of the year due to membership fees.

Figure 13: Membership Fee Income ($mm)

$300

$255 $259 $243 $247 $250 Last 20 year CAGR = 8% $242 $229 Last 10 year CAGR = 4% $210 $191 $200 $180 $173 $175 $159 $150 $150 $139 $118 $124 $106 $100 $90 $79 $66 $56 $50

Membership has grown every year since at least 1997, even through the financial crisis

Source: Company Data, Deutsche Bank

The key to continuing to increase MFI is to improve renewal rates, which as of the end of 2017, were at an all-time high of 86% (see Figure 14). But, this still trails COST’s total renewal rates of 90% in 2017, and the gap may even be wider adjusting for different calculation methodologies. Both companies consider a member to be renewed if that customer re-ups within 6 months of their membership expiration. Thus, the renewal rate looks at customer renewals on a rolling basis within the time period of seven months to 18 months prior. But, BJ’s only looks at members with two or more years of tenure in its calculation, which we believe is different to COST and Sam’s. If first-year member churn were included, we believe BJ’s renewal rates would be lower. Thus, we believe BJ’s has the opportunity to improve its renewal rates and by extension, its membership fee income. Not only will this increase its EBITDA as MFI flows to the bottom line as a 100% pass through, but we believe as renewal rates increase, spend per customer increases as more tenured members tend to spend more.

Deutsche Bank Securities Inc. Page 19 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 14: Renewal Rate

90%

88% 88%

86% 86% 85% 84% 84% 84% 84% 84% 83% 83% 83%83% 83%83%83% 83%83% 82% 82%82% 82% 82% 81%81%

80%

78%

76%

Source: Company Data, Deutsche Bank

Initiatives in place to grow renewals and MFI $ BJ’s does not report membership numbers except revealing that it currently has about five million paid memberships. Despite the lack of disclosure, we attempt to model membership numbers (see our membership model discussion later in this report) and believe BJ’s should be able to continue to increase both renewal rates and MFI through a number of initiatives, including a fee increase enacted in January of 2018. In general, we would characterize each of these as initiatives aimed at catching up with industry norms and improving upon processes that, under previous management teams, were probably subpar, but are now improved and thus positioned to grow. Increasing membership rates means more members per club, which then means more sales per club, or increasing same store sales. Moreover, more tenured members are typically more loyal and spend more each year, further enhancing comps. Thus, driving overall membership per club metrics as well as renewal rates acts as a key driver to comps and overall profitability growth. Figure 15 shows that, based on five million paid members and eight million total card holders, BJ’s averaged just over 23,000 paid and 37,000 total members per club in 2017, or about a third of COST’s 66,700 paid and 121,900 total members per club as of the end of FY17.

Figure 15: BJ versus COST Member Metrics BJ's Cost Clubs 215 741 Paid members (000) 5,000 49,400 Total card holders (000) 8,000 90,300

Paid members per club 23,256 66,667 Total card holders per club 37,209 121,862

Source: Company Data, Deutsche Bank

Page 20 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Thus, we believe BJ’s has a signiﬁcant opportunity to improve on these metrics and a number of initiatives in place aimed at driving improvements. These include:

■ Increased membership fees: Typically clubs increase their membership fees by $5 every five years. BJ’s last took an increase in 2011. Thus, the company was overdue an increase, particularly as COST also increased its fees by $5 in September 2017. Even with BJ’s $5 increase, the memberships, which are $55 for a base membership and $110 for the premium tier, are still below COST’s fees of $60 and $120. Sam’s charges $45 and $100. Typically, when a club pushes through an increase, membership renewal does see an impact, with the usual decrease being about 100 bps. But, six months after BJ’s increase, we believe the hit to renewal rates are trending better than that. As such, membership fee income should increase from the $5 per member bump. This will lift the MFI over a 24-month period as BJ’s 5mm members come up for renewal generally evenly over the 12 months of the year, and then the $5 increase is amortized over the 12 months of the annual fee. Over the 24 months, the benefit accelerates through the first year, peaking toward the end of year 1 and the beginning of year 2, before seeing a decelerating benefit out until the 24th month post the renewal. As such, BJ’s MFI should see a benefit through FY 19 (see Figure 16).

Figure 16: The Membership Fee Increase Impacts the P&L Over 24 Months, Peaking in the 12th Month

Months post fee increase: 1 2 3 4 5 6 7 8 9 Percent of memberships that come up for renewal post fee increase, by month 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3%

8.3% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 8.3% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 8.3% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 8.3% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% % of fee 8.3% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% increase 8.3% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% recognized 8.3% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% post renewal 8.3% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 8.3% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 8.3% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 8.3% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 8.3% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 1.4% 2.1% 2.8% 3.5% 4.2% 4.9% 5.6% 6.3% 6.9% 7.6% 8.3% 7.6% 6.9% 6.3% 5.6% 4.9% 4.2% 3.5% 2.8% 2.1% 1.4% 0.7%

% of total MFI benefit from fee increase by month

Source: Company Data, Deutsche Bank

■ “Always on”: In the past, BJ’s would employ semiannual mass marketing campaigns to drive new memberships through blanket mailings. But, under the new management team, BJ’s has revamped its marketing strategy to focus on a more personalized and digital platform throughout the year, with an aim to generate new customers at any time, rather than solely during the semiannual events as in the past.

■ Investing in prospecting: Through its “always on” strategy, we believe BJ’s is investing more marketing dollars in membership prospecting, including offering periodic introductory discounts on memberships in the $25 range. After one visit, assuming the average spend of $95 and a typical mark up of 15%, BJ’s generates just under $15 in operating profit for that first visit. Coupled with a $25 introductory fee, that means BJ’s generates total profit of about $40 after just one visit from a costumer

Deutsche Bank Securities Inc. Page 21 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

that signs up with the teaser rate, more than paying for the $30 discount. Each additional visit after the first adds to the accretion of that member. If the member trends towards the average, which means 22 trips and about $2,100 in average annual spend, the merchandise profits of over $300, using a 15% mark up, more than offset any initial investment. Thus, we think it makes sense for BJ’s to aggressively invest in prospecting.

■ Grow “Easy Renewal”: After investing in initial acquisitions, we think BJ’s has enhanced its focus on renewing customers, particularly those that start at introductory rates. One initiative in particular, “Easy Renewal” seems to be helping to drive renewal rates. Through this program, BJ’s enables members to renew their memberships through an automatic annual renewal process in which a customers’ credit card is automatically billed each year. We believe this leads to higher renewal rates than the historical “opt in” program in which members needed to actively enter a credit card number or other form of payment. We believe BJ’s ﬁrst launched this program in 2014, but handled it to an “opt out” strategy from “opt in” in 2017, meaning that all new members as of 2017 are automatically enrolled in the Easy Renewal program as of September of 2017. Thus, on average, 37% of members were on “easy renewal” throughout 2017, up from 15% in 2015, but expected to grow to 60% in 2018 due to the timing of when memberships come up for renewal, and up to 80% beyond this year. As customers that are signed up for easy renewal are more likely to stay on as members and as more customers become part of easy renewal, overall renewal rates are likely to go up.

■ Membership upgrades to help drive comps: Like COST and Sam’s, BJ’s oﬀers diﬀerent tiers of memberships, including its base “BJ’s Inner Circle” membership at an annual $55 fee, and its “BJ’s Perks Rewards” membership at $110. These compare to Costco’s $60 base “Gold Star” and “business” memberships and $120 “Executive” memberships, and Sam’s Club’s $45 base and $100 “Plus” memberships. But, BJ’s is underpenetrated in its higher-tier memberships at just 16% of members compared to 39% for COST.

Similarly, BJ's, like competitors, oﬀers a private label credit card program, which was implemented in 2014 and has already grown to 11% of members, a good start but underpenetrated, compared to 30% for COST (See Figure 17).

Figure 17: BJ versus COST Member Metrics Premium member penetration Co-branded credit card peneration

50% 35% 30% 39% 30% 40% 25% 30% 20% 20% 16% 15% 11% 10% 10% 5% 0% 0% BJ COST BJ COST

Some data is estimated

Source: Company Data, Deutsche Bank

Page 22 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

We believe each of these programs offer benefits to customers that more than pay for the higher membership fee. In particular, Perks Rewards customers receive 2% cash back on purchases, meaning that customers spending at least $2,750 a year would see savings from the $110 membership. As noted earlier, the average BJ’s customer shops 22 times a year and spends $95 per trip, for an average annual spend of $2,150. Thus, a customer needs to spend just above average to make the deal worthwhile. And of course, the leverage on the incremental sales more than offsets the margin impact of the cash back that BJ’s awards to its Perks members, making it accretive to profits as well as to comps.

Moreover, customers that use either private label credit card enjoy another 3% oﬀ at the point of sale, meaning that base “Inner Circle” customers get 3% back using the private label credit card, while Perks reward customers get a full 5% back using their private label credit card. Thus, if a customer signs up for the private label credit card, they need only spend $1,100 annually to make up for the additional $55 fee and this doesn’t include additional cash back for purchases outside BJ’s clubs using the private label credit card, or a 10c per gallon discount on gas using the tender. The program is largely funded through the better economics to BJ’s from customers using the private label credit card versus other forms of credit.

The key to the program is that typically once a customer signs up for either the higher-tier and / or the private label credit card, that customer tends to be more invested in BJ’s and thus more loyal and therefore spends more per trip and has more trips per year. For instance, COST’s higher-tier members account for 66% of sales, despite being only 39% of members. We believe BJ’s sees a similar 70% enhancement to average sales from its higher-tiered members. Thus as BJ’s is able to move customers up to either higher-tiered memberships or private label credit cards, comps beneﬁt while being neutral to margins.

BJ’s has smartly increased its focus on driving these programs, primarily through enhanced marketing at its membership desk. For instance, BJ’s has 10mm customer transactions annually at its service desk, enabling opportunistic touch points to convert prospects or interested customers into members and current members into private label credit card holders and Perks members. In addition, BJ’s recently launched “in-lane” selling techniques to enable associates to sell these programs, along with easy renewal at the point of purchase. Similarly, pre- approval for the private label credit program is rolling out in July. We think, simply by increasing its focus and rolling out some simple selling techniques, BJ’s should be able to improve the penetration of each of these membership-based programs, driving enhanced economics.

New club opportunity

Smallest nationwide, but beast in the east BJ’s operates 215 clubs in 16 states along the Eastern seaboard and into Ohio, with a heavier concentration in the Northeast and New England in particular. So, while BJ’s has fewer clubs than Costco’s 514 and Sam’s 597 domestic locations at the end of FY2017, it does out-store its competitors in its markets, where COST operates 152 stores and Sam’s 208 (see Figure 18). In New England and the

Deutsche Bank Securities Inc. Page 23 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Northeast in particular, BJ’s has an above-average share of the club business at 50% and 39% respectively. Interestingly, however, Figure 19 shows that BJ’s average store volume and average store proﬁtability is better in the Mid-Atlantic than its other regions, while still being above average in New England. This helps give us conﬁdence that BJ’s can successfully open clubs outside of the Northeast.

Figure 18: Stores By State Figure 19: BJ's Club Performance By Region

120% BJ's Costco Sam's Connecticut 13 6 1 100% 22% 22% 24% Delaware 4 1 1 80% Florida 31 25 46 60% Georgia 5 11 24 41% 47% 47% 40% Maine 3 0 3 20% Maryland 12 10 11 33% 29% 28% Massachusetts 25 6 0 0% Clubs Merchandise sales Club level EBITDA New Hampshire 6 1 2 South Atlantic Mid-Atlantic New England New Jersey 23 19 7

New York 44 19 12 BJ's Mid-Altantic clubs are their most productive and profitable North Carolina 10 8 22 Ohio 6 12 27 Pennsylvania 17 11 24 Rhode Island 3 0 0 South Carolina 1 5 13 Vermont 0 1 0 Virginia 12 17 15

BJ's has more stores than competitors in their key markets

Source: Company Data, Deutsche Bank Source: Company Data, Deutsche Bank

Reinvigorated new club opening process Both within its more dominant territories, but also within adjacent markets in the states in which it operates, we believe BJ’s has an opportunity to take more share through additional club openings. While this has been the case for some time, BJ’s misstepped some new openings in the past under previous management teams and has thus revamped its processes, setting the stage for a reacceleration. From 2013 to 2015, the company opened 12 stores growing from 201 to 213. But, because club openings were, on balance disappointing, the company slowed them significantly to focus on improving results in existing clubs and figure out how to open better. Since then, BJ’s has opened one club per year, opening a fill in club in Kearny, NJ in 2016 and in a new market in Summerville, SC in 2017. Results were better for these two locations, including significantly more members per club at opening and year one sales compared to the average opening metrics for the six clubs opened in 2015. We believe the improved performance was due to a new approach by the new management team, which included what we regard as fairly standard processes that the company had lacked in the past. Examples include:

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■ Using better analytics to target key neighborhoods around openings

■ Increasing pre-opening marketing to build awareness, while using vehicles that better served the target market (i.e. billboards for commuter markets, subway signs for areas where customers index to public transportation)

■ Market to existing or lapsed customers to inform about a new, potentially more convenient club location

■ Using “sister club” metrics to better assort new clubs at openings

Re-accelerating opening plans With clubs opening better, we expect BJ’s to open 15 to 20 new locations over the next ﬁve years, including four new locations in 2019 (see Figure 20). This should include some in existing markets and some in new markets, although all within BJ’s existing state footprint. And, we wouldn’t be surprised to see some upside to these numbers due to Sam’s shuttering of 20 stores in BJ’s operating states, including 17 that were located within 10 miles of a BJ’s club. In fact, we believe that BJ’s is already seeing some beneﬁt from Sam’s closings throughout its markets, both in terms of comps and member migration. In our view, this should also help BJ’s new club opening in New Hampshire.

Figure 20: BJ's Store Opening Schedule Clubs Net new clubs 2014 207 6 2015 213 6 2016 214 1 2017 215 1 2018E 216 1 2019E 220 4 BJ's is reaccelerating 2020E 224 4 store growth 2021E 228 4 2022E 232 4

Source: Company Data, Deutsche Bank

Other retailer closings could also provide additional real-estate opportunities, leading to more-than-expected new store openings. Longer term, BJ’s believes there is room for 100+ new clubs in fill and adjacent markets, serviceable through its existing network of six distribution centers. BJ’s will also open about five gas stations per year, growing off of its current base of 134 co-located stations.

New store economics support opening plans Our estimate of 17 new club openings from 2018 through 2022 on a base of 215 translates to 1.5%-2.0% store growth. New clubs typically open at $35mm to $40mm in ﬁrst-year sales, equal to 70%-80% new store productivity. Thus, the opening schedule should contribute 1%-1.5% to total top-line growth over the coming years. After year one, as stores ramp, the new store maturity waterfall should start to contribute to comps as ﬁrst-year stores tend to comp at about 10% and second-year stores at 8%, gradually working to mature volumes in the $50mm range (see Figure 21). As the opening schedule is still relatively modest, the impact to total comps will be less than 50bps, but helpful for a company that has comped in the 1%-2% range (see Figure 22).

Deutsche Bank Securities Inc. Page 25 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 21: BJ's New Club Revenue Ramp and Model Figure 22: BJ's "Comp Waterfall" Model ($mm)

$60 number of stores by comp year Store count comp year 1 comp year 2 comp year 3 comp year 4 $50 2013 201 $50 2014 207 2015 213 $35-$40 2016 214 $40 2017 215 2018E 216 1 1 6 6 2019E 220 1 1 1 6 $30 2020E 224 4 1 1 1 2021E 228 4 4 1 1 $20 2022E 232 4 4 4 1

% of total stores by comp year $10 Store count comp year 1 comp year 2 comp year 3 comp year 4 2018E 216 0.5% 0.5% 2.8% 2.8% 2019E 220 0.5% 0.5% 0.5% 2.8% $0 2020E 224 1.8% 0.5% 0.5% 0.5% Year 1 Year 2 Year 3 Year 4 Year 5 2021E 228 1.8% 1.8% 0.4% 0.4% 2022E 232 1.8% 1.8% 1.8% 0.4% New store metrics comps by comp year Build out cost = $6mm comp year 1 comp year 2 comp year 3 comp year 4 Members at grand opening = 15K to 20K Mature store sales = $50mm+ Impact to total comps 2019E 0.22% Net working capital investment = $1mm 2020E 0.26% Store maturity should add 20 to 45 bps to Payback = 4 to 5 years 2021E 0.37% comps in the coming years 2022E 0.44%

Source: Company Data, Deutsche Bank Source: Company Data, Deutsche Bank

Clubs typically cost $6mm in capital to open, including costs associated with gas stations, along with $4mm in working capital, less $3mm in payables. New clubs are expected to open with 15,000 to 20,000 new members, below BJ’s current member per club ratio of ~23,000. But, along with sales, we‘d expect the number of members per clubs to ramp towards average over time. Payback is planned to occur in four to ﬁve years.

Page 26 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club Risks

Comps have underperformed Costco and others

While BJ’s is expected to comp +1-2% for the foreseeable future, comps have only recently turned positive in 2H17 after several years of negative performance. We do see a path to positive multiyear comp trends, given more recent improvements in merchandising, as well as initiatives to drive member growth, frequency and basket building. But, comps have been below both competitors as well as some relevant industry-growth metrics. While the club business is less dependent on incremental comp growth, given its thin margins and membership model (in fact, BJ’s can leverage a 1% comp), we view top-line improvement as a key validator to the story. To justify a premium multiple to traditional grocers, BJ’s must show that it can comp at least in line with the industry over an extended period of time.

Tougher compares ahead

BJ’s 1Q18 comp ex-fuel of 2.0% was up against a -4.5% in 1Q17 due to some missteps, particularly in fresh foods a year ago. Additionally, we believe 1Q18 was hurt by ~100 bps due to weather. Still, comparisons get tougher from here as comps were down 0.9% in 2Q17 and turned positive in 2H17. Given the initiatives we outline in this report and a favorable consumer backdrop, we do believe that BJ can drive +LSD% comps in the coming quarters. We are modeling a 1.3% comp in 2Q18, which implies a signiﬁcant acceleration in the two-year stacked comp, and the acceleration should give credence to the notion that BJ’s recent initiatives are taking hold and the company can comp against tougher positive compares. Again, we view BJ’s ability to comp as integral to the story and any missteps in doing so would be viewed quite negatively.

Potential margin pressures

The retail business is highly competitive and across all of retail the cost of doing business is going up. As such, we outline three potential margin pressures facing BJ. While these pressures are well-known and the company does have oﬀsets in place, we do feel that they are worth mentioning as further increases could adversely aﬀect margins.

■ Competitive pricing: Part of BJ’s competitive advantage is its ability to price below the competition. Given its limited SKU offering and bulk packaging, BJ’s is able to price ~25% below traditional grocers and 15% below mass retailers such as Walmart and Target. BJ’s prices in line with Costco and monitors competitor prices on a weekly basis. While we don’t anticipate that Costco is planning any further price investments, particularly in an inflationary environment, if it were to lower prices, we believe BJ would be forced to follow suit, which would have a negative effect on margins.

■ Wages versus Costco: Wage pressure has been a persistent theme across retail. BJ’s does pay its employees competitively, in line with Target and Walmart, but below Costco. While it has experienced wage increases due to the tight labor market, BJ’s has been able to oﬀset these increased costs in other areas such as full/part-time employee mix and automating some of the in-store labor including self-checkout

Deutsche Bank Securities Inc. Page 27 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

lanes. As a company, it does not feel that it has had any issues retaining talented workers due to wage rates. That said, BJ’s competes with many other retailers and non-retail businesses for qualified help and invests significant resources in training its employees. In order to continue to attract and retain qualified employees, it may ultimately be forced to pay higher wages similar to Costco.

■ Transportation: Transportation costs continue to be a pressure point across all of retail due largely to rising trucking rates as well as increased fuel costs. If transportation costs remain elevated, we expect that BJ’s will be affected in the same way as others. That said, BJ has yet to see much pressure to date which it attributes to sourcing through a consortium and having an efficient distribution network. Additionally, while it has to manage cost inflation, there is an offset as inflation will benefit the sales line.

Above-average leverage

BJ’s exited the initial public oﬀering at 3.7x Net Debt / Adj. EBITDA. If we capitalize the leases at 8x, the Lease-adjusted Net Debt / EBITDAR is 5.3x post IPO. This is an above-average debt load and puts BJ at the higher end of our coverage group (see Figure 23). That said, we expect BJ’s to generate ~$195mm of pro forma FCF in 2018 and $230mm in 2019, which will be used to pay down debt to levels more in line with the coverage universe by the end of 2019. We expect Net debt / Adj. EBITDA, as deﬁned by the company, to be at or below 3x by the end of 2019.

Figure 23: Lease-Adjusted Net Debt to EBITDAR (Capitalized at 8x)

AAP 2.71 3.10 3.24 3.07 3.13 3.71 3.61 AZO 2.49 2.46 2.47 2.45 2.45 2.57 2.43 ORLY 1.96 2.05 1.74 1.51 1.64 2.12 2.23 BBY 2.20 2.07 1.48 1.62 1.14 1.29 1.67 BJ N/A N/A N/A N/A N/A 6.20 5.00 COST 0.81 1.61 1.55 1.63 1.38 1.52 3.61 TGT 2.45 2.00 1.71 1.32 1.82 1.77 2.19 WMT 1.93 2.07 1.84 1.95 1.87 1.92 2.43 HD 1.73 1.81 1.77 1.79 1.72 1.79 1.77 LOW 2.07 2.05 2.27 2.43 2.29 2.29 2.17 BBBY 1.35 1.48 2.11 2.41 2.78 3.29 3.80 WSM 1.47 1.57 1.69 1.79 1.83 2.55 2.72 ODP 4.70 4.69 3.69 3.12 3.11 3.81 3.97 TSCO 1.96 1.88 1.95 2.08 2.09 2.42 2.60 BGFV 4.86 4.03 5.00 5.05 4.58 4.61 4.79 DKS 2.63 2.74 2.75 2.98 2.93 3.26 3.54 HIBB 1.85 2.04 2.11 2.25 2.50 3.21 3.44 RH 1.68 2.02 3.09 2.75 4.60 4.18 2.98 MIK 5.58 5.83 5.02 4.39 4.50 4.41 4.40 PRTY 7.43 7.21 6.79 5.86 5.89 6.16 5.71 ULTA 1.25 1.20 1.05 1.14 1.13 1.19 1.24 Avg 2.65 2.70 2.67 2.58 2.67 3.06 3.16

Source: Company Data, Deutsche Bank

Page 28 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Lock up expiration 180 days post the mid-June S1 ﬁling

We believe that about 70% of BJ’s shares are owned Leonard Green and CVC Capital. Potential stock sales post the lock-up period could act as an overhang to the shares.

Deutsche Bank Securities Inc. Page 29 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club Financial Outlook Shows Comp Improvement, EBITDA and EPS Growth

Adjusted EBITDA has increased by 28% over the last two years, despite several years of comp underperformance, including declines in at least each of the past three years. Now, as initiatives start to take hold, enabling positive comps for three quarters in a row, we expect EBITDA to continue to grow.

A look back at what went wrong and what went right

Why the comp weakness over the past few years? As shown in Figure 24, BJ’s comps, excluding gas, have lagged competitors and industry data over the past few years. Some of this was self-inﬂicted as BJ’s moved away from several low-margin businesses. But, some was simply share loss. Some of the issues include:

■ Economic factors: These include food price deﬂation and changes in electronic beneﬁts transfer programs, which BJ’s estimates hurt 2016 comps by 60 bps and 40 bps, respectively.

■ Discontinuing low margin businesses: Examples include moving away from bulk cigarette sales, DVDs and jewelry and replacing the BJ’s Cafes with Dunkin Donuts franchises through an outsourced model. While these moves were accretive to margins, the impact on comps was 30 to 40 bps in each of the past two years.

■ Increased private label penetration: While private label products typically have 1,000 bps better margins, these items are usually priced 20% below national brands. Thus, each 1% increase in penetration hurts comps by 20 bps.

■ Lack of new club openings: New clubs typically comp in the 10% range in year 1, 8% in year 2 and 6% in year 3. Thus, the lack of openings in 2016 and 2017, compared to six openings in 2015 and six in 2014, hurt comps by about 20 bps a year.

■ Execution issues: Towards the end of 2016 and into early 2017, BJ’s changed out some of the labor model in its fresh area, which we believe led to unintended negative consequences from a lack of training and know-how on how to run these businesses. We believe this showed up in out of stocks and spoilage contributing to the mid-single-digit comp declines in the back half of 2016 and into 2017. While diﬃcult to quantify, BJ’s management believes the impact was 50 bps to 2017 comps.

Page 30 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 24: Comparable Company and Industry Comp Performance 1Q18 GAFO* 1.7% 2.2% 1.6% 0.4% 1.3% 4.0% Grocery** 1.9% 4.4% 2.3% 2.0% 2.2% 4.5%

COST Core U.S ex gas*** 6.0% 5.0% 6.0% 3.0% 3.7% 7.7% Sam's Club ex gas 0.7% 0.5% 0.4% 1.1% 2.0% 3.8%

WMT total (0.4%) 0.5% 1.0% 1.4% 2.1% 2.3% TGT (0.4%) 1.3% 2.1% (0.5%) 1.3% 3.0% 3.6% 5.2% 5.1% 1.0% 0.7% 1.9%

BJ's (ex-fuel) (1.0%) (0.3%) (0.5%) (2.3%) (0.9%) 2.0%

*Based on U.S. Census retail sales GAFO - sales through furniture and home furnishings, electronics & appliances, clothing & accessories, sportings goods & hobby/books/music, general merchandise, and office supply/stationary/gift stores. (NAICS codes 442, 443, 448, 451, 452, 4532)

**Based on U.S. Census retail sales "NAICS code 4451- sales through grocery stores" *** Based on fiscal calendar so 1Q18 matches up with COST FY18 Q3.

Source: US Census Bureau, Company Data, Deutsche Bank

Putting all these together, as shown in Figure 25, the total impact to 2016 and 2017 comps, excluding gas, was about 130 bps to 170 bps. Without these issues, comps over the past two years would have been closer to ﬂat compared to the reported down 1% to down 2%.

Figure 25: BJ's Comparable Store Sales Bridge ($mm)

FY16 FY17

0.0% 0.6%

-0.5% -0.3% 0.4% -0.2% -0.2% -0.6% -1.0% -0.4% 0.2% -0.9% -1.5% -0.6% 0.0% -0.4% 0.4% -2.0% Total negative impacts = 170 bps -0.2% -0.5% -0.2% -2.5% -2.3% -0.4% -0.2% -0.6% Total negative impacts = 130 bps

-0.8%

-1.0% FY17 Fresh Private label Lack of new Discounted FY17 execution clubs business adjusted

Source: Company Data, Deutsche Bank

Despite the negative comps over the past 3+ years, we are starting to see some improvement, including a run of three straight quarterly increases. Some of this is due to easier comparisons, but two-year stacked comps have been trending upwards as well. We believe the improvements are due in part to moving past some of the issues that hurt BJ’s comps in 2016 and early 2017. But, we also believe that some of the initiatives described throughout this report are starting to gain some traction, which as we outline below, should continue to drive positive comps, in our view (see Figure 26).

Deutsche Bank Securities Inc. Page 31 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 26: BJ's Comp Trends 1Q 2Q 3Q 4Q One year comps 2016 0.5% -1.7% -3.9% -3.6% 2017 -4.5% -0.9% 0.4% 1.2% 2018 2.0% 1.3% E 1.5% E 1.8% E 2019 2.0% E 2.0% E 2.0% E 2.0% E Two year stacked comps 2017 -4.0% -2.6% -3.5% -2.4% 2018 -2.5% 0.4% E 1.9% E 3.0% E 2019 4.0% E 3.3% E 3.5% E 3.8% E

Our estimates show that comps have been accelerating over the past few quarters on both a one year and two year basis, and that this should continue through 2019

Source: Company Data, Deutsche Bank

EBITDA up $113mm or 28% since 2015 despite the negative comps As noted, much of BJ’s comp declines over the last few years were due to company decisions to forego low-margin sales to benefit profits. Thus, despite weak sales, adjusted EBITDA has increased from $406mm in 2015 to $519mm in 2017 excluding $15mm in EBITDA in 2017 from the 53rd week. The timing of these improvements coincides, unsurprisingly, with the hiring of Chris Baldwin as CEO and much of the EBITDA improvement comes from efforts he led to lower product procurement costs through his “category profitability improvement” (CPI) initiative. We believe this benefited profits by over $200mm in the last two years. Factors driving EBITDA changes, both positive and negative include:

Positives

■ CPI – We think this has been the biggest proﬁt driver since 2015 at $214mm over the last two years

■ Sales from new clubs – Despite limited openings in 2016 and 2017, BJ’s proﬁts have beneﬁted from the 12 new openings in 2014 and 2015, by about $35mm.

■ MFI increases – Membership fee income in 2017 was $258mm, up $11mm from $247mm in 2015

Drags

■ Negative comps – This has largely offset the benefit of new club openings, hurting profits by $31mm

■ SG&A increases – The impact of costs associate with new clubs along with some productivity initiatives nets to a $26mm drag over the past two years

■ Investments for sales improving initiatives – These include investment in advertising, omnichannel and employee bonuses, and a one-time cost

Page 32 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

associated with chip and pin compliance for credit cards, among other costs. These lowered EBITDA by about $90mm over the past two years

In total, adjusted EBITDA margin, using net sales before MFI as the denominator, increased from 3.3% in 2015 to 3.8% in 2016 and 4.2% in 2017, excluding the extra week, or 4.3% including the extra week. This is in line with COST’s 4.3% EBITDA /net sales ratio in FY17 (see the Appendix at the end of the report for full comparisons).

Figure 27: BJ's EBITDA Bridge 2015-2017 ($mm) FY15-FY16 FY16-FY17 -$41 $600 $111 -$30 $600 $103 -$38 - $519 $500 -$10 $457 $457 -$16 $406 -$15 $500 $400 $400

$300 $300 $200 Excludes $15mm in EBITDA from the extra week-> $200 $100 $100 $0 $0

Source: Company Data, Deutsche Bank

Figure 28: Total Impact to BJ's EBITDA ($mm) 2 yr total Merchandise sales-comp ($15) ($15) ($30) Merchandise sales-new club $25 $10 MFI impact $8 $3 CPI savings $111 $103 SG&A increase ($30) $4 ($26) Investments ($38) ($41) ($79) Other ($10) ($1) ($11) Total

"CPI" or better buying has been the biggest driver of EBITDA improvement

Source: Company Data, Deutsche Bank

A look ahead to what we expect

Note that our full ﬁnancial models are shown in the appendix at the end of this report.

2Q18 comps should show a strong stacked acceleration BJ’s 13-week 2Q18 ends on 8/4/18 and compares to the 13 weeks ending 7/30/17. BJ’s will report 2Q comps on a “shifted” basis, meaning that for comps, the company will compare the 13 weeks ending 8/4/18 with the thirteen weeks ending 8/5/17. Our modeling assumptions include:

■ Comps should be positive for the 4th quarter in a row – We are modeling comps, excluding gas, to increase 1.3%. While this would be a slowdown from 2.0% in 1Q18, it does comp against a 360 bps more diﬃcult comparison. On a two-year stacked basis, our estimate yields a 0.4%

Deutsche Bank Securities Inc. Page 33 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

increase, nearly 300 bps better than last quarter and the best in over a year. Net sales before MFI and gas should grow a similar amount based on 215 clubs, the same as a year ago. But, including the beneﬁts of higher gas sales, we expect a 4% increase in net sales to $3,231mm (see our gas model discussion later in this report).

■ MFI benefiting from fee increase – We are modeling $70.0mm in MFI, up 9.1% from $64.2mm a year ago due to the fee increase taken in January 2018. This is similar to the 7% increase seen in 1Q18. This yields total sales of $3,301mm, up just over 4%.

■ Operating income up due to MFI increases – Our total operating income estimate for 2Q18 is $94.0mm, up 4.7% and equivalent to a 2.85% margin using total revenues, including MFI as the denominator. This is up 2 bps year over year. Excluding MFI, we model operating profit of $24.0mm, or 0.74% of net sales, down slightly from $25.6mm or 0.82% of net sales, primarily due to higher SG&A from investments. Note that we are excluding the impact of strategy consulting of $4mm, compensatory payments related to options of $36mm and management fees of $2mm. Our gross margin forecast is 15.78%, up 2 bps, excluding MFI. This estimate includes higher merchandise profit margins of 75 bps, offset by the negative impact of gas sales to mix.

■ Adjusted EBITDA also increasing – We are modeling 2Q18 adjusted EBITDA at $138.8mm, which includes the $94.0mm EBIT estimate, plus $41.6mm in D&A as well as adding back $1mm in stock-based compensation, $1mm in preopening expense and $1.2mm in non-cash rent. If we included these costs in our estimate, EBITDA would be $135.6mm. Our adjusted EBITDA estimate is up 2.2% year over year and equal to 4.29% of net sales and 4.20% of total revenues, down 9 bps y/ y in each case, with the decline due to mix associated with gas sales. Of the $138.8mm in adjusted EBITDA that we are estimating for 2Q18, 50.5% comes from MFI. EBITDA margin trends were better in 1Q18 on a year-over-year basis as BJ’s was cycling a particularly weak comp and margin performance from 1Q17 associated with the missteps in the fresh business.

■ Pro forma EPS of $0.30 – We are using a pro forma interest expense of $35mm, which assumes that the IPO had taken place on day 1 of the year. This compares to our estimate of an actual calculated interest of $47mm based on the July 2 IPO close. The interest expense is primarily due to BJ’s “First Lien Term Debt”, which has an interest rate of LIBOR + 3.50%, which we assume would equate to just under 5.75%. We are also using 139.8mm in weighted average shares outstanding, also based on the assumption that the IPO happened on day 1 of the year and including the exercise of the underwriters’ option of 5.625mm shares. Our tax rate assumption is 28%. The impact of assuming the IPO took place on day 1 of the year is to add $0.07 to our forecast due to the lower interest expense, oﬀsetting the higher share count.

■ Balance sheet post IPO – Again, using the convention that assumes the IPO took place on day 1 of the year, 1Q18 ending debt would be $2,058mm, including $251mm in current portion and $2,028mm in net debt, including $30mm in cash. This is down from $2,677mm in net debt at the end of 2017 due to the use of IPO proceeds. We estimate a similar net debt of $1,964mm at the end of 2Q18 due to a $65mm increase

Page 34 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

in cash during the quarter, with the majority of the debt made up of the First Lien Term Debt at LIBOR + 3.50%. On a LTM basis, this debt level equates to 3.7x leverage at the end of 1Q18, based on net debt to adjusted EBITDA, and 3.6x at the end of 2Q18. Capitalizing operating leases at 8x, leverage would be 5.3x at the end of 1Q18 and 5.2x at the end of 2Q18 on a lease-adjusted net debt to EBITDAR calculation.

Figure 29: BJ's Debt and Leverage $mm 1Q18 2Q18E 3Q18E 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E Cash $30 $95 $88 $101 $73 $104 $106 $124 LTD (LIBOR + 3.5%) $5,442 $5,420 $5,469 $5,280 $5,146 $5,049 $5,094 $4,903 Net Debt $5,412 $5,325 $5,382 $5,178 $5,073 $4,945 $4,989 $4,779 Net Debt to EBITDA 3.7x 3.6x 3.5x 3.4x 3.3x 3.1x 2.9x 2.7x Adjusted Net Debt to EBITDAR* 5.3x 5.2x 5.1x 5.0x 4.9x 4.8x 4.7x 4.6x

*Based on LTM EBITDA and EBITDAR, capitalizing operating leases at 8x

Source: Company Data, Deutsche Bank

Still more EBITDA growth to go in 2018 and 2019 After increasing adjusted EBITDA by $113mm in 2016 and 2017, excluding the extra week in 2017, we look for another $73mm increase over the next two years driven by primarily by sales, MFI and merchandise margins.

■ Steady low single-digit comps – We are modeling comparable store sales increases of 1.6% in 2018, which would be the ﬁrst positive comp year in at least three, and 2.0% in 2019, both excluding the impact of gas. Our estimates for 2018 build throughout the year, even as comparisons become more diﬃcult.

■ A return to square-footage growth – We are assuming one new club in 2018 to open in 3Q18, and another four news clubs in 2019. This equates to just over 1% growth in average club count in 2019, which we assume will open at about 75% productivity.

■ MFI fee increase benefits continue – Our MFI estimate for 2018 is $283.8mm, up 9.9% y/y from $258.3mm in 2017. For 2019, our estimate is $306.1mm, up another 7.9%. We believe that underlying MFI growth would be in the low-single-digit range, with the incremental growth coming from the 10% increase to the annual fee taken in January 2018. This ﬂows through the P&L over 24 months due to timing of when memberships come up for renewal and the accounting associated with the revenue recognition of the increase. MFI increased by an average of 2.0% from 2014 through 2017.

■ BJ's does not report membership numbers except revealing that it currently has about ﬁve million paid memberships. Despite the lack of disclosure, we attempt to model membership numbers (see our membership model discussion later in this report). From that analysis we estimate a 6.2% increase in membership in 2018 and a 4.4% increase in 2019, getting to just over 5.5mm paid members by that year. This contributes to the $48mm MFI we model from 2017 through 2019.

■ Sales growth accelerating with and without gas and MFI - Including comps and square-footage growth, our model works out to $10,955mm and $11,275mm in core merchandise sales in 2018 and 2019, up 1.9% on a 52/52 week basis and 2.9%, respectively. Adding in our estimate of the impact of gas sales, we model net sales of $12,690mm, up 3.5% for 2018 on a 52/52 week basis and $13,116mm, up 3.4% for 2019. Including MFI

Deutsche Bank Securities Inc. Page 35 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

increases, our model shows total revenues of $12,974mm in 2018, up 3.7% on a 52/52 basis and $13,422mm in 2019, up 3.5% (see Figure 30).

Figure 30: BJ's Sales Building Blocks Model

$mm Stores Beginning 214 215 216 New 1 1 4 Ending 215 216 220

Average store count 215 216 218 Growth in average store count 0.5% 1.2% New store productivity 75.0% 75.0% Sales growth from new stores 0.3% 0.9%

Comps, ex. gas 1.6% 2.0%

Merchandise sales (ex gas) $10,748 $10,955 $11,275 Merchandise sales (ex gas) growth 1.92% 2.9% + Gas sales $1,508 $1,735 $1,841 Gas sales growth 15.0% 6.1% = Net Sales $12,257 $12,690 $13,116 Net sales growth 3.5% 3.4%

+ MFI $258 $284 $306 MFI growth 9.9% 7.9%

+ Total Revenue $12,515 $12,974 $13,422 Tota revenue growth 3.7% 3.5%

Source: Company Data, Deutsche Bank

■ Profits benefiting from merchandise margin improvements - Our adjusted operating proﬁt estimates for 2018 and 2019 are $93.3mm and $98.5mm, respectively, excluding MFI and $377.1mm and $404.5mm with the MFI. These calculate to 19% growth in 2018 on a 52/52 week basis and 5% growth in 2019 excluding MFI and 12% and 7% growth including MFI. On a rate basis, excluding MFI and against net sales, we model an operating margin of 0.74% in 2018 and 0.75% in 2019, compared to 0.64% in 2017, excluding the extra week. Including MFI, our margin model against total revenues is 2.91% in 2018 and 3.01% in 2019, compared to 2.69% in 2017 excluding the extra week. These forecasts reﬂect merchandise gross margin gains of 66 bps and 8 bps in 2018 and 2019 from CPI, private label and other initiatives, but total gross margin changes of 16 bps and 1 bp due to the negative mix towards lower margin gas sales (again, see our gas model discussion later in this report).

■ Our SG&A ratio assumption goes from 13.87% in 2017 to 13.99% and 13.95% in 2018 and 2019, using net sales as the denominator. The slight decline in 2019 is due to deleverage from new clubs as well as continued investments. We assume a 4% increase in SG&A per club in 2018, followed by 2% in 2019.

Page 36 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

■ Our D&A assumption is relatively ﬂat at $162mm to $164mm per year, enabling some leverage to 1.28% of net sales in 2018 and 1.24% in 2019, versus 1.34% in 2017.

■ Note that we are excluding the impact of strategy consulting of $23.8mm in 2018 and $10.7mm in 2019, compensatory payments related to options of $36mm from 2Q18, and management fees of $4mm in 2018, and we exclude the extra week from 2017.

■ Adjusted EBITDA continuing to ramp - We are modeling 2018 adjusted EBITDA at $553.9mm, which includes the $377.1mm EBIT estimate, plus $162.5mm in D&A, as well as adding back $6.7mm in stock-based compensation, $3.3mm in preopening expense and $4.2mm in non-cash rent. If we included these $14.2mm in costs in our estimate, EBITDA would be $539.6mm. Our adjusted EBITDA estimate is up 6.7% year over year, excluding the extra week in 2017 and equal to 4.36% of net sales and 4.27% of total revenues, up 13 bps and 12 bps. Of the $554.0mm in adjusted EBITDA that we are estimating for 2018, 51.2% comes from MFI.

■ For 2019, we are modeling adjusted EBITDA at $591.8mm, which includes the $404.5mm EBIT estimate, plus $162.5mm in D&A, as well as adding back $9.5mm in stock-based compensation, $12.0mm in preopening expense and $3.2mm in non-cash rent. If we included these $24.7mm in costs in our estimate, EBITDA would be $567.0mm. Our adjusted EBITDA estimate is up 6.8% year over year and equal to 4.51% of net sales and 4.41% of total revenues, up 15 bps and 14 bps. Of the $591.8mm in adjusted EBITDA that we are estimating for 2019, 51.7% comes from MFI (see Figure 31).

Deutsche Bank Securities Inc. Page 37 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 31: BJ's EBITDA Analysis

$mm, 2017 reflects 52 weeks

EBIT including MFI $337 $377 $405 Exclusions from EBIT Strategic consulting $37 $24 $11 Compensatory payment $78 $36 $0 Management fees $8 $4 $0 Total exclusions from EBIT $123 $64 $11

D&A $164 $163 $162 EBITDA $501 $540 $567 Addbacks to EBITDA Stock based compensation $9 $7 $10 Pre opening expense $3 $3 $12 Non cash rent $5 $4 $3 Total add backs to EBITDA $17 $14 $25 Adjusted EBITDA

Y/Y growth in EBITDA 7.7% 5.1% Y/Y growth in adjusted EBITDA 6.9% 6.8%

Adjusted EBITDA as a percent of net sales 4.23% 4.36% 4.51% y/y change in bps 14 15 Adjusted EBITDA as a percent of total revenues 4.14% 4.27% 4.41% y/y change in bps 13 14 % of adjusted EBITDA from MFI 49.8% 51.2% 51.7%

Source: Company Data, Deutsche Bank

■ Pro forma EPS growing – For our 2018 EPS estimate, we are making the assumption that the IPO took place on day 1 of the year. This leads to a full-year pro forma interest expense assumption of $141mm for 2018 and $129mm for 2019 (actual 2018 interest would be about $20mm higher based on the actual July 2 IPO close). The pro forma assumptions include our estimate that IPO proceeds were used to pay down debt. We also assume that BJ’s pays down an additional $50mm in debt per quarter in 2H18 and 2019 from ongoing free cash ﬂow generation. The interest expense estimates are based on a high 6% interest rate on BJ’s LIBOR + 3.50% debt, implying LIBOR in the 3% range.

■ We are using 139.8mm in weighted average shares outstanding in 2018 and 141.0mm in 2019, also based on the assumption that the IPO happened on day 1 of the year and including the exercise of the underwriters’ option of 5.625mm shares. Our tax-rate assumption is 28%. These assumptions lead to our 2018 EPS estimate of $1.22 and our 2019 EPS estimate of $1.41, up 15% y/y.

■ Free cash flow generation leads to additional deleverage – Based on our pro forma 2018 and 2019 net income estimates of $154mm and $198mm, our D&A assumptions of $163mm each year and assuming working capital beneﬁts of about $20-30mm each year, we model cash ﬂow from operations of $358mm in 2018 (pro forma) and $393mm in 2019. We are modeling $164mm in 2018 capital expenditures and $161mm in 2019 capital expenditures, 40% for maintenance on existing stores and 35% for technology-related investments and 25% for new

Page 38 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

stores. These lead to pro forma free cash ﬂow of $194mm in 2018 and $232mm in 2019. We estimate that BJ’s will pay down about $50mm in debt per quarter, ending 2018 with net debt of $1,857mm and 2019 with net debt of $1,625mm, compared to $2,677mm at the end of 2017. This equates to leverage of 3.4x and 2.7x at the end of 2018 and 2019, respectively, not including operating leases. Capitalizing operating leases at 8x yields year-ending adjusted net debt to EBITDAR leverage ratios of 5.0x and 4.6x.

Long-term earnings algorithm shows solid EBITDA and above-average EPS growth

Looking beyond 2018 and 2019, we model quarterly through 2022. Using 2017 as the base year, and adjusting out the extra week in 2017, our assumptions calculate to long-term growth outlooks as follows:

■ A ﬁve-year merchandise sales excluding a gas CAGR of 3.0% on average comps of 1.9% excluding gas, average new store growth of 1.5% and new store productivity of 75%.

■ A ﬁve-year net sales CAGR of 3.5%, including the impact of gas sales growth.

■ A five-year MFI CAGR of 5.6%, including about average in 2018 and 2019 and about 3% annually in 2020-2022, driven by initiatives to increase new memberships, upgrade the mix of memberships and improve renewal rates. We’d expect another rate increase after this five-year period. On average, we model annual MFI dollars to be $317mm over the next five years.

■ An increase in total members of 4.0%, equal to a 2.6% increase in members per club. The MFI outpaces the membership numbers due to the January 2018 fee increase as well as initiatives to upgrade members to higher tier memberships.

■ A ﬁve-year total revenue CAGR of 3.5%.

■ A ﬁve-year operating income CAGR excluding MFI of 17.6%.

■ A ﬁve-year operating income CAGR, including MFI of 8.9%. On average, MFI accounts for 72% of annual operating income, with increases in MFI accounting for half of the cumulative EBIT growth over the next ﬁve years.

■ Operating margins excluding MFI and against net sales growing to 1.21% by 2022 from 0.64% in 2017, or up 10 bps on average annually. We estimate 35 bps of the 57 bps increase will come on the gross margin line, which includes 103 bps on the merchandise margin line, oﬀset by mix from higher gas sales. We estimate that SG&A as a percent of net sales will go to 13.79% by 2022 compared to 13.87% in 2017, with the rest of the margin gain coming from lower D&A, which was 1.34% of net revenues in 2017 and we estimate will be 1.13% in 2022.

■ Operating margins including MFI and against total revenues growing to 3.47% by 2022 from 2.69% in 2017, or up 15 bps on average annually.

■ A ﬁve-year adjusted EBITDA CAGR of 6.3% annually. On average, MFI accounts for 50% of annual adjusted EBITDA, with increases in MFI

Deutsche Bank Securities Inc. Page 39 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

accounting for 44% of the cumulative adjusted EBITDA growth over the next ﬁve years.

■ Adjusted EBITDA margin against net sales of 4.85% in 2022 from 4.23% in 2017, or up 12 bps annually. Against total revenues, our adjusted EBITDA margin goes to 4.74% in 2022 from 4.15% in 2017 or up 11 bps annually.

■ A ﬁve-year pretax income CAGR of 23.7% annually, or a four-year CAGR of 15.2% using 2018 as the base year, which adjusts out the abnormal decline in interest expense in 2017 due to the July 2018 IPO. Our pro forma estimates assume the IPO occurred on day 1 of 2018.

■ A ﬁve-year EPS CAGR of 26.8%, or a four-year CAGR of 14.8% using 2018 as the base year, which adjusts out the abnormal decline in interest expense in 2017 due to the July 2018 IPO, as well as the 2018 tax rate reduction and increase in share count due to the IPO. Our pro forma estimates assume the IPO occurred on day 1 of 2018.

Figure 32: BJ's Long-Term Growth Algorithm

$mm except per share CAGRs 2017-2022E 2018E-2022E Merchandise sales $10,748 $10,955 $11,275 $11,656 $12,047 $12,447 3.0% 3.2% Gas sales $1,508 $1,735 $1,841 $1,925 $2,011 $2,099 6.8% 4.9% Net sales $12,257 $12,690 $13,116 $13,581 $14,058 $14,546 3.5% 3.5% MFI $259 $284 $306 $318 $329 $339 5.6% 4.6% Total revenues $12,515 $12,974 $13,422 $13,899 $14,387 $14,886 3.5% 3.5%

Store count 215 216 220 224 228 232 1.5% 1.8% Members (000) 5,000 5,311 5,544 5,734 5,924 6,090 4.0% 3.5% Comps, ex. gas -0.9% 1.6% 2.0% 2.0% 2.0% 2.0% 1.9% 2.0%

EBIT ex. MFI $78 $93 $98 $120 $147 $176 17.7% 17.3% EBIT $337 $377 $405 $437 $476 $516 8.9% 8.1%

D&A $164 $163 $162 $164 $164 $164 0.0% 0.2% Adjusted EBITDA $519 $554 $592 $627 $665 $705 6.3% 6.2% EBITDA before adjustments $501 $540 $567 $601 $640 $680 6.3% 5.9%

Average annual margin change (bps) 2017-2022E 2018E-2022E Operating margin ex MFI* 0.64% 0.74% 0.75% 0.88% 1.04% 1.21% 12 12 Operating margin including MFI** 2.69% 2.91% 3.01% 3.15% 3.31% 3.47% 15 14 Operating margin (comparable)*** 2.75% 2.97% 3.08% 3.22% 3.39% 3.55% 16 14

Adjusted EBITDA margin ex MFI 2.12% 2.13% 2.18% 2.28% 2.39% 2.51% 8 10 Adjusted EBITDA margin including MFI** 4.15% 4.27% 4.41% 4.51% 4.62% 4.74% 12 12 Adjusted EBITDA margin (comparable)*** 4.23% 4.36% 4.51% 4.61% 4.73% 4.85% 12 12

CAGRs 2017-2022E 2018E-2022E Interest expense $193 $141 $129 $116 $106 $100 -12.4% -8.2% Pre tax income $143 $236 $275 $321 $370 $416 23.7% 15.2%

$0.64 $1.22 $1.41 $1.63 $1.88 $2.11 26.8% 14.8%

*As a percent of net sales; **As a precent of total revenues ***We also show margins using profits with MFI against net sales as others in the industry calculate margin in that way We see BJ's as a LSD top line story, with mid single 2017 data excludes the extra week digit profit growth and low double digit EPS growth 2018 data is pro forma assuming the IPO took place day 1 of the year within our interest and share count estimates

Source: Company Data, Deutsche Bank

Page 40 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Over the next ﬁve years, we also model the following cash ﬂow and balance sheet assumptions:

■ Average annual depreciation of $163mm and capex of $164mm.

■ Working capital to be a source of cash of $26mm on average annually.

■ Average cash from operations of $430mm. As noted above, we model average annual MFI of $317mm, meaning that 75% of our annual cash ﬂow from operations forecast comes from MFI.

■ Average free cash ﬂow of $266mm deﬁned as cash from operations less capital expenditures.

■ Average debt pay down of just under $160mm excluding IPO proceeds, lowering leverage by about 0.5x to 0.6x a year.

■ This will lead net debt to EBITDA leverage to fall to 1.0x by 2022. Including capitalizing operating leases at 8x, leverage will fall to 3.3x by 2022, which is about in line with the current broadline / hardline average.

■ Return on invested capital, calculated on trailing 12 month net income divided by the average of beginning and ending debt plus equity of 12.5% in 2018, growing to 14.9% by 2022

A quick look at sensitivity, both positive and negative

We believe our model, both in the near and long term is quite achievable and may even prove conservative on the comp line where our estimates still point to only modest growth. Thus, we take a look at the impact of additional comp points, as well as the impact of margin beats / misses and potential changes in membership renewal rates. We use 2019 as the base of our sensitivity analysis as that is the year on which we model our valuation work. Also, using 2019 allows a better annualized look at sensitivity as we are nearly half way through 2018. Each 1% comp beat/miss impacts 2019 EPS by $0.06: Each 1% additional ex gas comp relative to our 2019 forecast of 2.0% would drive $113mm in additional sales. If we assume an average gross margin of 18.0%, which we believe is BJ’s gross margin on non-gas sales, and that 40% of BJ’s 14.0% SG&A costs are fixed, then the additional $113mm in sales would flow through at 10% margins. This compares to a typical margin of 4%, excluding gas sales and D&A from the cost structure. An additional $11mm in operating profit dollars would add $0.056 to our 2019 EPS estimate of $1.41 or 4%. Each 10 bps of margin upside / downside impacts 2019 EPS by $0.07 If EBITDA margins were 4.61% in 2019 instead of our estimate of 4.51% against net sales, this would add $13mm to profits on a net sales forecast of $13,116mm including gas. This adds $0.066 to our 2019 EPS estimate of $1.41 or 6%. Each 1% upside / downside to membership renewal estimates impacts 2019 EPS by $0.02 We are assuming 2019 membership at 5.5mm, or up 4.4% versus 5.3mm in 2018. This is in part based on an 86.0% renewal rate in 2018 and an 87.0% renewal rate in 2019. A 1% beat in renewal rates would add 50,000 to membership. If these new members renew at an average of about $60, based on about 10% renewing at the higher priced $110 membership that would contribute about $3m to MFI, adding $0.015 to our 2019 EPS estimate of $1.41 or 1%.

Deutsche Bank Securities Inc. Page 41 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club Initiating with a Buy rating and a $30 price target

We are initiating coverage of BJ with a Buy rating and $30 valuation, based on 10x our 2019 adjusted EBITDA estimate.

Current valuation reﬂects big move post IPO

BJ initially priced at the high end of its proposed $15 to $17 IPO range, and opened on June 28th at $22 a share. Since then, the stock has continued to move higher to $25.70, up another 17%, for a total appreciation of 51% from the initial $17 price. Using our 1Q18 pro forma balance sheet, which assumes that the roughly $650mm raised through the IPO, including the 15% overallotment and excluding fees, was used to pay down debt, the current price calculates to an EV to adjusted EBITDA valuation of 9.8x and 9.2x on our 2018 and 2019 adjusted EBITDA estimates of $554mm and $592mm. This includes pro forma net debt of $1,857mm at the end of 2018 and pro forma shares outstanding of 139.8mm. On a P/E basis, the current price calculates to 21.1x our 2018 pro forma estimate of $1.22 and 18.3x our 2019 pro forma estimate of $1.41. These estimates assume that the IPO had taken place at the beginning of the year for purposes of estimated interest expense and share count (see Figure 33).

Figure 33: BJ's Valuation

$mm except per share amounts LT EPS Net Shares Adjusted EBITDA growth* debt* outstanding**

$554 $592 $1.22 $1.41 15% $1,857 140

EV / Adjusted EBITDA P/E to growth

Current price $25.70 9.8x 9.2x 21.1x 18.3x 143% 124%

Target price 10.9x 10.2x 24.6x 21.3x 167% 145%

Recent price performance

Stock price Stock price change from: Current $25.70 Initial IPO $17.00 51% Opening $22.00 17%

*Based on year end 2018 proforma as if IPO had taken place first day of the year **Based on growth from 2018 through 2022, with 2018 assuming IPO had taken place first day of the year for interest expense and share count (share count in mm)

Source: Company Data, Deutsche Bank

Our thoughts on the most relevant peer group

For our peer group valuation comparison, we have settled on a relatively narrow group of retailers, focusing on those with an emphasis on value-based merchandising, skewing towards grocery and consumables as this is how we see BJ’s go-to-market strategy. Thus, we have included COST, DG, DLTR, KR, TGT and WMT in our peer group. None are perfect comparables. COST is showing far better operating metrics than BJ’s is currently and has a valuation that tops almost all retailers regardless of the sector. But, given the similarities of their club business model, we felt Costco needed to be included. The dollar stores

Page 42 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club have much greater square footage growth than BJ’s and Dollar General targets a different customer while Dollar Tree’s mix is different. But, the focus on value and basic, consumable products make them appropriate peers, in our view. Similarly, Target and Walmart’s increasing focus on grocery justify those retailers as comparables, in our opinion, as does WMT’s Sam’s division, although this makes up just 7% of WMT’s operating profit. Lastly, we think Kroger makes sense due to their similar growth profile and grocery focus, although we’d say that the consistency of the club business, due to the MFI stability, makes for a better, and therefore more valuable business model.

Accepting these as the peers, Figure 34 shows that this group currently trades at 10.1x 2018E and 9.6x 2019E on an EV/EBITDA basis, using consensus forecasts. Historically, over the past 5 and 10 years, this group has traded at 9.1x and 8.3x next-12-month consensus estimates. On a P/E basis, this group is trading at 18.2x and 16.8x on consensus 2018 and 2019 estimates. Historically, the multiples have averaged 18.1x and 16.6x over the past 5 and 10 years, valued against next-12- month consensus estimates.

As a point of reference, a broader group of 38 retailers across many sectors is trading at 9.9x and 9.2x 2018 and 2019 EV to EBITDA and 18.3x and 16.4x 2018 and 2019 P/E, all using consensus estimates. Historically, retail has traded at 8.5x and 7.6x next-12-month consensus estimates over the past 5 and 10 years on EV to EBITDA valuation and 18.3x and 16.4x on P/Es.

Looking at our broadline/hardline coverage universe only, the EV/EBITDA metrics are 9.2x and 8.7x and P/Es are 15.9x and 14.6x on consensus 2018 and 2019 estimates. Historical multiples are 8.9x and 8.1x over the past 5 and 10 years on EV to EBITDA and 18.4x and 17.3x over the past 5 and 10 years on P/E using consensus next-12-month estimates.

Deutsche Bank Securities Inc. Page 43 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 34: BJ's Peer Group Valuation

Peer Group DB Broadlines/ Overall S&P Hardlines Coverage* Retailing** 500

COST DLTR TGT WMT Average

EV to EBITDA multiples

2018 15.7x 11.1x 9.9x 6.5x 7.9x 9.2x 10.1x 9.2x 9.9x NM 2019 14.7x 10.4x 9.1x 6.4x 7.8x 9.1x 9.6x 8.8x 9.2x NM

NTM 14.9x 10.7x 9.5x 6.5x 7.9x 9.1x 9.8x 9.1x 9.6x NM NTM (5-year average) 12.4x 9.7x 9.9x 6.9x 7.4x 8.3x 9.1x 8.9x 8.5x NM NTM (10-year average) 10.5x 9.2x 8.8x 6.0x 7.4x 7.8x 8.3x 8.1x 7.6x NM

P/E Multiples

2018 30.9x 16.4x 15.6x 13.3x 14.6x 18.3x 18.2x 15.9x 18.3x 17.5x 2019 27.9x 14.8x 13.9x 12.5x 14.1x 17.7x 16.8x 14.6x 16.4x 16.0x

NTM 29.0x 16.0x 15.2x 13.1x 14.7x 18.1x 17.7x 15.6x 18.1x 16.6x NTM (5-year average) 26.2x 16.9x 19.2x 15.0x 15.0x 16.1x 18.1x 18.4x 18.3x 15.8x NTM (10-year average) 23.3x 16.4x 17.5x 13.2x 14.2x 14.8x 16.6x 17.3x 16.4x 14.4x Our primary price target valuation is based on the peer average 2019 EV/EBITDA mulltiple

LT consensus EPS growth rate 11.8% 15.1% 13.5% 6.5% 8.8% 9.5% 10.9% <-We model a long term EPS growth rate of 14.8% for BJ's, above the peer average and higher than all except DG

All data based on Factset consensus estimates and downloads * Broadlines / Hardlines coverage includes AAP, AZO, ORLY, BBY, HD, LOW, RH, WSM, BBBY, ODP, DKS, BGFV, HIBB, ULTA, MIK, PRTY, TSCO, COST, TGT, WMT **Includes our Broadlines / Hardlines coverage universe along with AEO, ANF, BURL, DG, DLTR, FL, FND, GPS, HOME, JCP, JWN, KSS, L, M, ROST, TIF, TJX, URBN For historical averages, we exclude names that were not public or had non-meaningful multiples for a period of time during the historical date range

Source: Company Data, Deutsche Bank

Price target derivation based on 10x multiple

Our target price of $30 suggests 17% upside from the current price of $25.70, justifying a Buy rating. We use EV to adjusted EBITDA as our primary valuation metric and derive our $30 target based on a 10x target EV to adjusted EBITDA multiple against our 2019 adjusted EBITDA estimate of $592mm. This uses our pro forma 2018 ending balance sheet, which shows net debt of $1,857mm and our pro forma 1Q18 share count of 139.8mm. The 10x target is a slight premium to the peer average of 9.6x against consensus 2019 forecasts, with the premium justiﬁed by BJ's faster EPS growth rate, in our view.

On a P/E basis, the target implies 24.6x and 21.3x our 2018 and 2019 EPS forecasts. This is a bit of a higher valuation than the peer averages of 18.2x and 16.8x, but we think this is justiﬁed by BJ’s solid EPS CAGR of 15% on our long- term model. This compares to a peer average of 11% with a range of 7-15%.

Valuation sensitivity analysis shows 37% to the upside, 17% to the downside

As noted earlier in this report, each 1% beat in comps or 10 bps beat in operating margins would add about $12mm to EBITDA and $0.06 to EPS relative to our 2019 EPS estimate. A 1% improvement in membership renewal rates relative to our estimate would add about $3mm in EBITDA and $0.02 to EPS. We use these metrics to show bull and bear case potential for the stock:

■ Bull case of $35 – if we assume that BJ’s outperforms on each metric, by 2% on comps relative to our 2% estimate, by 20 bps on margin expansion

Page 44 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

relative to our 15 bps forecast, and by 2% on renewal rates relative to our 86% estimate, then 2019 adjusted EBITDA would be closer to $646mm and EPS would be closer to $1.69 versus our estimates of $592mm and $1.41. Under this beat and raise scenario, we think BJ’s would be assigned a higher target multiple of perhaps 10.5x 2019 EV to adjusted EBITDA. This would translate into a bull case stock price of $35, equal to a 21x P/E against our $1.69 upside case and up 37% versus the current stock price.

■ Bear case of $21 – if we assume that BJ’s underperforms on each metric, by 2% on comps relative to our 2% estimate, by 20 bps on margin expansion relative to our 15 bps forecast, and by 2% on renewal rates relative to our 86% estimate, then 2019 adjusted EBITDA would be closer to $538mm and EPS would be closer to $1.13 versus our current estimates of $592mm and $1.41. Under this scenario, we think BJ’s would be assigned a lower target multiple of 9x 2019 EV to adjusted EBITDA. This would translate into a bull case stock price of $21, equal to a 19x P/E against our $1.13 downside case and down 17% versus the current stock price.

Figure 35: BJ's Sensitivity Analysis

A 1% delta in comps and renewal rates along with each 10 bps difference in margins relative to our base case estimates would impact EBITDA by $27mm and EPS by $0.14. Our bull case assumes a 2% / 20 bps beat, while our bear case assumes the opposit

2019 Adjusted Target EV/ Implied 2019 Implied Current Implied upside/ EBITDA ($mm) EBITDA Multiple Price EPS P/E price (downside)

Base case $592 10.2x $30 $1.41 21.3x $25.70 17% Bull case $646 10.5x $35 $1.69 20.9x $25.70 37% Bear case $538 9.0x $21 $1.13 18.9x $25.70 -17%

Source: Company Data, Deutsche Bank

We see several risks to BJ achieving our target price, as noted in more detail earlier in this report. These include:

■ Comps have underperformed Costco and others

■ tougher compares ahead

■ Potential margin pressures

■ Above average leverage

■ Potential stock sales post 180 lock up period

DCF valuation alternative

We further support our $30 price target through a discounted cash flow analysis of BJ’s MFI cash flow stream. We believe the consistency of BJ’s MFI justifies this methodology. We use our existing MFI estimates through 2022, then assume a slight slowdown in 2023 and 2024. This may be conservative as BJ would be due another price increase in 2023 following its typical 5-year cadence. But, with the last increase in 2018 occurring after a 7-year pause, we chose not to assume a 2023 increase. Beyond 2024, we model a 2.0% growth rate to derive our terminal value. We discount back the MFI cash flows over the next roughly 6.5 years using a WACC of 5.8%, which is based on BJ’s current debt rate of LIBOR + 3.5%. We estimate that BJs cost of equity is just above 6%, but more than 100% of BJ’s

Deutsche Bank Securities Inc. Page 45 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club capital structure is debt post IPO. This yields a current value of the discounted cash flows of $6.2b. Taking out the current pro forma net debt of $2.0b leaves an implied equity value of the MFI cash flow of $4.2b, or $30 per share. We weight this 50% against a value of $30 for BJ’s $1.41 in earnings, half of which comes from MFI and half of which comes from operations, implying 21x against our P/E multiple. This is above the peer average, but justified by BJ's higher EPS growth rate. This weighting then yields a $30 valuation.

Figure 36: BJ's MFI Only DCF

Deutsche Bank Broadlines Retail

$mm MFI DCF Valuation MFI $247 $255 $258 $284 $306 $318 $329 $339 $350 $358 MFI Growth 1.8% 3.2% 1.2% 9.9% 7.9% 3.8% 3.6% 3.1% 3.0% 2.5% Tax Rate 32.8% 25.6% 36.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% After-Tax MFI Unlevered Free Cash Flow $166 $190 $165 $204 $220 $229 $237 $244 $252 $258 Terminal Value $7,018 Discounted Cash Flow $5,042 Discount Factor 0.6 1.6 2.6 3.6 4.6 5.6 6.6

Discounted Cash Flow $6,208.0 Less Net Debt (1Q18 pro forma) $2,027.9 Implied Equity Value $4,180.1 Shares Outstanding (1Q18 pro forma) 139.8 Implied Share Price from MFI Implied Share Price from P/E 2019 EPS estimate: $1.41 2019 target P/E: 21.0x 50/50 Weighted Average PT

Key Assumptions Terminal Value Growth Rate 2.0% WACC 5.8% Cost of Equity 6.3% Cost of Debt 5.8%

Discount Factor Days Calculation 7/10/2018 Today 2/2/2019 0.6 Discount Factor

WACC Calculation Risk Free Rate 2.9% (current 10 year bond yield) Beta 0.84 (equal to COST) Market Premium 4.2% % Equity -26.1% % Debt 126.1% (1Q18 pro forma) Cost of Equity 6.3% Cost of Debt 5.8% LIBOR + 3.5% WACC 5.8%

Source: Company Data, Deutsche Bank

Historical valuation spread not overly relevant but perhaps interesting

Both BJ and COST are far diﬀerent companies than they were when BJ was last publically traded before its 2011 LBO. Since then, COST has separated itself from most retailers, emerging as one of the strongest operators in any retail channel, not only in the U.S., but perhaps globally. BJ’s performance has been more mixed as a private company but is starting to emerge as a much better operator under new management compared to its last go around as a public entity. Thus, we do not believe that a look at BJ’s valuation multiples from prior to its LBO or comparisons to COST’s valuation during that time are overly relevant. Nonetheless, below we show that from June 2003 through September 2011, BJ’s traded at an average EV to EBITDA of 5.8x consensus forward estimates, a 2.9x spread versus COST, which traded at an average of 8.6x. On a P/E basis, against consensus forward estimates, BJ’s traded at 15.1x, a 4.0x discount to COST’s 19.1x average.

Page 46 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 37: Historical Valuation Multiples

BJ's versus COST EV/EBITDA Multiples BJ's versus COST P/E Multiples

14.0x 30.0x

13.0x 28.0x

12.0x 26.0x 11.0x 24.0x 10.0x 22.0x 9.0x 20.0x 8.0x 18.0x 7.0x 16.0x 6.0x 14.0x 5.0x

4.0x 12.0x

3.0x 10.0x Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17 COST-US BJ-US COST-US BJ-US

June 2003-Sep 2011 June 2003-Sep 2011 COST Spread COST Spread High 11.1x 7.9x 5.4x High 22.0x 21.1x 9.7x Low 6.1x 3.8x 0.7x Low 13.7x 10.4x -1.1x Average 8.6x 5.8x 2.9x Average 19.1x 15.1x 4.0x

June 2003-June 2018 June 2003-June 2018 COST COST High 14.1x High 28.3x Low 6.1x Low 13.7x Average 9.8x Average 21.0x

Current 14.1x Current 26.4x

Source: Company Data, Deutsche Bank

Deutsche Bank Securities Inc. Page 47 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club BJ’s Membership Model Discussion

BJ’s does not report membership numbers except revealing that it currently has about ﬁve million paid members. Despite the lack of disclosure, we attempt to model membership using the base of ﬁve million members at the end of 2017 as a starting point. Given reported 2017 MFI of $258.3mm on a 52-week basis, this would imply $51.65 in MFI dollars per member prior to the 10% fee increase implemented in January 2018. In addition to the fee increase, other key drivers of the model going forward include renewal rates, new members and MFI dollars per member. Below, we go into a little more detail on our key assumptions:

■ Fee increase: In January 2018, BJ’s implemented a 10% membership fee increase such that the $50 base membership went to $55 and the $100 premium membership increased to $110. Based on our model, the fee increase resulted in just shy of $25mm of incremental MFI from existing members that is recognized over a 24-month period. Thus, we assume $13.5mm in 2018 and $11.4mm in 2019 due to the timing of the membership renewals and the relevant accounting practices. Our $25mm is based on an 86% renewal rate on ﬁve million members paying an average increase of $5.80 (based on 16% penetration of higher-tier membership).

■ Renewal rates: In 2018 we assume a renewal rate of 86%, flat from 2017. Our assumption of a flat rate is the net of 1% improvement from the membership initiatives less a 1% increase in attrition due to the fee increase. We assume an 87% renewal rate in 2019 and 50 bps of improvement in each of the following two years to arrive at our target rate of 88%. A 1% change in the 2019 renewal rate affects EBITDA by $2.7mm.

■ New members: New members are a function of members per club and new club openings less any cannibalization. We assume 3.1% growth in members per average club in 2018 and 1.6% in 2019. Additionally, we assume one new club opening in 2018 and four new clubs per year thereafter. This results in 1 million new members added in 2018, or 310.5k net new members after accounting for attrition. In 2019, we assume 234k net new members after attrition, which results in ~5.5m members at the end of 2019.

■ MFI per member and the impact of discounted memberships: While current MFI per member is north of $50, our model attempts to account for several moving parts going forward as it relates to MFI per average new member, which is significantly lower out of the gates. A significant portion of new members pay only $25 in their first year as a member. After one year, they automatically step-up to a $55 membership unless they opt-out. Our model assumes that only 75% of discounted members renew after year one given the significant cost increase from $25 to $55 per year. Based on a blended average of discount memberships, full- price memberships and higher-tier memberships, we assume average MFI per new member of $31 in 2018, increasing by $1 per year as they pare back promotional discounts and increase higher-tier penetration.

Page 48 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

The discounted memberships are oﬀset by the fee increase such that MFI per member increases 3.5% to $53.44 in 2018 and 3.3% to $55.21 in 2019 before starting to level oﬀ from there. Any further penetration in higher-tier memberships could be a source of upside.

Putting it all together, we project $284mm of MFI in 2018 and $306mm of MFI in 2019. Off a base of $258mm in 2017, this is 9.9% growth in 2018 and 7.9% growth in 2019, at which point the full effects of the fee increase will have flown through the model. From there, our estimates call for 3-4% annual growth in MFI income in the out years. In recent years prior to the increase in 2018, MFI grew at a LSD% annual rate on average.

We estimate total adjusted EBITDA of $554mm and $592mm in 2018 and 2019 or 6.7% growth in 2018 and 6.8% in 2019. As such, MFI comprises 51% of total adjusted EBITDA in 2018 and 52% in 2019 and further implies that the MFI growth in 2018 and 2019 is responsible for 73% and 59% of the total EBITDA growth in 2018 and 2019.

Figure 38: BJ's MFI Building Blocks Model

($ in millions except per member figures, members in 000s)

Beginning members 4,800 5,000 5,311 New member adds 1,000 1,124 Lost members (690) (890) Net new members 200 311 234 Total ending members 5,000 5,311 5,544 Member growth 6.2% 4.4%

Average number of clubs 215 215 218 Members per average club 23.3 24.7 25.4 growth in members per club 5.8% 3.1%

MFI per Member $51.7 $53.4 $55.2 growth in MFI per member 3.5% 3.3%

Renewal Rate 86.0% 86.0% 87.0%

Beginning MFI $255 $258 $284 New member MFI $30 $35 Lost member MFI ($28) ($43) Incremental fee increase $14 $11 Prior Yr Timing / Discount Step-up $10 $19 Incremental MFI (net) $3 $26 $22 Total MFI at year end MFI growth 9.9% 7.9%

Source: Company Data, Deutsche Bank

Deutsche Bank Securities Inc. Page 49 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club The impact of gas on BJ’s model

Overview of Gas Business

As of 1Q18, BJ’s operated 133 gas stations at, or near, its 215 existing clubs. We believe that BJ will add roughly five gasoline stations per year as compared to one new club addition this year and four per year beginning in 2019. Currently, gas and other ancillary services (auto & tire, propane, optical etc.) make up 12% of the overall sales mix, of which we attribute the overwhelming majority to the gas business. It was 10% of the mix in 2016 and 11% in 2015. The gasoline business is a significant traffic driver to the clubs and also drives loyalty, especially given it is generally the lowest price offering in any given market. As gas prices and mix fluctuate, it’s important to understand how it affects the sales and margin profile of the overall business.

Impact to top line

On the simplest level, gasoline sales are a function of the number of gallons sold and the average price per gallon sold. Thus, as gasoline prices fluctuate dramatically, it can have a huge effect on overall sales. For example, in 1Q18 gas prices at the pump were up 14% y/y, which means that even if we kept the number of gallons sold constant, it would result in 14% higher gas sales or ~1.7% higher total company sales. Additionally, as BJ’s continues to open more gas stations, we expect the total number of gallons sold will continue to increase. Other drivers of gallons sold include miles driven and market-share gains or losses. While miles driven have increased every year since 2011, they are only up 0.16% YTD through April this year. Generally speaking, if gas prices increase enough then people will start to drive less. In 2011, the last time that we saw miles driven decrease on an annual basis, gas prices averaged ~$3.48 and were up roughly 27% y/y. As of July 2nd, average gasoline prices are up a similar 27% y/y. But, at $2.76 we think that there is still room to move higher before significant sticker shock emerges. One potential offset would be any trade-down or market-share increases as consumers are more aware of higher gas prices and seek out the cheapest gas, which can most often be found at BJ’s. Pricing is generally 1-2c below local competition and in line with Sam’s and Costco. Members who fill up with a BJ’s credit card also receive an additional 10 cents per gallon discount. Furthermore, credit card members are typically higher volume customers and renew at a higher rate, all of which helps drive the business model.

Impact to margins

The impact of the gasoline business on margins is more complicated as there are a few additional moving parts. Generally speaking, BJ’s strategy has been to keep profit dollars relatively consistent (net of gallon volume growth) by targeting approximately 7-8 cents profit per gallon sold. Thus, the price of gasoline, in theory, doesn’t affect the profit dollars, which are simply a function of gallons sold. That said, there are three main ways in which the gas business affects the overall margins.

Page 50 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

■ Gasoline mix as a % of overall sales: Gas margins are low-single-digits versus core merchandise margins in the high-teens, resulting in a mid- teens company average ex MFI. As such, as gas increases as part of the overall mix, whether due to increasing gas prices or gallons sold, it has a negative eﬀect on the overall margin rate.

■ Higher gas prices results in lower gas margin rate: Given the 7-8c profit per gallon targeted by the company, higher gas prices result in a lower margin rate but have no effect on the profit dollars. For example a 7.5 cent profit on a $2.50 gallon of gas is a 3.0% margin while a 7.5 cent profit on a $3.00 gallon of gas is a 2.5% margin. In both cases, however, the profit dollars are simply 7.5 cents multiplied by the total gallons sold, regardless of the price per gallon.

■ Rapid price swings can lead to temporary dislocations: Since gas prices are quite volatile and can experience significant price swings in a short period of time, there can be periods where retail prices at the pump don’t move as quickly or adequately reflect the current wholesale prices of gasoline. If wholesale gas prices are falling rapidly, retailers typically will operate with a lag and lower prices slower, which results in outsized profit per gallon increases during that period. Conversely, if wholesale prices are rising rapidly, retailers may not be able to raise prices at the pump in a fast enough manner, which ends up pressuring the margin rate in the short term.

Impact to our model

Our model has gasoline mix increasing from 12.3% of sales in 2017 to 14.0% of sales in 2019. To get there, we are modeling gasoline sales increases of 15% in 2018 and 6% in 2019, largely due to price per gallon increases of 12% in 2018 and 2% in 2019. We further model five new stations per year and assume volume growth per average station of 0.5% in 2018 and 1.0% in 2019. Using a 7 cent profit per gallon in 2018 and 7.1 cent profit per gallon in 2019 results in $46mm of profit dollars in 2018 and $49mm of profit dollars in 2019. While the profit dollars are $3mm dollars higher in 2019, the increased gasoline mix has a negative impact on overall gross margins. For example, we model core merchandise margins of 18.0% in 2019, up 70 bps from 17.3% in 2017, however, our total company gross margins increase by less than 20 basis points to 16.0% over this period due to the increased gasoline mix at roughly a 2.7% margin.

Deutsche Bank Securities Inc. Page 51 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 39: BJ's Gasoline Sales Building Blocks Model

(millions except store counts and price per gallon)

Gasoline Stations Beginning 131 133 138 New 2 5 5 Ending 133 138 143

Average station count 132 136 141 Growth in average station count 2.7% 3.7%

Gallons sold per average station 4.8 4.8 4.9 Growth in gallons sold per station 0.5% 1.0%

Total gallons sold 640.0 658.8 686.8 Growth in total gallons sold 2.9% 4.3%

Average price per gallon $2.36 $2.63 $2.68 Change in price per gallon 11.7% 1.8%

Total Gasoline Sales $1,508 $1,735 $1,841 Growth in total gasoline sales 15.0% 6.1%

Source:Company Data, Deutsche Bank

Page 52 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club Appendix: Financial Statements and Comparisons

Figure 40: Summary Income Statement

BJ's Wholesale Club 14 week period Income Statement, $M but reported 13 wks in model FY15 FY16 1Q17 2Q17 3Q17 4Q17 FY17 1Q18 2Q18E 3Q18E 4Q18E FY18E FY19E FY20E FY21E FY22E Period Ending 1/30/16 1/28/17 4/29/17 7/29/17 10/28/17 1/27/18 2/3/18 5/5/18 8/4/18 11/3/18 2/2/19 2/2/19 2/1/20 1/30/21 1/29/22 1/28/23 CAGR CAGR Number of Weeks in pd 52 weeks 52 weeks 13 weeks 13 weeks 13 weeks 13 weeks 53 weeks 13 weeks 13 weeks 13 weeks 13 weeks 52 weeks 52 weeks 52 weeks 52 weeks 52 weeks 17-22E 18-22E

Comparable Club Sales ex Fuel (0.5%) (2.3%) (4.5%) (0.9%) 0.4% 1.2% (0.9%) 2.0% 1.3% 1.5% 1.8% 1.6% 2.0% 2.0% 2.0% 2.0%

Net Sales $12,220.2 $12,095.3 $2,883.3 $3,103.3 $3,019.4 $3,250.7 $12,256.8 $2,993.7 $3,231.3 $3,111.0 $3,353.8 $12,689.8 $13,116.1 $13,581.3 $14,057.9 $14,546.3 3.5% 3.5% Membership Fee Income (MFI) $247.3 $255.2 $63.5 $64.2 $64.9 $65.7 $258.3 $68.0 $70.0 $72.3 $73.5 $283.8 $306.1 $317.6 $329.1 $339.4 5.6% 4.6% Total Revenue $12,467.6 $12,350.5 $2,946.8 $3,167.5 $3,084.2 $3,316.4 $12,515.0 $3,061.7 $3,301.4 $3,183.3 $3,427.2 $12,973.6 $13,422.2 $13,898.9 $14,387.0 $14,885.7 3.5% 3.5%

% growth y/y Net Sales growth (2.1%) (1.0%) (1.6%) 0.9% 3.3% 2.7% 1.3% 3.8% 4.1% 3.0% 3.2% 3.5% 3.4% 3.5% 3.5% 3.5% Membership Fee Income (MFI) 1.8% 3.2% (0.4%) (0.2%) 1.6% 3.7% 1.2% 7.0% 9.1% 11.5% 11.8% 9.9% 7.9% 3.8% 3.6% 3.1% Total Revenue (2.1%) (0.9%) (1.5%) 0.8% 3.3% 2.7% 1.3% 3.9% 4.2% 3.2% 3.3% 3.7% 3.5% 3.6% 3.5% 3.5%

Gross Profit (ex. MFI) 1,743.7 1,872.3 442.0 489.1 496.1 517.9 1,945.2 $483.4 $509.8 $510.2 $530.8 $2,034.2 $2,103.3 $2,185.9 $2,271.0 $2,358.9 Gross Margin (ex MFI) 14.27% 15.48% 15.33% 15.76% 16.43% 15.93% 15.87% 16.15% 15.78% 16.40% 15.83% 16.03% 16.04% 16.09% 16.15% 16.22%

SG&A Expense 1,797.8 1,872.3 $ 412.0 $ 421.1 $ 423.2 $ 443.3 $1,699.6 $ 432.0 $ 443.2 $ 441.1 $ 458.7 $1,775.0 $1,830.3 $1,890.0 $1,948.1 $2,006.4 SG&A % of Net Sales 14.71% 15.48% 14.29% 13.57% 14.01% 13.64% 13.87% 14.43% 13.72% 14.18% 13.68% 13.99% 13.95% 13.92% 13.86% 13.79%

Depreciation and Amortization $178.3 $41.1 $41.2 $41.1 $40.7 $164.1 $41.4 $41.6 $39.9 $39.6 $162.5 $162.5 $164.0 $164.0 $164.0 Preopening Expenses 6.5 $2.7 $0.8 $1.2 $0.1 $0.8 $3.0 $1.2 $1.0 $1.1 $0.0 $3.3 $12.0 $12.0 $12.0 $12.0

Operating Income (ex. MFI) (60.5) ($2.7) ($11.9) $25.6 $31.7 $33.2 $78.5 $8.8 $24.0 $28.1 $32.5 $93.3 98.5 119.8 146.9 176.5 17.6% 17.3% Operating Income $186.8 $252.5 $51.6 $89.8 $96.5 $98.9 $336.8 $76.7 $94.0 $100.5 $105.9 $377.1 $404.5 $437.5 $476.0 $515.9 8.9% 8.1% Operating Income change y/y 35.2% 37.9% 15.8% 58.6% 28.9% 33.4% 48.6% 4.7% 4.1% 7.2% 12.0% 7.3% 8.1% 8.8% 8.4%

Operating Margin (ex MFI) (0.5%) (0.0%) (0.4%) 0.82% 1.0% 1.0% 0.64% 0.29% 0.74% 0.90% 0.97% 0.74% 0.75% 0.9% 1.0% 1.2% Operating Margin 1.5% 2.0% 1.8% 2.8% 3.1% 3.0% 2.69% 2.51% 2.85% 3.16% 3.09% 2.91% 3.01% 3.1% 3.3% 3.5%

EBITDA $430.8 $92.7 $131.0 $137.7 $139.5 $500.9 $118.1 $135.6 $140.3 $145.5 $539.6 $567.0 $601.5 $640.0 $679.9 EBITDA Margin 3.5% 3.1% 4.1% 4.5% 4.2% 4.0% 3.9% 4.1% 4.4% 4.2% 4.2% 4.2% 4.3% 4.4% 4.6%

Adjusted EBITDA $406.0 $457.3 $98.7 $135.8 $141.1 $142.8 $519.0 $121.6 $138.8 $144.8 $148.8 $553.9 $591.8 $626.7 $665.2 $705.1 Adjusted EBITDA Margin 3.7% 3.3% 4.3% 4.6% 4.3% 4.1% 4.0% 4.2% 4.5% 4.3% 4.3% 4.4% 4.5% 4.6% 4.7%

Pro Forma Interest Expense, net (as if IPO occurred da 150.1 143.4 64.1 43.8 42.3 43.1 193.3 $ 35 $35.1 $35.7 $34.8 $ 140.6 $129.2 $116.0 $106.0 $99.8

Pretax Income 36.7 109.2 (12.5) 46.0 54.2 55.7 143.5 41.7 58.9 64.8 71.1 236.5 275.4 321.5 370.0 416.1 23.7% 15.2% Provision (Benefit) for Taxes 12.0 28.0 (4) 16.5 19.5 20.1 51.6 12 16.5 18.1 19.9 66.2 77.1 90.0 103.6 116.5 Tax Rate 32.8% 25.6% 36.0% 36.0% 36.0% 36.0% 36.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0%

Net Income $24.1 $80.7 ($8.1) $29.3 $34.6 $34.3 $90.1 $30.0 $42.4 $46.7 $51.2 $170.3 $198.3 $231.5 $266.4 $299.6 27.1% 15.2% Pro Forma Diluted Shares Outstanding 139.8 139.8 139.8 139.8 139.8 139.8 139.8 139.8 139.8 139.8 141.0 141.8 141.8 141.8 (as if IPO occurred on day one of year) Diluted EPS ($0.06) $0.21 $0.25 $0.25 $0.64 $0.21 $0.30 $0.33 $0.37 $1.22 $1.41 $1.63 $1.88 $2.11 26.8% 14.8% % change y/y NM 44.6% 34.8% 49.3% 88.9% 15.4% 16.1% 15.1% 12.4%

Store Count 213 214 214 215 215 215 215 215 215 216 216 216 220 224 228 232

Source: Company Data, DB estimates

Deutsche Bank Securities Inc. Page 53 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 41: Balance Sheet

BJ's Wholesale Club Balance Sheet, $M FY16 FY17 PRO FY18 FY19 FY20 FY21 FY22 Period Ending 1/28/17 4/29/17 7/29/17 10/28/17 2/3/18 2/3/18 FORMA Number of Weeks in pd 52 weeks 1Q17 2Q17 3Q17 4Q17 53 weeks 1Q18 2Q18E 3Q18E 4Q18E 52 weeks 52 weeks 52 weeks 52 weeks 52 weeks ASSETS Cash and equivalents 32.0 31.6 32.8 31.7 35.0 35.0 30.5 94.7 87.6 101.1 101.1 123.5 189.3 390.7 626.1 Accounts Receivable, net 166.2 156.2 166.1 179.8 190.8 190.8 168.7 174.5 185.2 196.8 196.8 203.5 210.6 218.0 225.5 Merchandise Inventories 1,031.8 1,054.8 1,031.1 1,183.6 1,019.1 1,019.1 1,055.2 1,041.4 1,195.4 1,029.3 1,029.3 1,039.6 1,050.0 1,060.5 1,071.1 Prepaid Expenses & Other 34.1 68.4 48.8 39.6 91.8 91.8 84.8 50.8 40.8 94.7 94.7 97.9 101.3 104.9 108.5 Prepaid Taxes 0.2 Total Current 1,264.4 1,310.9 1,278.7 1,434.7 1,336.6 1,336.6 1,339.2 1,361.4 1,509.0 1,421.9 1,421.9 1,464.5 1,551.3 1,774.1 2,031.2 Land and Buildings 409.4 404.4 Leasehold Costs and Improvements 171.4 184.2 Furnitures, Fixtures, Equip. 813.9 924.6 Construction in Progress 6.8 20.8 Less Accum. Depreciatiion (637.9) (775.2) PP&E, net 763.6 741.6 736.2 744.8 758.8 758.8 749.7 748.6 749.4 750.4 750.4 748.9 749.9 750.9 751.9 Goodwill 924.1 1,170.2 1,163.0 1,155.9 1,149.0 1,149.0 1,142.8 1,142.8 1,142.8 1,142.8 1,142.8 1,142.8 1,142.8 1,142.8 1,142.8 Intangibles, net 253.2 Other 26.9 32.0 31.1 30.9 29.5 29.5 28.5 28.5 28.5 28.5 28.5 28.5 28.5 28.5 28.5 Total Assets 3,232.2 3,254.6 3,209.1 3,366.2 3,273.9 3,273.9 3,260.1 3,281.3 3,429.6 3,343.6 3,343.6 3,384.7 3,472.5 3,696.3 3,954.4

LIABILITIES Current portion of LT Debt 20.0 322.4 236.3 231.3 219.8 219.8 250.6 250.6 250.6 250.6 250.6 250.6 250.6 250.6 250.6 Accounts Payable 720.6 729.5 751.9 891.1 751.9 751.9 799.5 778.4 918.5 776.8 776.8 802.6 830.2 858.5 887.4 Accrued Expenses and Other 457.7 429.4 438.5 448.0 497.9 497.9 453.4 452.4 461.6 513.7 513.7 531.1 549.8 569.0 588.6 Closed Store Obligations Due Within 1 yr 2.0 Total Current 1,200.3 1,481.3 1,426.7 1,570.4 1,469.6 1,469.6 1,503.6 1,481.3 1,630.6 1,541.0 1,541.0 1,584.3 1,630.6 1,678.0 1,726.5 LT Debt 2,000.1 2,542.0 2,533.9 2,529.4 2,492.7 2,492.7 1,807.8 1,807.8 1,757.8 1,707.8 1,707.8 1,497.8 1,297.8 1,197.8 1,097.8 Noncurrent Closed Store Obligations 6.3 Deferred Income Taxes 92.9 Other Non-current 271.7 360.8 356.2 349.5 331.0 331.0 323.0 323.0 323.0 323.0 323.0 323.0 323.0 323.0 323.0 Redeemable Common Stock 8.1 Total Liabilities 3,579.4 4,384.1 4,316.9 4,449.3 4,293.3 4,293.3 3,634.3 3,612.1 3,711.4 3,571.8 3,571.8 3,405.1 3,251.4 3,198.7 3,147.3

Shareholder's Equity (Deficit) Stockholders' Deficit (347.2) (1,129.5) (1,107.8) (1,083.1) (1,019.4) (1,019.4) (374.2) (330.8) (281.8) (228.2) (228.2) (20.4) 221.1 497.5 807.1 Total Libilities & Stockholder's Deficit 3,232.2 3,254.6 3,209.1 3,366.2 3,273.9 3,273.9 3,260.1 3,281.3 3,429.6 3,343.6 3,343.6 3,384.7 3,472.5 3,696.3 3,954.4

Net Debt (2,833) (2,737) (2,729) (2,677) (2,677) (2,028) (1,964) (1,921) (1,857) (1,857) (1,625) (1,359) (1,058) (722)

Net Debt / Adjusted EBITDA 5.2x 3.7x 3.6x 3.5x 3.4x 3.4x 2.7x 2.2x 1.6x 1.0x Lease Adjusted Net Debt / Adj. EBITDAR (8x) 6.2x 5.3x 5.2x 5.1x 5.0x 5.0x 4.6x 4.1x 3.7x 3.3x

Source: Company Data, DB estimates

Figure 42: Cash Flow Statement

BJ's Wholesale Club PRO Statement of Cash Flows, $M FORMA FY16 1Q17 2Q17 3Q17 4Q17 FY17 1Q18 2Q18E 3Q18E 4Q18E FY18E FY19E FY20E FY21E FY22E Period Ending 1/28/17 4/29/17 7/29/17 10/28/17 1/27/18 2/3/18 5/5/18 Number of Weeks in pd 52 weeks 13 weeks 13 weeks 13 weeks 13 weeks 53 weeks 13 weeks 52 weeks 52 weeks 52 weeks 52 weeks 52 weeks

Cash Flow from Ops Net Income 44.2 (58.9) 19.7 22.8 66.7 50.3 14.1 42.4 46.7 51.2 154.4 198.3 231.5 266.4 299.6 Charges for Discontinued Ops 0.8 2.8 D&A 178.3 41.1 41.2 41.2 40.7 164.1 41.4 41.6 39.9 39.6 162.5 162.5 164.0 164.0 164.0 Amortization of Debt Issuance Costs and OID 17.1 2.1 2.1 2.2 2.1 8.5 2.1 2.1 Debt Issuance Write-off 9.8 9.8 Other Non Cash Items, net 0.0 2.4 (3.5) (7.9) (10.9) 3.9 2.3 2.3 Stock Based Compensation 11.8 9.1 1.0 1.0 2.4 2.4 6.7 9.5 10.0 10.0 10.0 Deferred Income Tax Provision (23.5) (35.6) Accounts Receivable 26.5 10.1 (9.9) (13.7) (11.0) (24.5) 22.0 (5.8) (10.7) (11.6) (6.0) (6.7) (7.2) (7.3) (7.5) Merchandise Inventories 30.0 (22.9) 23.7 (152.5) 164.4 12.7 (36.1) 13.9 (154.0) 166.1 (10.2) (10.3) (10.4) (10.5) (10.6) Prepaid Expenses 16.2 (2.8) 7.1 (5.7) (46.4) (47.9) 7.4 34.0 10.0 (53.9) (2.5) (3.2) (3.4) (3.5) (3.6) Other Assets 2.0 1.0 Accounts Payable (29.3) 8.8 22.5 139.2 (126.9) 36.1 58.3 (21.2) 140.1 (141.7) 35.6 25.8 27.6 28.3 28.9 Change in Book Overdrafts (42.8) 7.5 Accrued Expenses 49.4 (56.0) 14.2 21.0 31.3 23.2 (45.7) (1.1) 9.2 52.1 14.5 17.5 18.7 19.1 19.6 Accrued Income Taxes 6.3 (12.7) Closed Store Obligations (1.9) (0.5) (0.5) (0.8) (0.6) (2.4) (0.5) (0.5) Other Noncurrent Liabilities 12.1 1.7 2.6 0.6 0.3 4.2 (1.0) (1.0) Net Cash from Operating Activities $297.4 ($65.1) $119.1 $46.4 $109.7 $210.1 $65.4 $104.9 $83.5 $104.2 $357.9 $393.4 $430.8 $466.5 $500.4

Cash Flow from Investing Activities Capex, net (114.8) (24.4) (21.8) (39.9) (51.3) (137.5) (42.1) (40.6) (40.6) (40.6) (164.0) (161.0) (165.0) (165.0) (165.0) Net Cash used in Investing Activities ($114.8) ($24.4) ($21.8) ($39.9) ($51.3) ($137.5) ($42.1) ($40.6) ($40.6) ($40.6) ($164.0) ($161.0) ($165.0) ($165.0) ($165.0)

Cash Flow From Financing Activities Proceeds from long term debt 547.5 (4.8) (4.8) (4.8) 547.5 Payments on Long Term Debt (65.2) (14.4) (642.8) 0.0 (50.0) (50.0) (742.8) (210.0) (200.0) (100.0) (100.0) Proceeds from ABL Facility 1,166.0 303.0 (91.0) (5.0) (45.0) 1,645.0 466.0 Payments on ABL Facility (1,287.0) (1,483.0) (403.0) Debt Issuance Costs Paid (0.8) (27.0) 2.4 (24.6) (47.0) Dividends Paid (0.0) (735.6) 0.1 (0.0) (735.5) 0.0 Capital Lease and Financing Obligations Paid (0.5) (0.7) (0.2) Cash Received from Stock Exercises and Issuance 0.4 0.9 690.6 Cash Paid for Share Repurchases (1.4) (2.0) (0.0) Other Financing Activities 0.4 1.2 (0.3) (0.2) (5.3) (2.8) (1.3) Net Cash Used in Financing Activities ($188.1) $89.2 ($96.1) ($7.6) ($55.2) ($69.6) $62.3 $0.0 ($50.0) ($50.0) ($742.8) ($210.0) ($200.0) ($100.0) ($100.0)

Net Increase (Decrease) in Cash & Equivalents ($5.4) ($0.4) $1.2 ($1.1) $3.2 $3.0 $85.5 $64.2 ($7.1) $13.6 ($548.9) $22.4 $65.8 $201.5 $235.4 Cash At Beginning of Period 37.4 32.0 31.6 32.8 31.7 32.0 35.0 30.5 94.7 87.6 35.0 101.1 123.5 189.3 390.7 Cash At End of Period $32.0 $31.6 $32.8 $31.7 $35.0 $35.0 $120.5 $94.7 $87.6 $101.1 ($514.0) $123.5 $189.3 $390.7 $626.1

Free Cash Flow $183 ($90) $97 $7 $58 $73 $23 $64 $43 $64 $194 $232 $266 $301 $335

Source: Company Data, DB estimates

Page 54 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 43: Comparison Table 1

Total sales ($mm) 2015 2016 2017 2018E 2019E 2020E BJ's $12,468 $12,351 $12,515 $12,974 $13,422 $13,899 y/y % change (2.1%) (1.0%) 1.3% 3.5% 3.4% 3.5%

Costco $116,199 $118,719 $126,591 $141,671 $150,210 $159,376 y/y % change 3.2% 2.2% 6.6% 11.9% 6.0% 6.1%

Costco (U.S.) $84,351 $86,579 $92,118 N/A N/A N/A y/y % change 4.8% 2.6% 6.4%

Sam's Club $56,828 $57,365 $59,216 $58,551 $59,958 N/A y/y % change (2.1%) 0.9% 3.2% (1.1%) 2.4%

Same store sales (ex. fuel) 2015 2016 2017 2018E 2019E 2020E BJ's (0.5%) (2.3%) (0.9%) 1.6% 2.0% 2.0%

Costco 7.0% 4.0% 3.8% 6.8% 3.5% 4.2%

Costco (U.S.) 6.0% 3.0% 3.7% 7.3% 2.7% 4.1%

Sam's Club 0.4% 1.1% 2.0% 2.2% 2.0% N/A

Club count 2015 2016 2017 2018E 2019E 2020E BJ's 213 214 215 216 220 224 y/y % change 2.9% 0.5% 0.5% 0.5% 1.9% 1.8%

Costco 686 715 741 762 786 810 y/y % change 3.5% 4.2% 3.6% 2.8% 3.1% 3.1%

Costco (U.S.) 480 501 514 527 541 555 y/y % change 2.6% 4.4% 2.6% 2.5% 2.7% 2.7%

Sam's Club 655 660 597 598 601 N/A y/y % change 1.2% 0.8% (9.5%) 0.2% 0.5%

Total sales per club ($mm) 2015 2016 2017 2018E 2019E 2020E BJ's $59 $58 $58 $60 $61 $62 y/y % change (4.8%) (1.4%) 0.9% 3.2% 1.6% 1.7%

Costco $169 $166 $171 $186 $191 $197 y/y % change (0.3%) (2.0%) 2.9% 8.8% 2.8% 3.0%

Costco (U.S.) $176 $173 $179 N/A N/A N/A y/y % change 2.2% (1.7%) 3.7%

Sam's Club $87 $87 $99 $98 $100 N/A y/y % change (3.3%) 0.2% 14.1% (1.3%) 1.9%

Membership fee income (MFI $mm) 2015 2016 2017 2018E 2019E 2020E BJ's $247 $255 $258 $284 $306 $318 y/y % change 1.8% 3.2% 1.2% 9.9% 7.9% 3.8%

Costco $2,533 $2,646 $2,853 $3,156 $3,431 $3,734 y/y % change 4.3% 4.5% 7.8% 10.6% 8.7% 8.8%

Costco (U.S.) $1,772 $1,854 $1,979 N/A N/A N/A y/y % change 3.4% 4.6% 6.7%

Sam's Club $1,348 $1,372 $1,411 $1,405 $1,439 N/A y/y % change 4.3% 1.8% 2.8% (0.4%) 2.4%

MFI as a percent of total sales 2015 2016 2017 2018E 2019E 2020E BJ's 2.0% 2.1% 2.1% 2.2% 2.3% 2.3% y/y bps change 7 bps 8 bps (0) bps 12 bps 9 bps 0 bps

Costco 2.2% 2.2% 2.3% 2.2% 2.3% 2.3% y/y % change 2 bps 5 bps 2 bps (3) bps 6 bps 6 bps

Costco (U.S.) 2.1% 2.1% 2.1% N/A N/A N/A y/y % change (3) bps 4 bps 1 bps

Sam's Club 2.4% 2.4% 2.4% 2.4% 2.4% N/A y/y % change 15 bps 2 bps (1) bps 2 bps 0 bps

Sales excluding MFI ($mm) 2015 2016 2017 2018E 2019E 2020E BJ's $12,220 $12,095 $12,257 $12,690 $13,116 $13,581 y/y % change (2.1%) (1.0%) 1.3% 3.5% 3.4% 3.5%

Costco $113,666 $116,073 $123,738 $138,515 $146,780 $155,642 y/y % change 3.1% 2.1% 6.6% 11.9% 6.0% 6.0%

Costco (U.S.) $82,579 $84,725 $90,139 N/A N/A N/A y/y % change 4.8% 2.6% 6.4%

Sam's Club $55,480 $55,993 $57,805 $57,146 $58,519 N/A y/y % change (2.2%) 0.9% 3.2% (1.1%) 2.4%

Data based on Fiscal year results COST (U.S) MFI estimated based on store count, assuming fewer members per club, but higher MFI per BJ's 2017 data based on reported 52 week results member in US vs company avg. COST 2017 data based on estimated 52 week results COST (U.S.) store count estimated

Source: Company Data, Deutsche Bank

Deutsche Bank Securities Inc. Page 55 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 44: Comparison Table 2

Square footage ('000) 2015 2016 2017 2018E 2019E 2020E BJ's 23,004 23,112 23,220 23,305 23,645 23,985 y/y % change 0.5% 0.5% 0.4% 1.5% 1.4%

Costco 98,700 103,200 107,300 110,464 114,078 117,692 y/y % change 3.6% 4.6% 4.0% 2.9% 3.3% 3.2%

Costco (U.S.) 69,900 73,300 75,400 77,248 79,361 81,473 y/y % change 2.6% 4.9% 2.9% 2.5% 2.7% 2.7%

Sam's Club 87,552 88,376 80,068 80,228 80,658 N/A y/y % change 1.2% 0.9% -9.4% 0.2% 0.5%

Square footage per club ('000) 2015 2016 2017 2018E 2019E 2020E BJ's 108 108 108 108 107 107 y/y % change 0.0% 0.0% -0.1% -0.4% -0.4%

Costco 144 144 145 145 145 145 y/y % change 0.1% 0.3% 0.3% 0.1% 0.1% 0.1%

Costco (U.S.) 146 146 147 147 147 147 y/y % change 0.1% 0.5% 0.3% 0.0% 0.0% 0.0%

Sam's Club 134 134 134 134 134 N/A y/y % change (0.0%) 0.2% 0.2% 0.0% 0.0%

Sales (ex MFI) per club ($mm) 2015 2016 2017 2018E 2019E 2020E BJ's $57 $57 $57 $59 $60 $61 y/y % change (4.9%) (1.5%) 0.9% 3.1% 1.5% 1.7%

Costco $166 $162 $167 $182 $187 $192 y/y % change (0.3%) (2.0%) 2.9% 8.9% 2.7% 2.9%

Costco (U.S.) $172 $169 $175 N/A N/A N/A y/y % change 2.2% (1.7%) 3.7%

Sam's Club $85 $85 $97 $96 $97 N/A y/y % change (3.4%) 0.2% 14.1% (1.3%) 1.9%

Sales (ex MFI) per square foot ($) 2015 2016 2017 2018E 2019E 2020E BJ's $531 $523 $528 $545 $555 $566 y/y % change (1.5%) 0.9% 3.2% 1.9% 2.1%

Costco $1,152 $1,125 $1,153 $1,254 $1,287 $1,322 y/y % change (0.4%) (2.3%) 2.5% 8.7% 2.6% 2.8%

Costco (U.S.) $1,181 $1,156 $1,195 N/A N/A N/A y/y % change 2.1% (2.2%) 3.4%

Sam's Club $634 $634 $722 $712 $726 N/A y/y % change (3.4%) (0.0%) 13.9% (1.3%) 1.9%

Gross margin 2015 2016 2017 2018E 2019E 2020E BJ's 16.0% 17.2% 17.6% 17.9% 18.0% 18.0% y/y bps change 47 bps 126 bps 38 bps 26 bps 8 bps 6 bps

Costco 13.0% 13.3% 13.3% 13.1% 13.1% 13.2% y/y bps change 43 bps 30 bps 1 bps (28) bps 7 bps 4 bps

Sam's Club 10.5% 10.9% 10.4% 10.5% 10.3% N/A y/y bps change 30 bps 39 bps (44) bps 1 bps (15) bps

SG&A as a percent of total sales 2015 2016 2017 2018E 2019E 2020E BJ's N/A 16.6% 14.9% 14.9% 14.8% 14.8% y/y bps change (171) bps 4 bps (9) bps (7) bps

Costco 9.8% 10.2% 10.0% 9.8% 9.9% 9.9% y/y bps change 17 bps 32 bps (13) bps (22) bps 6 bps 4 bps

Sam's Club 7.3% 8.0% 8.8% 7.7% 7.6% N/A y/y bps change 50 bps 68 bps 82 bps (108) bps (10) bps

SG&A per club ($mm) 2015 2016 2017 2018E 2019E 2020E BJ's N/A $10 $9 $9 $9 $9 y/y % change (9.5%) 3.5% 1.0% 1.2%

Costco $17 $17 $17 $18 $19 $20 y/y % change 1.5% 1.2% 1.6% 6.5% 3.5% 3.4%

Sam's Club $6 $7 $9 $8 $8 N/A y/y % change 3.9% 9.5% 25.8% (13.4%) 0.6%

Data based on Fiscal year results BJ's square footage data based on company disclosure of average club size of 108,000 in 2017, with DB BJ's 2017 data based on reported 52 week results estimates of ~85,000 sq. ft. per new club for outer years COST 2017 data based on estimated 52 week results Based on COST SG&A ex pre-opening expenses

Source: Company Data, Deutsche Bank

Page 56 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 45: Comparison Table 3

Operating profit (inc. MFI $mm) 2015 2016 2017 2018E 2019E 2020E BJ's $187 $253 $337 $377 $405 $437 y/y % change 1.5% 35.2% 33.4% 12.0% 7.3% 8.1%

Costco $3,624 $3,672 $4,087 $4,511 $4,800 $5,098 y/y % change 12.5% 1.3% 11.3% 10.4% 6.4% 6.2%

Costco (U.S.) $2,308 $2,326 $2,594 N/A N/A N/A y/y % change 22.8% 23.7% 38.0%

Sam's Club $1,820 $1,671 $1,534 $1,606 $1,615 N/A y/y % change (7.9%) (8.2%) (8.2%) 4.7% 0.5%

Operating margin (including MFI) 2015 2016 2017 2018E 2019E 2020E BJ's 1.5% 2.0% 2.7% 2.9% 3.0% 3.1% y/y bps change 5 bps 55 bps 65 bps 22 bps 11 bps 13 bps

Costco 3.1% 3.1% 3.2% 3.2% 3.2% 3.2% y/y bps change 26 bps (3) bps 14 bps (4) bps 1 bps 0 bps

Costco (U.S.) 2.7% 2.7% 2.8% N/A N/A N/A y/y bps change 40 bps (5) bps 13 bps

Sam's Club 3.2% 2.9% 2.6% 2.7% 2.7% N/A y/y bps change (20) bps (29) bps (32) bps 15 bps (5) bps

Operating margin (ex MFI) 2015 2016 2017 2018E 2019E 2020E BJ's (0.5%) (0.0%) 0.6% 0.7% 0.7% 0.9% y/y bps change (1) bps 46 bps 65 bps 9 bps 1 bps 13 bps

Costco 1.0% 0.9% 1.0% 1.0% 0.9% 0.9% y/y bps change 24 bps (8) bps 11 bps (2) bps (5) bps (6) bps

Costco (U.S.) 0.6% 0.6% 0.7% N/A N/A N/A y/y bps change 44 bps (9) bps 13 bps

Sam's Club 0.8% 0.5% (0.7%) 0.3% 0.3% 0.0% y/y bps change (35) bps (31) bps (125) bps 107 bps (0) bps (34) bps

MFI as a percent of total op. profit 2015 2016 2017 2018E 2019E 2020E BJ's 132.4% 101.1% 76.7% 75.2% 75.7% 72.6% y/y bps change 38 bps (3,134) bps (2,439) bps (143) bps 41 bps (305) bps

Costco 69.9% 72.1% 69.8% 70.0% 71.5% 73.2% y/y bps change (551) bps 216 bps (226) bps 16 bps 151 bps 176 bps

Costco (U.S.) 76.8% 79.7% 76.3% N/A N/A N/A y/y bps change (144) bps 292 bps (342) bps

Sam's Club 74.1% 82.1% 92.0% 87.5% 89.1% N/A y/y bps change 868 bps 804 bps 988 bps (450) bps 162 bps

Adjusted EBITDA ($mm) 2015 2016 2017 2018E 2019E 2020E BJ's $406 $457 $519 $554 $592 $627 y/y % change (1.9%) 12.6% 13.5% 6.7% 6.8% 5.9%

Costco $4,734 $4,930 $5,378 $5,986 $6,385 $6,779 y/y % change 11.4% 4.1% 9.1% 11.3% 6.7% 6.2%

Sam's Club $2,292 $2,158 $1,448 $2,067 $2,087 N/A y/y % change (6.4%) (5.8%) (32.9%) 42.7% 1.0%

Adj. EBITDA percent of total sales 2015 2016 2017 2018E 2019E 2020E BJ's 3.3% 3.7% 4.1% 4.3% 4.4% 4.5% y/y bps change 1 bps 45 bps 44 bps 12 bps 14 bps 10 bps

Costco 4.1% 4.2% 4.2% 4.2% 4.3% 4.3% y/y bps change 30 bps 8 bps 10 bps (2) bps 3 bps 0 bps

Sam's Club 4.0% 3.8% 2.4% 3.5% 3.5% N/A y/y bps change (19) bps (27) bps (132) bps 108 bps (5) bps

MFI as a percent of Adj. EBITDA 2015 2016 2017 2018E 2019E 2020E BJ's 60.9% 55.8% 49.8% 51.2% 51.7% 50.7% y/y bps change 221 bps (511) bps (605) bps 147 bps 49 bps (104) bps

Costco 53.5% 53.7% 53.1% 52.7% 53.7% 55.1% y/y bps change (364) bps 16 bps (62) bps (34) bps 102 bps 135 bps

Sam's Club 58.8% 63.6% 97.4% 68.0% 69.0% N/A y/y bps change 606 bps 476 bps 3,387 bps (2,946) bps 98 bps

Data based on Fiscal year results BJ's 2017 data based on reported 52 week results COST 2017 data based on estimated 52 week results

Source: Company Data, Deutsche Bank

Deutsche Bank Securities Inc. Page 57 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 46: Comparison Table 4

Rent ($mm) 2015 2016 2017 2018E 2019E 2020E BJ's $288 $298 $302 $306 $313 $322 y/y % change 3.7% 1.3% 1.4% 2.2% 2.9%

Costco $252 $250 $258 $276 $285 $295 y/y % change 9.6% (0.8%) 3.2% 7.1% 3.3% 3.3%

Rent as a percent of total sales 2015 2016 2017 2018E 2019E 2020E BJ's 2.3% 2.4% 2.4% 2.4% 2.3% 2.3% y/y bps change 11 bps (0) bps (5) bps (3) bps (2) bps

Costco 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% y/y bps change 1 bps (1) bps (1) bps (1) bps (0) bps (0) bps

Net debt to adjusted EBITDA 2015 2016 2017 2018E 2019E 2020E BJ's 0.5x 4.3x 5.2x 3.3x 2.7x 2.2x y/y change (91.3%) 817.3% 18.7% (35.3%) (18.2%) (20.7%)

Costco 1.3x 1.0x 1.2x 3.4x 3.3x 0.0x y/y change 8.1% (19.2%) 16.1% 183.9% (5.5%) (100.0%)

Adjusted net debt/ EBITDAR* 2015 2016 2017 2018E 2019E 2020E BJ's 3.6x 5.8x 6.2x 5.0x 4.6x 4.1x y/y change 61.1% 7.2% (19.4%) (8.9%) (9.0%)

Costco 1.6x 1.4x 1.5x 3.6x 3.4x N/A y/y change 5.6% (15.4%) 9.9% 137.3% (5.2%)

ROIC 2015 2016 2017 2018E 2019E 2020E BJ's 2.8% 4.9% 4.4% 13.0% 12.0% 13.4% y/y bps change 184 bps 207 bps (50) bps 863 bps (105) bps 147 bps

Costco 14.5% 14.9% 16.0% 16.9% 15.9% 14.5% y/y bps change 208 bps 40 bps 113 bps 88 bps (101) bps (137) bps

Capital expenditures ($mm) 2015 2016 2017 2018E 2019E 2020E BJ's -$112 -$115 -$137 -$164 -$161 -$165 y/y % change (27.6%) 2.1% 19.8% 19.3% (1.8%) 2.5%

Costco -$2,393 -$2,649 -$2,502 -$2,675 -$2,700 -$2,700 y/y % change 20.1% 10.7% (5.5%) 6.9% 0.9% 0.0%

Sam's Club -$695 -$639 -$626 N/A N/A N/A y/y % change (7.7%) (8.1%) (2.0%)

CapEx as a percent of total sales 2015 2016 2017 2018E 2019E 2020E BJ's 0.9% 0.9% 1.1% 1.3% 1.2% 1.2% y/y bps change (32) bps 3 bps 17 bps 17 bps (6) bps (1) bps

Costco 2.1% 2.2% 2.0% 1.9% 1.8% 1.7% y/y bps change 383 bps 17 bps (25) bps (9) bps (9) bps (10) bps

Sam's Club 1.2% 1.1% 1.1% N/A N/A N/A y/y bps change (7) bps (11) bps (6) bps

Free cash flow ($mm) 2015 2016 2017 2018E 2019E 2020E BJ's $47 $183 $73 $201 $232 $260 y/y % change (64.0%) 288.7% (60.2%) 177.0% 15.6% 11.8%

Costco $1,892 $643 $4,224 $2,974 $2,850 $3,006 y/y % change 11.6% (66.0%) 556.9% (29.6%) (4.2%) 5.4%

Membership renewal rates 2015 2016 2017 2018E 2019E 2020E BJ's 84.0% 85.0% 86.0% 86.0% 86.0% 86.0%

Costco 88.0% 87.6% 87.2% 87.2% 87.2% 87.2%

Costco (U.S.) 91.0% 91.0% 91.0% 91.0% 91.0% 91.0%

Data based on Fiscal year results ROIC calculated at net income over avg. of beginning long term debt plus equity BJ's 2017 data based on reported 52 week results * Net Debt/EBITDAR is calculated capitalizing rent 8x COST 2017 data based on estimated 52 week results

Source: Company Data, Deutsche Bank

Page 58 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Figure 47: Comparison Table 5

Total membership (paid '000) 2017 BJ's 5,000

Costco 49,400

Costco (U.S.) 32,500

Sam's Club N/A

Total membership (cardholders '000) 2017 BJ's 8,000

Costco 90,300

Costco (U.S.) 59,500

Sam's Club N/A

Sales excluding MFI per cardholder 2017 BJ's $1,532

Costco $1,370

Costco (U.S.) $1,515

Sam's Club N/A

Cardholders per club 2017 BJ's 37,209

Costco 121,862

Costco (U.S.) 115,759

Sam's Club N/A

Operating profit excluding MFI per cardholder ($) 2017 BJ's $10

Costco $14

Costco (U.S.) $10

Sam's Club N/A

% of membership in higher tier 2017 BJ's 16%

Costco 39%

Percent of members with private label credit card 2017 BJ's 11%

Costco 30%

Sales mix by category 2017 24% Edible Groceries, 29% Perishables, 21% Non-Edible BJ's Grocery, 14% General Merchandise, 12% Gas & Other Ancillary Service

Costco 20% Sundries; 21% Food; 14% Fresh Foods; 16% Hardlines; 12% Softlines; 17% Ancillary and Other

58% Grocery and Consumables; 21% Fuel and Other Sam's Club Categories; 9% Tech., Office and Entertainment; 6% Home & Apparel; 6% Health & Wellness

SKU count 2017 BJ's 7,200

Costco 3,800

Sam's Club 5,200

Employees 2017 BJ's 26,520

Costco 239,000

Sam's Club 100,000

Employees per club 2017 BJ's 123

Costco 323

Sam's Club 168

SG&A per employee ($) 2017 BJ's $76,087

Costco $54,184

Sam's Club $52,025

Sales excluding MFI per employee ($) 2017 BJ's $462,171

Costco $527,916

Data based on Fiscal year results COST US membership data estimated BJ's 2017 data based on reported 52 week results COST 2017 data based on estimated 52 week results

Source: Company Data, Deutsche Bank

Deutsche Bank Securities Inc. Page 59 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club Appendix 1

Important Disclosures *Other information available upon request

Disclosure checklist Company Ticker Recent price* Disclosure BJ's Wholesale Club BJ.N 25.91 (USD) 20 Jul 2018 1, 7, 8 *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at https://research.db.com/ Research/Disclosures/CompanySearch. Aside from within this report, important risk and conflict disclosures can also be found at https://research.db.com/Research/Topics/Equities? topicId=RB0002. Investors are strongly encouraged to review this information before investing. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees. 7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 8. Deutsche Bank and/or its affiliate(s) expects to receive, or intends to seek, compensation for investment banking services from this company in the next three months. Important Disclosures Required by Non-U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees. 7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at https://research.db.com/Research/Disclosures/CompanySearch Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Mike Baker

Page 60 Deutsche Bank Securities Inc. 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Historical recommendations and target price. BJ's Wholesale Club (BJ.N)

(as of 07/19/2018) 40.00 Current Recommendations Buy Hold Sell 30.00 Not Rated Suspended Rating

** Analyst is no longer at Deutsche Bank 20.00 Security price

10.00

0.00 28. Jun 30. Jun 2. Jul 4. Jul 6. Jul 8. Jul 10. Jul 12. Jul 14. Jul 16. Jul 18. Jul Date

§§§§$$$$$§§§§§

Equity Rating Key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock. Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Newly issued research recommendations and target prices supersede previously published research.

Deutsche Bank Securities Inc. Page 61 23 July 2018 Retailing / Department Stores & Broadlines BJ's Wholesale Club

Additional Information

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Page 66 Deutsche Bank Securities Inc. David Folkerts-Landau Group Chief Economist and Global Head of Research

Raj Hindocha Michael Spencer Steve Pollard Global Chief Operating Oﬃcer Head of APAC Research Head of Americas Research Research Global Head of Economics Global Head of Equity Research

Anthony Klarman Paul Reynolds Dave Clark Pam Finelli Global Head of Head of EMEA Head of APAC Global Head of Debt Research Equity Research Equity Research Equity Derivatives Research

Andreas Neubauer Spyros Mesomeris Head of Research - Germany Global Head of Quantitative and QIS Research

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