Supply chain disruptions and high inflation have been troubling major retail stocks. However, discount store operators have remained relatively less affected, with consumers rushing to buy general merchandise at relatively lower prices than traditional ones.

Moreover, an increase in consumer confidence in July and a tight job market should boost the performance of discount retailers. Therefore, major discount retailers BJ’s Wholesale Club Holdings, Inc. (BJ) and Big Lots, Inc. (BIG) should stay afloat.

BJ operates warehouse clubs, offering perishable, edible grocery, general merchandise, non-edible grocery products, gasoline, and other ancillary services. It also sells its products through its website and mobile app. As of June 10, 2022, it operated 229 warehouse clubs and 160 gas locations in 17 states.

On the other hand, BIG operates as a home discount retailer that offers furniture, seasonal, soft home, hard home, home maintenance, organization, and consumables and food categories. It operates approximately 1,432 stores and an e-commerce platform.

Out of the 12 Wall Street analysts rating BJ, eight rated it Buy. In contrast, none of the eight analysts rating BIG has recommended buying the stock.

While BIG gained 5.5% over the past month, BJ surged 20.3%. BJ is a clear winner with 19.5% gains over the past nine months versus BIG’s 50.6% returns. While Wall Street analysts prefer BJ over BIG, which one is a better buy now? Let’s find out.

Recent Financial Results

For its fiscal 2022 first quarter ended April 30, 2022, BJ’s total revenues increased 16.2% year-over-year to $4.50 billion. The company’s operating income came in at $150.32 million, representing a 19.1% rise from the prior-year period.

While its adjusted net income increased 18.8% year-over-year to $118.43 million, its adjusted EPS grew 20.8% to $0.87. As of April 30, 2022, the company had $37.95 million in cash and cash equivalents.

For the fiscal 2022 first quarter ended March 31, 2022, BIG’s net sales decreased 15.4% year-over-year to $1.38 billion. The company’s gross profit came in at $504.59 million, representing a 22.8% year-over-year decline. Its operating loss came in at $13.54 million versus an operating income of $122.55 million in the year-ago period.

BIG’s net loss came in at $11.08 million, compared to a net income of $94.56 million from the prior-year period. Its loss per share came in at $0.39 versus a $2.62 EPS in the year-ago period. As of April 30, 2022, the company had $61.71 million in cash and cash equivalents.

Past and Expected Financial Performance

Over the past three years, BJ’s EPS, net income, and EBITDA have increased at CAGRs of 43.5%, 45.4%, and 21.5%, respectively.

Analysts expect BJ’s EPS to grow 1.8% in fiscal 2022, ending January 28, 2023, and 10.6% in fiscal 2023. The company’s revenue is expected to grow 10% year-over-year in fiscal 2022 and 6.5% in fiscal 2023. Its EPS is expected to grow at 6.5% per annum over the next five years.

Over the past three years, BIG’s EPS, net income, and EBITDA have declined at CAGRs of 13.1%, 20.1%, and 13.2%, respectively.

BIG’s EPS is expected to decrease 146.5% year-over-year in fiscal 2022, ending January 28, 2023, and rise 171.9% in fiscal 2023. The company’s revenue is expected to decline 6% year-over-year in fiscal 2022 and rise 2.5% in fiscal 2023. Its EPS is expected to decline at a 35.2% rate per annum over the next five years.

Valuation

In terms of forward EV/Sales, BJ is currently trading at 0.46x, 45.7% higher than BIG’s 0.67x. In terms of non-GAAP forward P/E, BIG’s 10.02x compares with BJ’s 19.10x.

Profitability

BJ’s trailing-12-month revenue is 2.9 times that of BIG’s. Also, BJ is more profitable, with a 2.7% net income margin versus BIG’s 4.4%.

Furthermore, BJ’s ROE, ROA and ROTC of 80.7%, 7.2% and 11.2% compare with BIG’s 6.4%, 1.7% and 2.3%, respectively.

POWR Ratings

While BJ has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, BIG has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

BJ and BIG have been graded a B grade for Value, in sync with their lower-than-industry valuation ratios. BJ’s 0.67x forward EV/Sales is 63% lower than the industry average. BIG’s 0.46x forward EV/Sales is 58.2% lower than the industry average.

BJ has a C grade for Sentiment, reflecting a relatively lower earnings growth expectation than its industry peers. BJ’s EPS is expected to grow 1.8% year-over-year to $3.31 for fiscal 2022 ending January 28, 2023. BIG’s D grade for Sentiment is in sync with its negative earnings estimates for fiscal 2022 ending January 28, 2023.

Of the 38 stocks in the A-rated Grocery/Big Box Retailers industry, BJ is ranked #23, while BIG is ranked #38.

Beyond what we have stated above, our POWR Ratings system has graded BIG and BJ for Stability, Growth, Momentum, and Quality. Get all BIG ratings here. Also, click here to see the additional POWR Ratings for BJ.

The Winner

Given high inflation, rising foot traffic at discount stores, and resilient consumer spending should help BJ and BIG stay afloat. However, BJ is a better buy based on favorable analyst sentiment, higher profitability, and better financials.

Our research shows that the odds of success increase if one invests in stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Grocery/Big Box Retailers industry.

BJ shares were trading at $69.14 per share on Thursday afternoon, down $0.63 (-0.90%). Year-to-date, BJ has gained 3.24%, versus a -15.41% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

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