Costco Wholesale Corporation (COST) and BJ’s Wholesale Club Holdings, Inc. (BJ) are two of the world’s prominent retail and warehouse companies. They have largely benefited from the COVID-19 pandemic because shutdown regimes led to panic shopping and the hoarding of essentials.
While neither company is a pure e-commerce platform, they both adapted to the “new normal” quickly, placing more emphasis on their wider product ranges, unique bulk offerings, digital presence and improved delivery systems. Though vaccine roll outs are encouraging some people to return to brick-and-mortar stores, most consumers are sticking with the omnichannel fulfillment capabilities of companies like these.
With the new Presidential administration moving ahead with a proposed new stimulus package, a forthcoming potential rise in consumers’ spending capacity should spark pent-up demand for products in the warehouses of both companies.
Both stocks have generated decent returns over the past year. While COST returned 15.1% over this period, BJ gained 98.8%. In terms of year-to-date performance, BJ is a clear winner with 16.6% returns versus COST’s 5.9% loss. But which of these stocks is a better buy now? Let’s find out.
Business Structure and Latest Movements
COST operates a chain of membership warehouses in the United States and internationally. It offers branded and private-label products in a range of merchandise categories. Its warehouses are designed to help small- to medium-sized businesses reduce their costs in purchasing for resale and for everyday business use. COST currently operates 803 warehouses that deliver one of the largest and most exclusive product category selections to be found under a single roof.
After holding off on offering curbside pickup for groceries for years, COST recently launched a pilot program to offer members same-day pickup on grocery and general merchandise items in New Mexico. However, COST recently closed its photo centers at its 800 stores, ending four services that have a decidedly retro vibe. However, the company is still operating its online photo center.
BJ operates warehouse clubs on the East Coast of the United States. The company provides a curated assortment focused on perishable products, general merchandise, gas and other ancillary services to deliver a differentiated shopping experience that is further enhanced by its omnichannel capabilities. BJ currently operates nearly 221 clubs, that serve more than six million members.
To remain competitive and attract customers, BJ recently unveiled new features on its app as a part of its rapid transformation into digital solutions. The new app features include easier search and scan functionalities, personalized product recommendations as well as seamless navigation for discovering deals and products. On January 27, BJ entered a consumer financing partnership with Citizens Financial Group, one of the nation’s oldest and largest financial institutions, to provide customers an affordable way to pay for large purchases. BJ plans to launch Citizens Pay to provide easy financing options for online orders.
Recent Financial Results
COST’s most recent monthly results for January 2021 (the four weeks ended January 31) were better than expected, with comparable sales up 15.7%. Comparable e-commerce sales surged 105.4% year-over-year. COST’s net sales in its fiscal first quarter ended November 22, 2020 were $42.35 billion, rising 17% versus the prior year. Its comparable e-commerce sales for the quarter improved 86.4% year-over-year. And its EPS for the quarter came in at $2.62, compared to the year-ago value of $1.90.
BJ is scheduled to release financial results for its fiscal fourth quarter ended January 31, 2021 on March 4, 2021. BJ’s revenue in the third quarter grew 15.6% year-over-year to $3.73 billion, while its comparable club sales increased 14.1%. Its operating income improved 88% year-over-year to $190.4 million, representing 5.1% of total revenues. Moreover, its EPS more than doubled to $0.88, compared to the year-ago value of $0.40.
Past and Expected Financial Performance
COST’s revenue and EPS have grown at a CAGR of 11.8% and 15.6%, respectively, year-over-year over the past 12 months.
Analysts expect COST’s revenue to increase 11.9% in the current quarter (ending February 28, 2021) and 10.3% in the current year. The company’s EPS is expected to grow 16.2% in the current quarter and 15.4% in the current year. Moreover, its EPS is expected to grow at a rate of 8.6% per annum over the next five years.
In comparison, BJ’s revenue and EPS grew at a CAGR of 13.9% and 77%, respectively, year-over-year over the past 12 months.
Analysts expect BJ’s revenue to increase 13.5% in the current quarter (ended January 31, 2021) and 16.8% in the current year. The company’s EPS is expected to grow 67.5% in the current quarter and 108.2% in the current year. And its EPS is expected to grow at a rate of 18.5% per annum over the next five years.
BJ has an edge over COST here.
COST’s trailing-12-month revenue is more than 11.5 times BJ’s. But BJ is the more profitable, with a gross profit margin of 19.1% versus COST’s 13.2%.
BJ’s ROE of 651% compares favorably with COST’s 27.8%.
In terms of forward p/e, COST is currently trading at 33.60x, 130% more expensive than BJ which is currently trading at 14.60x. In addition, BJ is less expensive compared to COST in terms of trailing-12-month p/s (0.91x versus 0.40x).
In terms of trailing-12-month price/cash flow also, COST’s 16.67x is 161.3% higher than BJ’s 6.38x.
BJ looks much more affordable compared to COST.
Both COST and BJ have an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
While BJ has a Value Grade of A, COST is graded a B, consistent with its relatively higher valuation multiples.
Additionally, BJ has a Growth Grade of A, implying its ability to grow its financials at a faster rate than its peers, compared to a C grade for COST.
While COST is ranked #12 of 40 stocks in the A-rated Grocery/Big Box Retailers industry, BJ is ranked #21 in the same industry.
Beyond what I stated above, our POWR Ratings system has also rated both COST and BJ for Momentum, Stability, Sentiment, and Quality. Get all the COST ratings here. Also, click here to see the additional POWR Ratings for BJ.
There has been a structural shift to in-home consumption since the onset of the public health crisis. People have been spending less on travel, hotels and dining out, and seem to be redirecting their consumption to in home and wellness products like cleaning supplies, health and beauty aids. This trend is fueling growth in the consumer staples industry. However, BJ has proved to be the better investment based on the factors discussed here.
BJ was struggling to stay afloat prior to the pandemic, primarily due to massive debt levels, meager sales growth, and larger industry players. However, as the health crisis ushered an unprecedented demand for groceries and paper products, customers finally acknowledged BJ’s value, scale of operation, and product sizes and selection. BJ seems uniquely positioned to gain market share and thrive based on its strategic investments in digital capabilities, enhancing membership, assortment, marketing and geographic expansion.
Click here to learn about other top-rated Grocery/Big Box Retailers stocks.
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
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COST shares were trading at $357.32 per share on Thursday afternoon, down $0.72 (-0.20%). Year-to-date, COST has declined -4.98%, versus a 4.67% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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