Costco Wholesale Corporation (NASDAQ:COST) survived the retail apocalypse relatively unscathed, but should BJ’s IPO have Costco — and COST stockholders — spooked?
Last week, BJ’s Wholesale Club announced that it would be coming back onto the public market after a seven year hiatus during which the firm’s private equity owners Leonard Green & Partners and CVC Capital Partners say they expanded the company and prepared it to compete in the increasingly competitive retail space. The BJ’s IPO has shined a spotlight on wholesale retailers like Costco and Walmart Inc’s (NYSE:WMT) Sam’s Club.
Right now, Costco is the clear winner of the group with a larger physical footprint and healthier same store sales growth than the other two. Should Costco be shaking in its boots? Or is BJ’s destined for another bumpy ride on the NYSE?
How do They Stack Up?
Comparing BJ’s and Costco side by side is like looking at a diagram of David and Goliath. BJ’s has made some pretty impressive improvements to its financials during its time as a private company. The firm’s income has gone from being in the red back in 2013 to $50 million in 2017. The company has also been steadily improving its membership retention, boasting an 86% membership renewal rate for fiscal year 2017.
While that’s not a bad snapshot, it’s nothing compared to Costco. Not only does Costco have some of the most loyal members in the world with an 87% renewal rate worldwide and 90% for the U.S., but it has a lot more of them. Costco is a far larger company with 741 stores spread across the globe, BJ’s on the other hand has a mere 215 locations mostly concentrated in the Northeast corner of the U.S.
You might look at those figures and argue that BJ’s has room to grow, but I’m not so sure that makes sense either. Wholesalers are caught in the shift toward online shopping just like the rest of their peers, so making strides in e-commerce is essential for future growth. That’s the case for both BJ’s and Costco, but right now only one looks well-equipped to improve its e-commerce business.
Costco is struggling with declining margins as it grows its online presence because the cost of building out the necessary infrastructure to fulfill and ship online orders is eating into the company’s profitability. However, Costco has 24 distribution centers up and running to help with that increased burden — BJ’s has only six, all of which are located on the East Coast.
BJ’s Debt Problem
Outside of being inferior to Costco both size and strength wise, BJ’s has the added concern of debt — something that investors should consider before jumping on board BJ’s IPO. The company is strapped with around $2.75 billion worth of debt — a lot of which has been the result of massive dividends paid out to BJ’s private equity owners during its time as a private company.
In 2017 BJ’s refinanced its loans and took on additional debt in order to pay out $735.5 million in dividends. That’s on top a $650 million dividend the firm payed out in 2011 after it was taken private and a $450 million dividend payed out in 2013 — both financed by more borrowing. The 2013 dividend was particularly disparaging as the amount of debt necessary to finance that payment caused Moody’s to cut the company’s debt rating.
Oh, and did I mention that the firm’s prospectus says it will use the funds raised in its IPO to pay off debt?
The Bottom Line on BJ’s IPO
In some cases, companies can go from public to private and come back stronger, but in the case of BJ’s I’m not sure I’d buy it.
It’s unclear exactly how much stake in the company Leonard Green & Partners and CVC will hold on to in the IPO, but their actions since taking the company private don’t appear to have BJ’s profitability in mind. For that reason, I’d stay far, far away from BJ’s stock when it hits the market and I don’t think there’s any reason for Costco to worry about the IPO.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
