Everyone knows that Costco Wholesale (NASDAQ:COST) has been a big winner during the pandemic. But shares in its smaller competitor, BJ Wholesale Club Holdings (NYSE:BJ), have done just as well. BJ’s doubled its earnings between its January quarter and July. That came on sales growth of 14%. Growth has made BJ’s a hot stock.
Shares of BJ stock are up 90% for the year, far outpacing Costco’s 31% gain and even beating that of Amazon (NASDAQ:AMZN).
It could be real, or it could be the pandemic. BJ’s is due to report earnings on Nov. 19. Analysts expect 63 cents per share of net income on revenue of $3.7 billion for the three months ending in October. That would be slightly behind the July numbers, 78 cents per share of income on revenue of $3.95 billion.
But the whisper number on BJ earnings analysts are giving their best customers is 76 cents.
Why, BJ’s, Why?
There are currently about 216 BJ Warehouse Clubs against 785 Costcos and about 600 Walmart (NYSE:WMT) Sam’s Club units. BJ’s was originally created by a discount store firm called Zayre. It was sold to private equity in 2011 and only came public again two years ago.
While Costco developed around edge cities and Sam’s Club stores followed Walmarts, BJ’s is a product of the northeast. It is based in Massachusetts and has a big presence around New York City. With smaller houses and apartments, New Yorkers were slow to pick up on the vast quantity warehouse ethic. The pandemic changed that.
BJ’s has sought to take advantage, with online ordering and contactless grocery pick-up. That one feature alone helped boost digital orders by 300%, year-over-year, during the July quarter. The company hopes to keep the momentum with a new chief digital officer recruited from Home Depot (NYSE:HD).
To keep the sales growth going, BJ’s is also opening new stores, entering new markets and adding new members.
The Smaller Base
Many of BJ’s advantages stem from its smaller size. It has barely one-tenth the sales of Costco, thus its small sales gains are magnified.
Because its growth momentum is recent, BJ’s is also a cheaper stock. The market cap of $5.8 billion is less than half its annual sales. The price-earnings ratio is 20, less than half of Costco’s. Before the pandemic started this was a $20/share stock. It is trading around $40. The analysts who supported this stock in the spring look like geniuses.
The question is whether this will continue as the pandemic eases. The 15 analysts following BJ’s at Tipranks have an average price target of almost $49, a nice gain. Their target on Costco is below its current price.
The Bottom Line on BJ Stock
My guess is that BJ’s will beat estimates for the October quarter and even into Christmas. People are huddling closer together as the pandemic reaches its peak.
The question remains whether BJ’s growth is sustainable, which would justify a higher multiple on sales and earnings. You can get Walmart right now for just 24 times earnings, along with a 54 cent per share dividend yielding 1.5%, something BJ’s doesn’t have.
My concern is the depth of BJ’s management. Its new CEO, Lee Delaney, was in private equity until 2016. Finance people are only now being replaced by operations people in key positions.
If there were a Costco on one side of the street and a BJ’s on the other, which would you go to? At some point in the next few years, that will become the question.
At the time of publication, Dana Blankenhorn had long positions in AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
