BJ's Wholesale (BJ -1.55%) often becomes forgotten in the discussion on retail. As a company operating primarily on the East Coast, it does not have the international footprint of Amazon, Walmart, or its larger warehouse club rival, Costco Wholesale. Moreover, its growth rates have lagged these bigger peers. 

However, the novel coronavirus pandemic could help to boost profits, at least temporarily. Analysts continue to raise estimates, and the company has invested more in employee retention during this critical time. BJ's also continues to slowly add warehouses and expand westward. Given these signs of hope, investors might wonder if the current company and market conditions offer sufficient justification to buy BJ's stock or if it remains cheap for a reason.

The front of a BJ's Wholesale Club and adjacent liquor store.

Image source: Getty Images.

BJ's continues to lag Costco

The consumer staples sector has become one of the few bright spots in the market over the past few weeks. As most stocks fell quickly into bear market territory during the COVID-19 crisis, BJ's stock and other retailers either have held steady or made gains.

However, BJ's has not turned its smaller size into an advantage -- particularly not against Costco, whose $135 billion market cap dwarfs BJ's, which is roughly $3.5 billion. Costco is much more efficient and has much greater scale. BJ's maintains 218 clubs that support 5.5 million members; compare that to Costco, whose 785 warehouses claim 53.9 million paid members. 

Turning to the balance sheet, BJ's holds about $1.34 billion in long-term debt. This may not seem significant compared to many large companies -- Costco has $5.1 billion. Still, BJ's counters that with only $30.2 million in cash, compared to Costco's $8.7 billion. BJ's also retains negative stockholders' equity as liabilities exceed the value of assets. With double-digit earnings growth, the company is not facing solvency issues. However, with only about 1.5% net sales growth in the last quarter, sales growth will probably do little to help the balance sheet. Here, BJ's also compares poorly to Costco, which saw a 10.5% increase in net sales growth over a similar period. This is probably going to mean that expansion will only come slowly.

Still, BJ's has made some progress. While traditionally focused on the East Coast, it expanded into Michigan last year. Investors should also remember that Walmart started as a regional retailer before expanding across the U.S. and beyond. Walmart's stock debuted on the New York Stock Exchange in 1972 at a split-adjusted price of just $0.06 per share, a tiny fraction of today's value of around $129 per share.

Still, such a scenario appears less likely for BJ's. Unless it can improve both its finances and growth rates, the company will struggle to take a similar path.

Stock price growth continues to lag

The behavior of BJ's stock has also reflected little optimism. All of its rivals have also seen their stock prices rise over the last year. Conversely, BJ's stock hasn't moved much since returning to the public markets in 2018.

BJ Chart

BJ data by YCharts

This stagnation may not last. Analysts predict that earnings will increase by an average of 10.8% per year over the next five years. BJ's, with a forward price-to-earnings (P/E) ratio around 15, has also maintained a lower multiple than Walmart or Costco.  Perhaps that will take the P/E ratio so low that investors will be intrigued. Nonetheless, without a catalyst, investors have no apparent reason to hope for rapid gains.

Can BJ's turn itself around?

Despite the company's challenges, BJ's is working to improve its performance. It has implemented what it calls "Project Momentum," a drive to cut $100 million in costs over the next two years.

COVID-19 has also affected stocks like BJ's. Thus, investors need to watch the next earnings report, which is expected in the coming weeks. The panic buying of consumer staples began to have a significant effect on retail activity starting in the second week in March. With the report covering the Feb. 1 to April 30 time period, investors should get a glimpse of how coronavirus drove sales for the retailer. Still, while the company responded with temporary wage increases, bonuses, and dedicated shopping hours for those 60 and over, it has yet to offer any insight on how coronavirus will affect sales and earnings.  

Analysts will be looking for $0.34 per share in profits, a 30.8% increase from the same quarter last year. While investors should not expect the company to sustain that growth rate, the higher profits could help improve the company's balance sheet. 

However, even with improvements, BJ's has far to go before it can catch up to Costco. With financials limiting the ability to expand, investors have little reason to hope for the same kind of regional to national expansion that enriched Walmart shareholders in previous decades.

Nonetheless, investors should continue to watch this company's stock. BJ's trades at a relatively low P/E ratio, and analysts project double-digit earnings growth. If the company can continue to improve both growth and efficiency, investors may finally have a reason to buy BJ's stock.