Investors in BJ's Wholesale Club Holdings (BJ 5.43%) had a great 2020, with the stock outperforming a booming market and trouncing peers like Costco (COST 2.45%) and Walmart (WMT 3.32%). The warehouse giant's soaring sales have management targeting a much bigger store footprint, which might deliver impressive returns to investors even following last year's stock price surge.
But it's also possible that BJ's market share gains will slow as the COVID-19 threat fades. Earnings might be pressured, too, by the need for many years of aggressive capital spending projects. With that bigger picture in mind, let's look at BJ's Wholesale as a stock investment today.
Why buy the stock?
The bullish thesis for the stock can be summed up in three words: growth, cash, and opportunity. On the growth front, BJ's outpaced the industry with comparable-store sales gains surging over 20% in the 2020 fiscal year. That success means that it won market share from smaller local stores and from warehouse retailing leaders like Costco, which recently announced a 14% sales increase.
Just as important, the growth triggered a surge in earnings and cash flow. Operating income jumped 82% last year, and BJ's more than doubled its annual operating cash flow. As a result, it is flush with resources it can use in 2021 and beyond as it works to expand its store footprint beyond its East Coast roots.
As for that opportunity, it isn't clear just how far that expansion might go. But the retailer operates just 221 clubs today, compared to Costco's 558 locations in the U.S. market. BJ's just booked $15 billion in annual revenue while the industry leader counts nearly $180 billion in global sales.
Risks to the outlook
On the other hand, investors might be in for disappointing returns if BJ's market-share gains start reversing in 2021, which would suggest they mostly came from the temporary dislocations caused by the pandemic.
The more concrete threat is increased competition from the likes of Walmart, which plans to dramatically boost spending over the next few years to bolster its e-commerce platform and merchandising. Wins in these areas supported BJ's growth in 2020, but it should get harder to stand out from competitors in 2021 and beyond as peers raise their game in multichannel retailing. At the very least, continued growth wins in the industry will require significant capital spending by BJ's and other players.
Bulk up on the stock?
The good news is that many of these risks are reflected in BJ's valuation. You only have to pay about 0.4 times sales for its stock today, or less than half the price of Costco or Walmart. BJ's is a relative bargain in terms of earnings, too, with a P/E ratio of 13 compared to 20 for Target (TGT -0.65%), and roughly 30 for both Walmart and Costco.
Each of these businesses have larger sales footprints and longer track records of growth through a wide range of operating conditions. That's why it makes sense that BJ's would be valued at a smaller premium than the industry giants.
That gap could shrink over the next few years, generating impressive shareholder returns in the process. But that scenario assumes the retailer can repeat its 2020 wins again and again, under different selling conditions. If you believe that's possible, then BJ's looks like a great way to gain exposure to the warehouse retailing niche without paying premium stock prices.