BJ's Wholesale Club (BJ 0.93%) has spent most of its history in the shadow of other warehouse retailers. Though it has existed nearly as long as its larger rival, Costco (COST 0.63%), it has remained a regional player as Costco expanded worldwide.
However, with the onset of the pandemic and Costco's success in navigating it, this has brought greater attention to BJ's as well. A closer examination of the business shows how BJ's may have begun a long-term, secular bull trend.
How BJ's has changed
Investors might wonder how BJ's stands out amid competition from Costco, Walmart's (WMT 0.27%) Sam's Club, and others. Before the pandemic, the outlook had seemed bleak for BJ's Wholesale. The retailer, which operates 225 stores in 17 states, was in the midst of its second stint as a stock (after being taken private for a few years). It produced only slow revenue growth, and a heavy debt load hampered its potential.
However, Lee Delaney took over as CEO of the company in 2020, right before the pandemic. As it hit, he capitalized on BJ's smaller size, adapting his store for pandemic shoppers faster than competitors did. This brought massive revenue and profit increases. In 2020, revenue surged 17% year over year while net income increased 125%.
At the same time, BJ's shored up its balance sheet. Total debt has fallen from over $1.7 billion at the end of fiscal 2019 to $748 million today. This has freed up capital to help increase the pace of opening new warehouse clubs.
Delaney passed away unexpectedly in April 2021. However, the current CEO, Robert W. Eddy, has worked for BJ's since 2007. Although an e-commerce slowdown in recent quarters has affected BJ's, growth remains above pre-pandemic levels under Eddy's tenure.
Since its fiscal year closed at the end of January, BJ's will likely not release Q4 and full-year earnings until March. However, we can look at the first nine months. Revenue for that period came in at $12.3 billion, 7% higher than in the first three quarters of 2020. Still, net income fell about 2% to $319 million as labor market struggles and supply-chain challenges weighed on the company.
Despite these struggles, BJ's stock has risen by 40% over the past 12 months, only slightly below Costco's 46% gain -- and by 181% over two years, far outpacing Costco's 70% return.
Even with an expanding multiple, BJ's price-to-earnings ratio stands at about 20. In comparison, Costco sells for 45 times earnings while Walmart trades at a 49 multiple. This means BJ's stockholders are paying significantly less for growth.
Admittedly, with recent moves into the Pittsburgh area and plans to open stores near Nashville, the focus at BJ's remains on the eastern part of the U.S. However, the company could eventually earn massive gains as its footprint moves steadily westward. Similar expansion brought outsize returns to Costco and Walmart shareholders in decades past.
A long-term growth story
Thanks to the pandemic, BJ's appears to have begun a long-term growth story. Indeed, the death of its CEO may have added to pressure on the company to evolve as it also dealt with supply-chain challenges and changing shopping patterns amid the end of lockdowns. Today, the faster revenue growth and lower debt level appear to have permanently changed BJ's growth outlook for the better.