The warehouse retailing niche is more popular than ever as consumers look for ways to stretch their inflation-squeezed budgets. This tailwind has helped lift sales to new records for both Costco Wholesale (COST -1.78%) and smaller rival BJ's Wholesale Club (BJ -1.13%). Investors have assigned quite different valuations to the two companies, though, potentially making one a better buy right now.
Let's take a closer look at the two successful retailers to see which one would be a better fit for your portfolio today.
The latest results
Thanks to a pair of late-May operating updates, investors have a clear picture of the growth trends for these businesses. Costco's comparable-store sales were up 4% through early May after accounting for swings in currency exchange rates and gasoline prices. BJ's fared better in its most recent quarter, which ended in late April, with comps rising 6%.
Both companies reported a shift away from certain big-ticket purchases as consumers became more cautious in their spending patterns. Yet BJ's enjoys slightly faster sales and market share growth. "We are very pleased with the strength of our operating performance this quarter," CEO Bob Eddy said during a recent conference call with investors.
Member satisfaction
The most important product a wholesale club sells is its membership, and both companies are winning in this critical area. Renewal rates are sitting at record highs for both BJ's and Costco, in fact. BJ's renewal rate was 90% this past quarter and Costco's was 93% in the core U.S. market.
Investors shouldn't expect wins here to power stronger earnings, though. The companies rely on pricing advantages to attract shoppers, so extra fee income is directed toward keeping prices lower. That's obvious from their gross profit margins, which are far lower than the margins of their traditional retail peers.
BJ Gross Profit Margin data by YCharts.
Costco has the edge here, thanks to its higher renewal rate and its ability to consistently raise its membership fees. The next fee hike should lay the groundwork for several additional years of industry-leading value for shoppers, after all.
Price and value
Despite its slower growth in 2023, Costco has a lot going for it as an investment. Its larger, global business should see less volatility if recessions strike key markets like the U.S., and its annual earnings are highly likely to rise along with increased membership fees.
Investors willing to take on more risk around rocky results should consider BJ's stock, which trades at an attractive discount. Shares are priced at roughly 0.4 times annual sales compared to Costco's price-to-sales ratio of 1.
Sure, this discount reflects its smaller selling footprint and its higher exposure to the headwinds a U.S. recession would generate. But demand pullbacks are a natural part of the retail industry and don't challenge the long-term bullish thesis. As a result, investors should consider adding BJ's Wholesale Club to their watch lists today.
The retailer is winning market share, satisfying its customers, and building out its sales footprint in a competitive industry. Those factors should all support strong shareholder returns, especially given that the stock is valued at a discount to competitors right now.
