Buy Better: Costco vs. BJ’s Wholesale Club

Both Costco Wholesale (COSTS 0.86%) and BJ’s Wholesale Club (BJ 0.60%) Stocks are beating the market in 2022, and it’s not hard to see why. Consumers are focused on saving money, and an inflationary environment tends to make warehouse traders’ value propositions more obvious.

These companies appear ideally positioned to weather a potential recession, and earnings growth could be particularly strong if the economy avoids this scenario. But which is the better buy for 2023?

Stability vs Potential

Both companies are growing at an impressive rate today, with comparable store sales rising in the mid-single digits on top of booming sales gains a year ago. Their focus on consumer staples has allowed Costco and BJ’s to avoid the kind of challenges that hurt less diversified retailers Goal and home depot. In contrast to these companies, the wholesale clubs see increased customer traffic and higher average spend.

But BJ’s has a slight advantage on the growth front due to its smaller retail footprint. Strong customer trends in recent years mean the chain can expand from its current regional focus to reach more metro areas.

On the other hand, Costco’s maturity and massive size provide stability, which could be valuable if a recession develops in large markets like the U.S. in 2023. But Costco is already well-established in most major metro areas, so its scope for expansion is more limited.

profit outlook

Both companies rely almost entirely on membership fees to generate profits, giving Costco and BJ’s another advantage over other retailers. Earnings won’t collapse during periods of slower consumer spending because they’re not tied to commodity premiums.

But Costco has better prospects here. The company is on the verge of increasing its annual membership fees after holding those fees constant for several years. Subscribers clearly get a lot of value from their memberships, too.

Costco just reported that its renewal rate rose to about 92% by the end of 2022. That means the chain has room to increase its fees in 2023, boosting its revenue immediately.

The better value?

Costco is valued at a significant premium compared to BJ, reflecting some of its unique competitive advantages such as: B. Its huge global base of paying members. You can own BJ’s stock for 0.5 times annual sales, compared to Costco’s 0.9 times sales.

In my opinion, that premium shouldn’t put you off this outstanding stock. While Costco isn’t immune to recessions, its sales and earnings should hold up far better than most of its industry peers. Combine this factor with the ability to increase annual fees over time and you have all the ingredients you need for market-breaking returns.

Sure, BJ’s Wholesale Club could see faster growth over the next few years as it opens warehouses in new regions. But Costco’s stock, which got cheaper through 2022, seems more attractive to hold in a variety of potential selling environments investors could see over the next few years. Both companies are currently winners, but the industry leader seems like a less risky choice.

Demitri Kalogeropoulos has positions at Costco Wholesale and Home Depot. The Motley Fool has positions in and recommends Costco Wholesale, Home Depot, and Target. The Motley Fool has a disclosure policy.

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