With their 40-year history, warehouse club operators have successfully established their own sector. With a history of strong growth and performance, many are wondering whether or not they should purchase stock from companies such as Costco (NASDAQ: COST) and BJ’s (NYSE: BJ).
Although these companies have remained top players in this sector, there are some concerns. Is it time to invest in the warehouse club sector — or have these companies reached their peak in terms of their investment potential?
If you are ready to buy wholesale club stock, which is the better option — Costco or BJ’s Wholesale Club?
The Pros and Cons of Buying Warehouse Club Operators
Although concentrated, the membership warehouse industry has a few key players. Costco (NASDAQ: COST) and BJ’s Wholesale (NYSE: BJ) are two of these leading industry retailers, but are they worth buying?
In terms of buying stock from warehouse club operators, each company yields its own pros and cons. In recent years, retail and grocery companies have struggled. However, many warehouse club operators offer a wide range of products, providing them with a business edge. This includes membership fees.
Nevertheless, this industry as a whole often faces price cuts, rising freight costs, and low margins. Although there are a number of highly successful clubs within this sector, overall, the growth rate has slowed (which is largely based on lost revenues from e-commerce).
Consumer behavior has played a role as many consumers have taken their shopping experiences online. However, there are a number of warehouse club giants that may still provide profitable investing opportunities — particularly Costco.
Is BJ’s Wholesale Club Stock Worth Buying?
While focusing your attention on BJ’s Wholesale Club Stock, there are conflicting messages in regards to its stock value. Although many agree that better days are ahead for BJ stock, others are concerned that this wholesale club does not showcase the level of financial performance or growth they’d like to see.
As reported by MarketWatch in May 2018, BJ’s made a statement regarding its numbers over the past two years. The new management team made significant changes with respect to company culture and operations which translated to net income and EBITDA growth.
Although BJ’s Wholesale Club focuses on volume and annual membership fees, much like other warehouse giants, its numbers are not very impressive when listed beside Costco, or even Sam’s Club. Although BJ’s financials have been improving, they do not compare well to Costco on net income margins, operating ratios or net income to membership fees.
Bottom line: BJ stock has potential, especially if it can continue to build momentum but it’s got a few worts and many experts agree that BJ’s has very little chance of catching up to Costco.
Should You Buy Costco Stock?
As stated by the U.S. News & World Report, over the long-term, Costco stock has been a “winner.” However, in recent years, there are some concerns. When you review the past ten years or so, there is no denying that COST shares produced significant returns; Costco shares are up more than 150 percent.
But the gorilla in the room is Amazon (NASDAQ: AMZN). As consumers migrate online, the tradeoff between paying a higher monthly fee or a delivery fee favors Amazon.
Nevertheless, Costco stock has been bullish in recent years. Compared to JC Penney (JCP) and Dick’s Sporting Goods (NYSE: DKS), Costco deserves high praise. While others suffered sales declines, Costco has seen sales rise.
Just some of the reasons to keep on eye on Costco stock include:
- Although many retailers and grocers have been affected by AMZN, especially after the company purchased Whole Foods, Costco continues to be seen as more complementary than competitive. Costco also offers products that Amazon does not yet, including tires and gasoline.
- With more than 45 million paying members and over 500 warehouses across the United States (720+ worldwide), Costco strategically attracts consumer traffic with discounted gasoline. They are now also the largest wine retailers and their in-house brand, Kirkland, helps boost their margins. Meaning, Costco is known for its efficiency scalability and unique assets.
Certainly, Costco stock is not cheap. Costco’s price-to-earnings ratio is higher than most of its competitors, including Wal-Mart (NYSE: WMT) and Target (NYSE: TGT). However, this warehouse giant continues to display financial strength and growth potential.
BJ’s Wholesale Club Vs Costco Stock Summary
Overall, when comparing financial performance, key assets, and opportunities for expansion, BJ’s appears to be limited. There are also concerns surrounding the large debt load that BJ’s Wholesales carries.
Stacked side-by-side, Costco Wholesale has proven its place in the marketplace time and time again — even surviving the “retail apocalypse.” Although Costco has continued to increase earnings and reward investors, Costco stock may well be showing signs of a lofty valuation. However, for those interested in buying in, that opportunity may be just around the corner.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.