In this piece, I evaluated two big box retail stocks, Costco Wholesale Corporation (COST) and BJ's Wholesale Club Holdings, Inc. (BJ), to determine the better investment.
Following a two-month consumer spending slowdown, April’s spending increased by 0.8%, a sign of economic resilience amid rising prices. Also, the core Personal Consumption Expenditure (PCE) index rose 0.4% sequentially and 4.7% year-over-year in April.
Retail sales rebounded in April by rising 0.4% sequentially and 1.6% year-over-year. The retail sales came in lower than the 0.8% consensus estimate. According to the National Retail Federation, retail sales will grow between 4% and 6% in 2023 to reach between $5.13 trillion and $5.23 trillion.
These signs of economic resilience may prompt the Fed to hike rates this month. Another rate hike will push the federal funds rate, which is already at a 16-year high, higher. The high benchmark interest rate and tighter lending standards will likely tip the economy toward a recession, forcing consumers to cut their discretionary spending and pressure big-box retailers.
COST’s EPS was $0.37 lower than the consensus estimate during the third quarter. Its revenue also missed the consensus estimate by $1.01 billion. Moreover, same-store sales rose 0.3%, coming much below analyst estimates of 2.9%. Although its membership fees rose 6.1% year-over-year to $1.04 billion, it was lower than Wall Street estimates of $1.05 billion.
BJ surpassed the consensus EPS estimate by 0.2% in the first quarter but failed to beat analysts’ revenue estimates by 2%. Its membership fee income increased by 6.1% year-over-year to $102.50 million. BJ’s President and CEO Bob Eddy said, “We reported a record first quarter in net income and adjusted EBITDA, demonstrating the power of our business model and the warehouse club channel.”
“We drove topline growth bolstered by robust traffic and share gains. We also made significant improvements on our merchandise margins largely due to waning supply chain pressures and moderating inflation. We remain focused on our strategic priorities and believe that we are well-positioned to maximize long-term shareholder value,” he added.
BJ’s executive VP and CFO Laura Felice said, “Our fiscal 2023 outlook on our business remains unchanged given the sustained strength in our grocery business and our gains in market share. We are confident that the strength of our core business and our intense focus on delivering value will continue to drive long-term growth.”
When it comes to price performance, COST is the clear winner. COST’s stock has gained 13.1% in price year-to-date compared to BJ’s 4.8% decline. In addition, COST’s stock has gained 9.3% over the past year, higher than BJ’s 2.9% gain.
Let’s dive deeper to find out which one of these stocks is a better investment:
Recent Financial Results
COST’s total revenue for the third quarter ended May 7, 2023, increased 2% year-over-year to $53.65 billion. Its net sales rose 1.9% over the prior-year quarter to $52.60 billion. The company’s net income attributable to COST declined 3.8% year-over-year to $1.30 billion. Its EPS came in at $2.93, representing a decline of 3.6% year-over-year.
BJ’s net sales for the first quarter ended April 29, 2023, increased 5% year-over-year to $4.62 billion. Its total revenue rose 5% over the prior-year quarter to $4.72 billion. The company’s adjusted EBITDA increased 16.4% year-over-year to $256.98 million. Its adjusted net income declined 2.3% year-over-year to $115.65 million. In addition, its adjusted EPS came in at $0.85, representing a decline of 2.3% year-over-year.
Expected Financial Performance
Analysts expect COST’s EPS for fiscal 2023 and 2024 to increase 9.5% and 7.3% year-over-year to $14.53 and $15.59. Its fiscal 2023 and 2024 revenue is expected to increase 6.4% and 5.1% year-over-year to $241.36 billion and $253.77 billion. Its EPS and revenue for the quarter ending August 2023 are expected to increase 13.8% and 8.1% year-over-year to $4.79 and $77.92 billion, respectively.
For fiscal 2024, BJ’s EPS is expected to decline 0.6% year-over-year to $3.90. Its revenue for the same year is expected to increase 6.3% year-over-year to $20.53 billion. Its EPS and revenue for fiscal 2025 are expected to increase 7.6% and 4.6% year-over-year to $4.19 and $21.48 billion, respectively.
Its EPS for the quarter ending July 2023 is expected to decline 12.1% year-over-year to $0.93, while its revenue for the same quarter is expected to increase 1.9% year-over-year to $5.20 billion.
Profitability
COST’s trailing-12-month revenue is 11.99 times what BJ generates. BJ’s EBITDA margin and net income margin of 5.05% and 2.64% are higher than COST’s 4.22% and 2.58%, respectively. On the other hand, COST’s levered FCF margin and Return on Assets of 1.73% and 9.26% are higher than BJ’s 1.55% and 8.89%, respectively.
Valuation
In terms of forward non-GAAP PEG, BJ is currently trading at 2.88x, 13.9% lower than COST’s 3.30x. BJ’s forward EV/Sales ratio of 0.56x is 66.1% lower than COST’s 0.93x. Likewise, BJ’s forward EV/EBITDA of 10.56x compares to COST’s 21.47x.
Thus, BJ is relatively more affordable.
POWR Ratings
COST has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Similarly, BJ has an overall rating of C, translating to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. Both COST and BJ have a C grade for Quality, in sync with their mixed profitability.
BJ has a B grade for Value, consistent with its discounted valuation. On the other hand, COST’s mixed valuation justifies its C grade for Value.
Of the 37 stocks in the A-rated Grocery/Big Box Retailers industry, COST is ranked #28, while BJ is ranked #30 in the same industry.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, and Sentiment. Click here to view COST ratings. Get all the ratings of BJ here.
The Winner
Big-box retailers have been reporting growing sales amid higher prices on food and essentials. Moreover, consumers are still spending money, as is evident from the 0.8% rise in consumer spending in April. However, the future looks increasingly uncertain as the Fed might go ahead with another interest rate hike this month, pushing the economy into a recession later this year, leading to a drop in consumer spending.
Although COST’s sales rose, its revenue and earnings missed analyst estimates as consumer spending on non-discretionary items fell. Due to the challenging macroeconomic environment, the company is holding back on its membership fee hike. On the other hand, BJ reported record first-quarter net income and adjusted EBITDA but fell short of the revenue estimates.
Given the strength of its grocery business, the company remains confident of a strong showing in 2023. However, the Fed’s possible rate hike remains a concern. Therefore, waiting for a better entry point in both stocks could be wise.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Grocery/Big Box Retailers industry here.
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COST shares fell $2.57 (-0.50%) in premarket trading Wednesday. Year-to-date, COST has gained 12.96%, versus a 12.46% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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