When it comes to warehouse retailers in the U.S., much of the investor focus out there centers on Costco Wholesale (NASDAQ: COST) or Walmart 's (NYSE: WMT) Sam's Club. With locations in almost every state in the U.S., have a much more noticeable public presence.
Because of that focus, investors may have missed the fact that there is a third player in the warehouse retailing market. They also have missed the stock price growth in BJ's Wholesale (NYSE: BJ) .
Although it has a much smaller presence than its two large competitors, BJ's stock has far outperformed the S&P 500 over the last five years. Its price is up 223% over that timeframe compared to the S&P 500's 95% gains. Given those strong gains, should investors take a closer look at BJ's, or continue to bypass the retail stock ?
BJ's Wholesale and its struggles
At first glance, one could forgive investors for overlooking BJ's. The company began in Massachusetts in February 1984, mere months after the founding of Costco in Washington state. Yet Costco operates in nearly every U.S. state and on four continents, while BJ's has yet to build a warehouse west of the Mississippi River.
It has expanded gradually, especially when considering its smaller size. Its footprint of 244 warehouse clubs grew by only six locations in the previous year. Furthermore, its total revenue for the first six months of fiscal 2024 (ended Aug. 3) came to just over $10.1 billion, a 4.5% increase from year-ago levels.
Rising operating costs weighed on its bottom line. Hence, its net income for the first two quarters of fiscal 2024 was $256 million, growing only 3% from year-ago levels. Such increases are unlikely to drive growth investors into the stock.
As mentioned before, Costco and Sam's Club have long overshadowed BJ's in the states where it operates. Additionally, it struggled with high debt levels before the COVID-19 pandemic. At the end of fiscal 2019 (ended Feb. 1, 2020), BJ's held almost $1.7 billion in total debt when its book value was negative.
Company improvements
The COVID-19 pandemic may have rescued the company's financials. Revenue growth was less than 1% in fiscal 2019. However, revenue rose by 17% in the next fiscal year. Its approach of smaller product sizes and acceptance of manufacturer's coupons likely attracted customers who would have overlooked it before the pandemic.
That reduced its total debt by 34% in one year, freeing up capital to build new warehouses and invest in its business.
The double-digit revenue growth did not last. Nonetheless, its financial condition has dramatically improved. Today, the total debt is just $616 million, and its stockholders' equity stands at almost $1.7 billion, making its remaining debt easier to bear.
Its membership revenue grew 9% in the first half of fiscal 2024, which could point to a coming increase in revenue. Although analysts forecast 3% growth this fiscal year, they expect it will accelerate to 7% by fiscal 2025.
That could lead to some long-overdue multiples expansion. For now, BJ's price-to-earnings (P/E) ratio is 21. That's well below Sam's Club parent Walmart at 40 times earnings and Costco at a P/E ratio of 55! That difference and its regional footprint could prompt some investors to see BJ's as a second chance if they missed the run on Costco.
Should I stop ignoring BJ's?
Retail stock investors should keep BJ's Wholesale on their watch lists, but the prospects of it outperforming the S&P 500 are unclear going forward. Indeed, BJ's stock far outperformed the S&P 500 over the last five years, and the stock sells at a significant discount to its most direct competitors. If one has a deep interest in retail stocks, it is arguably a buy.
Nonetheless, a return to double-digit revenue growth appears unlikely without another catalyst like a pandemic. Its slow pace of expansion and single-digit revenue growth are also unlikely to draw many growth investors into the stock.
Ultimately, the low valuation and prospects for faster revenue growth should boost BJ's stock, and it could benefit if its P/E ratio starts to resemble Walmart's or Costco's more closely.
However, individual stocks come with added risk, and since it is now on pace to closely approximate the S&P 500, most investors may be better off sticking with an index fund.
Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. The Motley Fool has a disclosure policy .
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