BJ’s Wholesale club is the 3rd largest of the warehouse clubs offering groceries and general goods in North America, with 219 stores as of . The company is roughly 1/4 the size of Costco by store footprint and about 1/3 the size of Sam’s club on the same basis. Costco has a market cap of roughly $168 billion, an enterprise value of $150 billion and an EV/EBITDA ratio of about 20X. BJs has a market cap of roughly $5.8 billion, an enterprise value of $9.5 billion and an EV/EBITDA ratio of 15.7X. Costco reports roughly 58 million paid club memberships. BJ reports roughly 6 million paying members.
Costco generated more than $160 billion in sales in its last fiscal year which just ended. BJs is on track to touch $16 billion for fiscal $2020. Given the massive disparity in the size of the two companies, one would think that Costco would have a commanding increase in its EBITDA margin. Costco earned about 11.2% gross margin on sales in 2020. Not so, the two companies report margins roughly 25 basis points off of one another.
This could indicate that there are really few areas to reduce costs beyond a certain point to boost operating margins, once a company has achieved a certain minimum threshold of sales. Alternatively, the similarities in margin might reflect the fact that, although Costco has significantly greater stores, they are spread out all across the globe. Many of the Costco markets are relatively new (France, Spain and China) and these new regions lack the economies of scale to provide a significant boost to the bottom line. Costco’s larger revenue contribution from low margin gasoline and pharmacy operations may also account for the relative parity in gross margins at the store level. Costco, by way of comparison, generated about 57% of 2020 sales from groceries; the balance from general merchandise, gas bars and pharmacy sales.
BJs, in contrast, operates exclusively in the United States and, until recently, focused almost exclusively in the US East coast region. BJ’s with roughly 1/4 the store footprint of Costco, has about 28,000 employees. Costco has roughly 273,000 full and part time employees (156,000 are full time). BJs has a heavy emphasis on groceries which represents roughly 76% of total sales. 8% of revenues come from the affiliated gas bars and 16% comes from general merchandise.
Costco owns roughly 79% of its stores and land surrounding said properties. Costco grew its store footprint by about 1.6% for the last fiscal year. BJs, in contrast, only owns the buildings on 14% of its locations. The remainder are leased.
If one takes a helicopter view of BJs vs Costco, the business model, while similar for the typical investment analyst, does have some appreciable differences. BJS focuses upon groceries whereas Costco generates an increasingly even split between grocery items and non grocery items in its overall stores.
Secondly, BJs permits customers to use any manufacturers coupons offered. As manufacturers pay retailers for these coupon redemptions, other than the cost of processing, which has greatly diminished over the years due to technological advances, there isn’t any downside to a retailer for coupon acceptance. Yet, neither Costco nor Sams accept them.
Finally, Costco has emphasized ownership of the lands and buildings in which it operates. BJs has preferred the less capital intensive, but less asset heavy, leasing model. I prefer ownership myself, but in a retail environment where there are far more empty stores than active in the United States, maybe ownership of retail building and lands isn’t all that its cracked up to be.
My rational for owning BJs plus Costco is twofold. I believe that BJs operates a better grocery business than does Costco. Margins on grocery are sniffed at by many retail analysts, but they certainly exceed gasoline and pharmacy dispensary margins. Therefore, I think that an opportunity exists for BJs to outperform Costco on an operating profit level, as a percentage of sales, in the coming years. Secondly, BJs has only recently returned to the markets as a publicly traded company. BJs didn’t have the strongest balance sheet and this constrained the ability of the company to grow the store base. The Covid pandemic has produced high levels of profitability for all three of the membership club retailers. There is no reason that BJ’s won’t take advantage of this windfall profit and embark upon a more rapid expansion. Grocery, where BJs has demonstrated strength, is somewhat less susceptible to Amazon type disruptions that might be underway with the pharmacy store sector of retail.
https://www.sec.gov/ix?doc=/Archives/edgar/data/1531152/000153115220000156/bj-20200801.htm#i4dcb6a0378a04c209f90444ce8e7f65e_19
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