Should investors stop ignoring this under-the-radar retail stock?

When it comes to warehouse retailers in the US, much of the investor focus there is on Costco Wholesale (COST -0.16%) or Walmarthis (WMT 0.45%) Sam’s Club. With locations in nearly every state in the US, they have a much more visible public presence.

Because of this focus, investors may have missed the fact that there is a third player in the warehouse retail market. They also missed out on the stock price rally BJ’s Wholesale (BJ -3.97%).

Although it has a much smaller footprint than its two biggest competitors, BJ’s stock has far outperformed S&P 500 in the last five years. Its price is up 223% over that time frame, compared to the S&P 500’s 95% gains. Given these strong gains, investors should take a closer look at BJ’s or continue to steer clear of the retail stock ?

BJ’s Wholesale and its struggles

At first glance, investors could be forgiven for overlooking BJs. The company started in Massachusetts in February 1984, just months after Costco was founded in Washington state. However, Costco operates in nearly every US 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 just six locations over the previous year. Additionally, its total revenue for the first six months of fiscal 2024 (ended Aug. 3) came in at just over $10.1 billion, up 4.5 percent from last year’s level.

Rising operating costs weighed on its bottom line. As a result, net income for the first two quarters of fiscal 2024 was $256 million, up just 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 they operate. In addition, it struggled with high levels of debt before the COVID-19 pandemic. At the end of fiscal 2019 (ended February 1, 2020), BJ had nearly $1.7 billion in total debt when its book value was negative.

Company Improvements

The COVID-19 pandemic may have saved the company’s finances. Revenue growth was less than 1% in fiscal 2019. However, revenue rose 17% in the following fiscal year. Its approach to smaller product sizes and acceptance of manufacturer coupons has likely attracted customers who would have been overlooked before the pandemic.

This reduced total debt by 34% in one year, freeing up capital to build new warehouses and invest in its business.

The double-digit revenue growth didn’t last. However, his financial situation improved dramatically. Today, total debt is just $616 million and shareholders’ equity stands at nearly $1.7 billion, making the remaining debt more bearable.

Its membership revenue rose 9% in the first half of fiscal 2024, which could indicate future revenue growth. While analysts are forecasting 3% growth this fiscal year, they expect it to accelerate to 7% by fiscal 2025.

This could lead to a long-awaited expansion of multiples. Right 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 lead some investors to view BJ’s as a second chance if it misses the run on Costco.

Should I stop ignoring BJs?

Retail investors should keep BJ’s Wholesale on their watch lists, but the prospects for it outperforming the S&P 500 going forward are unclear. Indeed, BJ’s stock has far outperformed the S&P 500 over the past five years, and the stock sells at a significant discount to its most direct competitors. If one has a deep interest in the retail stock, it is likely a buy.

However, a return to double-digit revenue growth seems unlikely without another catalyst like a pandemic. Its slow pace of expansion and single-digit revenue growth are unlikely to attract many growth investors to the stock.

Finally, the low valuation and prospects for faster revenue growth should boost BJ’s stock, and it could benefit if the P/E ratio starts to look more like that of Walmart or Costco.

However, individual stocks carry additional risk, and since it’s now on track to closely approximate the S&P 500, most investors would be better off sticking with an index fund.