Thursday, March 04, 2010

Don't Lump Costco and BJ's Together

Barron’s
Both Costco Wholesale (ticker: COST) and BJ's Wholesale Club (BJ) are under pressure today after the discounters missed quarterly estimates. Costco is down 0.6%, while BJ's is off 4.6%.

While the latest earnings results look similar, the companies are on divergent paths. Costco remains the market leader with a long-term story driven by international growth. BJ's is focused on the Eastern portion of the United States and has no international presence.

Valuations already recognize much of the difference. Costco fetches 20 times expected earnings per share for the next 12 months, while BJ's trades at a cheaper 12.8 times. Still, we'd stick with the pricier name. (See Barron's Take, "Costco's Stock on Sale, Too," Dec. 10, 2009.)

Costco has 413 stores throughout the U.S. compared with 180 clubs for BJ's, which are in 15 Eastern states. More significant is Costco's proven strategy for international expansion. The discounter has locations in Canada, Mexico, the United Kingdom, Taiwan, Korea, Japan and Australia.

Other differences are evident in the margins, which remain higher at Costco. For its fiscal second quarter, Costco's gross margin was up 20 basis points to 10.7%, while BJ's margin held flat at 9.3% in its fiscal fourth quarter.

"For these type of large companies, I think it's pretty telling," Wall Street Strategies analyst Brian Sozzi says of the margin difference. "It's a reflection of the sales mix and the consumer coming back into the stores."

Link to full article: http://online.barrons.com/article/SB126756871937454701.html?mod=BOLFeed

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