Better Stock to Buy Right Now: Costco vs. BJ's Wholesale

Bulk-buying, bargain-hunting shoppers have made the members-only discount store concept wildly successful. Costco Wholesale (NASDAQ: COST) and BJ's Wholesale Club (NYSE: BJ) are translating that popularity into strong growth and record profitability. At the time of this writing, shares of both companies are at an all-time high with Costco up 44% this year and BJ's up a similarly impressive 40%.

Should you buy Costco or BJ's Wholesale stock now? Here's what you need to know.

Image source: Getty Images.

The case for BJ's Wholesale Club

Despite a similar club-based warehouse retail model, BJ's Wholesale has some key differences compared to industry leader Costco. In this case, BJ's current 7.5 million paying members and 247 club stores are materially smaller than Costco's 76 million members and 891 warehouse locations worldwide.

Still, BJ's counts on a strong regional presence, particularly in the eastern United States. Members are attracted to a typically greater variety of grocery items, often available in smaller packages, making BJ's a more convenient option for everyday shopping. BJ's is known for accepting coupons and running regular promotions that may allow it to win over some of the most price-conscious customers.

The latest company results suggest its strategy is working. In the third quarter (ended Nov. 2), comparable club sales, excluding the gas station business, increased by 3.8% year over year, accelerating from the 2.3% pace in Q3 2023. Adjusted earnings per share (EPS) this quarter were up 18% from last year with the headline numbers beating Wall Street analyst estimates.

Management cited a robust increase in memberships and store traffic. Investments to expand e-commerce capabilities are also paying off. Digitally enabled comparable sales, which include services like home delivery and in-store pickup, are up 30% this year as a new growth driver. The company is projecting confidence in its outlook by hiking full-year growth and earnings guidance.

Overall, there's a lot to like about BJ's Wholesale Club as an investment idea benefiting from a new round of operating and financial momentum. The company is unlikely to dethrone Costco as the largest big-box wholesaler anytime soon, but its key advantage is its more compelling valuation. Shares of BJ's are trading at 24 times its consensus 2024 EPS as a forward price-to-earnings (P/E) ratio, representing a deep discount compared to Costco's forward P/E of 54. While some of that spread may be justified given Costco's scale and earnings prowess, investors looking for a bargain in this important consumer goods category may find shares of BJ's Wholesale the better deal.

BJ PE Ratio (Forward) data by YCharts

The case for Costco Wholesale

As good as the results from BJ's have been, Costco's growth trends are even stronger. The company posted its monthly operating update for October (ended Nov. 2), noting its total company net comparable sales excluding the impacts of changes in gasoline prices and foreign exchange increased by 6.5% from last year. That's well above BJ's growth rate last quarter and highlights Costco's size advantage with exposure to high-growth international markets.

Where Costco stands out from BJ's is its larger selection of premium and big-ticket items in categories like jewelry, electronics, and furniture. In a resilient macroeconomic backdrop with an expectation for consumers to see lower borrowing costs as the Federal Reserve moves to cut interest rates, Costco could be poised to capture a rebound in member discretionary spending.

Ultimately, the attraction of Costco over BJ's Wholesale goes back to its industry leadership and brand recognition. Costco stock is pricey, but that valuation can be justified by investors recognizing the company's blue chip status and what may still be the early stages of a significant opportunity to expand globally.

Decision time

There's a lot to like about Costco Wholesale, but unfortunately, its stock is just too expensive for me to jump in and buy today. In turn, shares of BJ's Wholesale appear to offer more value and may be the better choice for investors right now. Given the inherent unpredictability of the stock market and the risk that company results disappoint, BJ's Wholesale stock is better-positioned to reward shareholders into 2025 and beyond.

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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.