This Costco-Like Retailer Trades at a Much Cheaper Valuation Than Costco. Is It a Buy?

BJ's Wholesale Club (NYSE: BJ) operates in the same membership-warehouse niche that has made Costco Wholesale (NASDAQ: COST) a market favorite. Yet, the two stocks command very different valuations today. The smaller chain, which is more well-known on the East Coast than elsewhere, trades at a much lower earnings multiple despite operating a similar value-based model built on membership fees and bulk goods.

The valuation gap between BJ's and its larger and more fine-tuned peer is worth a closer look following the smaller membership-based warehouse retailer's recent quarterly update. BJ's delivered mid-single-digit revenue growth and another strong quarter for membership fees -- an important driver of recurring income for this type of retailer. At the same time, however, profit growth lagged as operating expenses climbed.

For investors trying to decide whether BJ's offers a bargain alternative to Costco, here's a closer look at how it measures up.

Image source: Getty Images.

Membership and sales trends

BJ's total fiscal third-quarter revenue rose 4.9% year over year to $5.35 billion. Comparable sales for the quarter grew 1.1%. However, when adjusted for changes in gasoline prices, they increased 1.8%. Membership fee income was the clear standout, climbing 9.8% to $126.3 million as BJ's benefited from higher-tier membership penetration and fee increases that took effect at the start of the year.

Of course, the top line is not the whole story. BJ's operating income in the quarter declined 4.8% year over year to $218.4 million, and net income slipped 2.4% to $152.1 million. Higher labor and occupancy costs tied to new clubs and gas stations, along with increased advertising and depreciation, weighed on profitability. Management also lapped a legal settlement benefit from the prior-year quarter that made the comparison tougher.

Still, the company stated that digitally enabled comparable sales grew 30% year over year in the third quarter and now represent a significantly larger slice of sales than just a few years ago.

Additionally, management was upbeat:

"Our business continues to perform well in a volatile environment and we are maintaining an unwavering focus on what matters most: taking care of families who depend on us," said BJ's Wholesale Club CEO Bob Eddy in the company's third-quarter earnings release. "We are confident that we can be the destination for value and convenience, and we are entering the holiday season with momentum."

BJ's now expects comparable club sales, excluding gasoline, to rise 2% to 3% for the full fiscal year. And it raised its adjusted earnings-per-share outlook to a range of $4.30 to $4.40. These figures compare to previous full-year forecasts for comparable club sales growth of 2% to 3.5% and for adjusted earnings per share of $4.20 to $4.35.

There's a good reason for the cheaper valuation

To understand why BJ's shares are relatively cheaper than Costco's in terms of valuation, it is helpful to compare the two businesses side by side. Costco's fiscal 2025 results show a very different growth profile. Revenue for the year increased 8.2% to $275.2 billion. Additionally, Costco's comparable sales, excluding changes in gasoline prices and currencies, rose 6.4% year over year in its most recently reported quarter (fiscal Q4).

Clearly, BJ's is growing more slowly. Driving this home, total revenue increased 4.3% year over year to $15.9 billion through the first nine months of fiscal 2025. Comparable club sales, excluding gasoline, were up 2.6% over that span, well below Costco's full-year pace. That gap partly reflects Costco's broader footprint and brand strength with both consumers and suppliers.

The valuation spread between the two companies, however, is extremely wide. As of this writing, BJ's trades at about 19 times forward earnings and about 0.6 times sales. Costco, by contrast, commands a forward price-to-earnings ratio of about 44 and trades at about 1.4 times sales. Investors are paying a major premium for Costco's scale, stronger growth profile, and long track record of consistent execution.

BJ's massive discount compared to Costco's valuation, however, does not necessarily mean BJ's stock is mispriced. The two are very different, starting with size. BJ's operates fewer than 300 clubs. Meanwhile, Costco has a well-known brand in the U.S. and Canada, and it is seeing impressive early momentum internationally. It's total warehouse count? Over 900 -- and those warehouses push far more sales volume through them.

Additionally, BJ's recent results show modest top-line growth, as well as some pressure on its operating margin. In a crowded landscape that includes Costco, Walmart's Sam's Club, and traditional grocers, BJ's must continue to prove that it can carve out lasting advantages and accelerate its sales growth before it can command a higher valuation multiple.

At the same time, BJ's current valuation does not look demanding for a membership-based retailer with positive comparable sales and rising membership fees. Therefore, for investors who already own Costco or are unwilling to pay the valuation that Costco commands, BJ's offers a solid alternative for gaining exposure to the warehouse club model. Sure, you get slower growth. But there's less valuation risk.

Daniel Sparks 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.