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Credit Suisse Likes BJ's Wholesale Over Costco Right Now

February 13, 2020 1:55 pm
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Credit Suisse Likes BJ's Wholesale Over Costco Right Now

Warehouse retail offers investors an attractive theme as it touches on multiple growing consumer trends, according to Credit Suisse, but investors shouldn't rush out to buy shares of the industry titan.

Judah Frommer initiated coverage of Costco Wholesale Corporation (NASDAQ:COST) with a Neutral rating and $328 price target. The analyst also initiated coverage of BJs Wholesale Club Holdings Inc (NYSE:BJ) with an Outperform rating and $25 price target.

Warehouse clubs operate a business model that hit on key themes that will dominate the next five to 10 years of consumer staples retail, Frommer wrote in a note. These include younger millennials expanding subscription services to include warehouse clubs, a surge in popularity in private label or store brands and warehouse clubs are in the very early stages of a digital rollout.

Costco: Valuation Concerns

Costco ranks among the highest-quality consumer staples names in the U.S. and is a "clear standout" in the warehouse space. Frommer said the company deserves credit for showing industry-leading same-store sales growth but difficult year-over-year comparisons and Street estimates call for a slowdown in comps. Also, near-peak gross margins can be attributed to "outsized" fuel profits and this trend is unlikely to repeat.

As such, Costco's stock is trading at a "fairly balanced" valuation ahead of expectations for slowing comps and peak margins.

BJ's Wholesale: Trades Like A Grocer

Frommer said BJ's Wholesale offers a bigger selection of products for sale compared to its competitors with a heavy focus on grocery.

Behind the scenes management has arguably shown a lack of vision in its go-forward strategy. However, the stock is valued more like a traditional grocer at current levels and that offers a positive risk-reward profile. Shares are also trading near all-time lows, but further downside is unlikely given consistent membership fee income growth and improved membership renewal rates

"We do not assume that BJ is close to approaching the industry-leading top-line momentum and per-square-foot productivity that Costco enjoys, but its model does deserve a premium valuation to traditional grocers, in our view," the analyst wrote in a note.

COST, BJ Price Action

Shares of Costco traded around $318 at time of publication, while BJ's stock was up 2.2% at $22 per share.

Related Links:

Costco CEO Talks Special Dividend, Membership Fees In CNBC Interview

UBS, Wells Fargo Remain BJs Wholesale Bulls, Morgan Stanley Sticks To Sidelines

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