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Last Thursday, BJ's Wholesale Club (NYSE: BJ) returned to the public markets after a seven-year stint under private ownership. The IPO priced at $17 a share -- at the high end of the expected range.
Furthermore, BJ's stock had a nice pop during its first two days of trading, opening at more than $20 and reaching $23.65 by the end of the week. This gave the company a market cap of about $3 billion.
BJ's Wholesale Stock Performance, data by YCharts.
However, BJ's Wholesale Club is clearly inferior to its larger competitor Costco Wholesale (NASDAQ: COST) in several key respects. This makes it vulnerable to Costco's ongoing growth in the long run. That's why I am steering clear of BJ's stock.
Low sales productivity
BJ's first (and arguably most serious) problem is the low productivity of its warehouses. The company has sales per square foot of about $540, according to retail analyst Chuck Grom. By contrast, Costco generated $93.9 billion of revenue in the U.S. last year with 75.4 million square feet of retail space (as of the end of the fiscal year). This puts Costco's domestic sales per square foot at an incredible $1,245.
This gap in sales productivity is particularly striking because the typical BJ's club is a good deal smaller than a typical Costco (roughly 110,000 square feet compared to 145,000 square feet).
Having a smaller club size should theoretically bolster sales per square foot. However, BJ's doesn't have the same real estate quality as Costco. Furthermore, its target demographic has a lower income than the average Costco member. Finally, Costco has nearly three times as many members per warehouse as BJ's.
Costco has much higher sales volumes per warehouse than BJ's. Image source: Costco Wholesale.
Subpar sales trends
The second strike against BJ's Wholesale Club is that it hasn't been able to grow its sales. Comparable-club sales decreased in four of the last five fiscal years. Excluding gasoline sales -- which can be volatile due to changes in gas prices -- BJ's has reported comp sales declines in each of its five most recent fiscal years.
For comparison, Costco has posted mid-single-digit domestic comp sales growth (excluding gasoline sales) over the past year. For its three most recent fiscal years, it has averaged domestic comp sales growth (ex-gas) of approximately 4%.
BJ's already spends more than 15% of its sales on operating expenses, compared to just 10.3% at Costco. This means that BJ's needs higher gross margins to be profitable. Given that Costco has 10 times as much revenue as BJ's -- and thus more buying power -- the only way that BJ's can maintain a higher gross margin than its larger rival is to charge higher prices (on average).