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Investors love warehouse chain Costco Wholesale (NASDAQ: COST), and for good reason. This well-managed business consistently keeps its prices low for its members in spite of inflationary headwinds. And for its efforts, it's rewarded with loyalty from its members and high-margin recurring revenue from its membership fees.
This consistent source of profits allows Costco's management to reward shareholders on a regular basis. One of its preferred methods is paying a growing dividend. It's paid and increased its dividend for 19 straight years, and I expect this streak to continue for decades to come.
But if there's one knock on Costco stock, it's its valuation -- the stock is expensive. At 50 times trailing earnings right now, Costco shares trade at almost a 50% premium to the 10-year average for their valuation, as the chart below shows.
The late great Charlie Munger loved Costco stock, which was one of only three stocks in his personal portfolio. But even he bemoaned its valuation.
What's to like about BJ's stock?
This is why I want to highlight BJ's Wholesale Club (NYSE: BJ) stock. It offers investors many of the exact same benefits of Costco stock but is a better bargain by a mile. Considering the business model is membership-based, an investment thesis for BJ's Wholesale Club revolves around its ability to gain and retain members.
Since this is the core issue for a BJ's investment, shareholders should be encouraged. When BJ's went public in early 2018, it had more than 5 million paid memberships. Now it has more than 7 million as of the end of its fiscal 2023.
BJ's hasn't just found new members; it's retained old ones as well. The company's renewal rate in 2023 was 90%. For perspective, Costco's renewal rate in its most recent quarter was only marginally better at 93%.
To retain members, both clubs must provide value to their shoppers -- it's the whole reason someone would pay to shop there in the first place. One of the ways BJ's seems to be providing value to its members is through its privately owned brands. In 2017, 19% of its sales came from its own line. But in 2023, the penetration rate was nearly 26%.
Long term, BJ's management believes its privately owned brands can hit 30% of sales. This should provide value for members and consequently spur ongoing high renewal rates.
BJ's isn't only retaining members at existing stores. It's also opening up new locations at a modest pace. As of the end of 2023, it has 244 club locations, and it intends to open 12 new locations this year. For what it's worth, Costco has nearly 900 locations, which suggests that BJ's could grow for quite some time at its current pace.