Shop for a Bargain at BJ's

Rising prices and a slowing economy are hurting most retailers, and last week's retail sales results show that consumers are favoring discount stores. I think BJ's Wholesale Club (BJ - commentary - Cramer's Take) may be the way to play this trend. Based on its relative value compared to Costco (COST - commentary - Cramer's Take), BJ's' stock could rise between 25% and 40% over the next year or so.

BJ's same-store sales rose 6% in March, compared to a 7% rise at rival Costco. Wal-Mart (WMT - commentary - Cramer's Take) eked out a modest gain, while Target (TGT - commentary - Cramer's Take) and Family Dollar (FDO - commentary - Cramer's Take) saw declines.

Over the last year, BJ's has significantly underperformed Costco. The promotion of longtime employee Laura Sen to the position of president and chief operating officer in January, however, may have answered investor concerns regarding CEO succession. Since then, the stock has been catching up to Costco, though there remains 15 percentage points of differential performance that could be made up.

BJ's has 177 stores, clustered primarily in the Northeast and Florida. The company tries to differentiate itself by offering both bulk quantities and smaller, supermarket-sized portions of many products. It is also the only warehouse club that accepts all manufacturers' coupons, which may be an important differentiator in the current shopping environment.

Analysts appear to agree. Since January, estimated earnings per share for the current fiscal year have risen from $1.94 to $2.03. In the last 60 days, estimates for the fiscal year ending in January 2010 have risen from $2.13 to $2.22. In that time, estimates for Costco have been essentially unchanged. As a result, even though BJ's shares have been performing better than those of its rival during that time, its forward P/E of 17.9 times remains well below the 20.5 multiple enjoyed by Costco.

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At the time of publication, Trent had no positions in the stocks mentioned, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.