Wholesale Club War: BJ's vs. Costco

BJ's Wholesale Club delivered healthy sales this spring. In April, the wholesale club retailer registered an 8.5% sales increase, and in May the company's sales increased $7.4% from the same period the previous year. But the company has been seen as facing stiff competition from Costco, and now the company will accept an offer from two leading investment firms to buy the chain with the ambition of enhanced competition against Costco in the future.

With 190 wholesale club retail stores in 15 states, Westborough, Massachusetts-based BJ's (NYSE: BJ) has performed well across all categories this year, improving across all categories, from beauty care products to coffee and small appliances. But analysts have been neutral on BJ's stock because of stiff competition that's coming on fast from Costco (NASDAQ: COST).

Based in Issaquah, Washington, Costco Wholesale Corp. is the largest membership wholesale retail club in the United States and the company has been on a fast-growth pace. The company touts on its web page it was the first American company to grow from zero in sales to $3 billion in less than six years, and with close to 450 warehouses in the United States, Costco has been looming as a dark cloud to BJ's, threatening the company's future prospects

Costco is Wholesale Club Sales Leader

Already Costco has been an ominous figure for Sam's Club, the other leading competitor in the warehouse space. Owned by Wal-Mart, Sam's Club has more warehouses than Costco but Costco has a higher total sales volume than Wal-Mart. Sam's Club can hold its own, however, if for no other reason than it's part of Wal-Mart, the world's largest retailer (NSYE: WMT). BJ's, though, has approached what many industry watchers viewed as a peak, in both sales growth and stock price, unless something is done to counter back against Costco's impeding presence.

That's why BJ's Wholesale Club's management has approved a buyout by two private equity investors in a deal worth roughly $2.8 billion. The nation's third-largest wholesale club behind Sam's Club and Costco said Wednesday that Leonard Green & Partners and CVC Capital Partners will pay $51.25 per share in cash for BJ's common stock, a 6.6 percent premium over Tuesday's closing price of $48.08.

This was an opportunistic price - management wanted to get it done, said Brian Sozzi, an analyst at Wall Street Strategies Inc in New York, in an interview with Bloomberg. As a shareholder, you don't want to see this type of deal and haggling going into the holiday season.

The deal is expected to close in the fourth quarter, but BJ's board of directors must approve the deal with a vote, but that isn't expected to be an issue.

BJ's will benefit from the continued execution of our business plan and the significant retail expertise of our new partners LGP and CVC, as well as from continued investments in our clubs, our people and technology, and the future of our business, said Laura Sen, BJ's chief executive, said in a statement.

Firms Get Good Price for BJ's

The price paid by the private equity firms was slightly higher than Costco's current valuation in the stock market. Costco is trading near its 52-week high at $79.99 per share, or a price-to-earnings ratio of 25. The private equity deal for BJ's is equivalent to a price-to-earnings ratio of about 26.

Leonard Green has been on the hunt for large retailers in the past year, taking over companies including Jo-Ann Stores Inc, and J. Crew Group Inc. The firm manages roughly $9 billion in holdings and has significant ownership stakes in Whole Foods Market Inc. and Petco Animal Supplies Inc.

What this means for BJ's industry watchers say is that the company will be positioned for growth and some in-store changes to go directly against Costco. Known for having higher quality and better deals on higher quality food and beverage items, Costco is largest retailer of fine wine in the world. The company doesn't advertise, but its food and wine strengths have driven sales and profits.

Costco has carried more in the way of organic and alternative choices of products than its competitors, including BJ's, but each of the chains does well with its own signature items. BJ's, however, is expected to push growth once the acquisition is complete that will keep the chain competitive against Costco with more stores and more offerings in the higher-end food categories.