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BJ’s or Costco?

Consumers may have their reasons for choosing BJ’s Wholesale Club over Costco, or vice versa, but Cramer on Monday made his case for which was the best stock. BJ’s, he told viewers, seemed the better company in virtually every conceivable category.

These two companies occupy a special niche in the investing world. Their lower prices make them attractive to customers, so they work as trade-down plays on the recession. But because they are not true defensive stocks – like, say, food or drug firms – they can ride the recovery right back up. Of course, investors can only pick one. Here’s why Cramer went with BJ’s .

The biggest difference between BJ’s and Costco is geography. While the former is largely an East Coast business, the latter has a large footprint in the West. New York is home to 19% of BJ’s 181 stores, with 15% in Florida and 11% each in Massachusetts and New Jersey. Costco, on the other hand, operates 28% of its 403 stores in California and another 7% in Washington.

The California exposure has hit Costco hard, as housing foreclosures and unemployment hurt consumers’ spending power. Now, that negative could turn into a positive if the state’s economic outlook changes, but the large number of jobless Californians will make that hard. Florida has had its share of troubles, for sure, but at least BJ’s exposure to the Sunshine State is considerably smaller. And BJ’s has spread the risk with its outlets in Massachusetts and New Jersey, areas less impacted by the recession.

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Another key part of valuating retail companies is their ability to expand, Cramer said, and BJ’s takes this contest as well. Retail stocks run out of appreciation when the underlying firms run out of room to grow. So it’s a big plus that BJ’s could double its number of outlets and still not match Costco’s size. That means there is plenty of growth left.

Cost structures play an important role here as well. The biggest factor? Unions – as in BJ’s workers are not organized and lack formal representation. This allows the company to keep wages lower than Costco, and that boosts margins. West Coast Costco is also in the unlucky position of competing with Sam’s Club, the biggest of these three warehouse wholesalers, while East Coast BJ’s fights for customers with supermarkets, which are often just as bogged down by unionized employees.

BJ’s also shows its top performance in terms of the industry’s key metrics. A new merchandising strategy has proved successful, helping with last quarter’s same-store sales growth, excluding fuel, of 7.5%. Compare that with Costco’s 0%. While BJ’s is up from 6.4% last quarter, Costco has drifted down from 6% same-store sales growth three quarters ago to its present level – zilch.

Despite all these checks in BJ’s pro column, Costco still fetches a higher multiple. A better translation: BJ’s is cheaper, trading at just 13 times next year’s earnings estimates while Costco trades at 18. And at $35.73, BJ’s is still closer to its 52-week low than its high. Cramer thinks the stock still “has much further to go.”

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