Cramer Crowns a Discount King

BJ’s Wholesale Club is the discount king, Cramer said Thursday. While Big Lots is a close second – a discount prince, perhaps – BJ’s is the stock to buy when it comes to off-price retail.

Mad Money has dedicated this week in part to finding the king of the discounters. As the economy shows signs of recovery, Cramer wanted to know which of these trade-down plays would still work. Big Lots andTJX Cos. also got nominations but BJ’s proved itself the best investment.

“It’s got the better business model,” Cramer said of BJ’s, “it has more room for growth than any of the others, and it’s the best stock.”

Cramer gave a nod to Ross Stores , too, a retailer very similar to TJX. That’s both a good and a bad thing, though. Ross shares the same excellence in execution as TJX, last quarter delivering a 3% increase in same-store sales while also shrinking inventories by 9%, and it even offers the potential for more growth. But it’s the dependence on overstocked apparel that’s the problem.

If business is good for brand-name dealers, then the discounters have to pay up for merchandise. And with clothing retailers enjoying increased sales as well as lean inventories right now, Ross and TJX’s margins are being squeezed. Good execution or not, these cheap apparel stores are just too vulnerable to the business cycle.

Why BJ’s specifically, though? Because it carries less downside risk. Big Lots may not have the exact same sourcing problems as TJX or Ross Stores, but it does have the potential for something similar. Not to mention, Big Lots’ store experience is far inferior to BJ’s. Both of these things matter.

Also, BJ’s is less susceptible to the economic recovery. The store’s paying members aren’t likely to walk away just because they now have a little extra money in their pockets. Other discount retailers can’t claim the same distinction.

In terms of the stock itself, Cramer likes BJ’s because of its smaller move since the early March bottom – just 5%. Over the same period, Costco is up 27%, Big Lots 46%, TJX 70% and Ross Stores 59%. BJ’s is also the cheapest, trading at just 12 times 2010. Costco trades at more than 18 times next year’s earnings. And BJ’s, with its 180 locations, offers the most growth potential. Costco operates 557 stores.

Another great plus for BJ’s: The company predicted that same-store sales would increase 3% to 5% in the third quarter and 4% to 6% in Q4. Aside of Ross Stores, that’s the best sales guidance of any of the retailers Cramer looked at this week.

The rest of the stocks – TJX, COST, BIG and ROST – are in the Sell Block until they drop lower. They’re too expensive right now.

“Price matters,” Cramer said. “Not just at the stores, but in stocks, too.”

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