Retail Giants: A Tale of Two Stocks
Walmart and Costco Wholesale are the undisputed champions of brick-and-mortar retail, reigning supreme in terms of revenue. Their recent success is a testament to their strength in consumer staples and reputation for offering competitive prices. The membership model of Costco and Walmart’s Sam’s Club provides an added advantage, setting them apart from their competitors.
A Glimpse into Their Performance
The chart below illustrates the impressive performance of both stocks over the last five years. While past results don’t guarantee future success, it’s essential to examine what each stock has to offer today to determine which is the better investment opportunity.
Business Models: Similarities and Differences
Walmart and Costco share similar business models, but there are key differences. Walmart operates primarily as a conventional retailer, with its superstores offering a wide range of merchandise. The company generates most of its revenue from groceries and is renowned for its “everyday low prices” model. Walmart’s customer base tends to skew towards lower- and middle-income customers, with its U.S. stores primarily located in rural and suburban areas.
In contrast, Costco operates solely as a membership-based retailer, creating an economic moat through its membership fees and high-quality merchandise at competitive prices. The company has consistently ranked high in customer satisfaction, thanks to its commitment to these characteristics.
Recent Results: A Tale of Success
Both Walmart and Costco have delivered solid results, defying the challenges posed by inflation. Walmart reported a impressive quarter with 5.5% revenue growth, an improvement in gross margin, and a 14% increase in adjusted earnings per share. The company’s investments in omnichannel and growth businesses like advertising and e-commerce have paid off.
Costco, meanwhile, delivered similar results, with comparable sales excluding fuel and currency exchange up 5.9%. Revenue increased by 1% to $78.2 billion, despite losing a week in its fiscal calendar. The company’s margins continue to expand, with earnings per share rising from $4.86 to $5.29.
Valuation: A Premium Price
Both Walmart and Costco have earned a premium valuation due to their recent success. Walmart trades at a price-to-earnings (P/E) ratio of 38.4, offering a 1% dividend yield. Costco is also richly valued at a P/E of 59, with a dividend yield of 0.5%. The company has a history of paying large special dividends every few years.
The Verdict: Which Stock Reigns Supreme?
While both businesses are executing well, their current valuations are steep. Of the two companies, I’d rather own Costco due to its attractive growth opportunity, faster store openings, and consistent track record of growth. However, I’d prefer to wait for a more attractive valuation to buy the stock. Costco is the better buy, but patience is required.
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