Optimal Purchase Option: Walmart versus Costco at Present
Walmart and Costco, both symbolized by their tickers WMT (-0.96%) and COST (-0.47%) respectively, are recession-proof retail giants. Walmart's vast market reach allows it to offer products at lower prices, leveraging its physical stores to fulfill online orders. Costco, on the other hand, keeps shoppers hooked with bulk discounts and membership plans.
Over the past three years, the duo outshined the market with Walmart's stock skyrocketing over 90% and Costco's stock rallying over 60%. In contrast, the S&P 500 advanced only 23% during this period. Let's delve into why these two titans outperformed the market, and determine which one is the smarter investment at present.
Walmart vs Costco: What Sets Them Apart
Walmart is a multifaceted retailer, boasting its namesake superstores in various countries and competing with Costco via its Sam's Club banner in the warehouse club market. Walmart operates over 10,600 stores worldwide with 80% of its revenue sourced from U.S. Walmart and Sam's Club outlets in fiscal 2024.
Costco sticks to its forte, operating members-only warehouse clubs selling discount and bulk items. It secures most of its profits via high-margin membership fees, enabling it to offer items at low margins. Their growth strategy focuses on acquiring new members, maintaining high renewal rates, opening new warehouses, and hiking membership fees periodically.
Which Retailer is Outpacing the Market?
Walmart's revenue spiked by 7% in COVID-19-impacted fiscal 2021, but it dipped slightly to a 2% increase in fiscal 2022 as it disposed of non-core and overseas businesses. Revenue recuperated to 7% in fiscal 2023 and grown another 6% in fiscal 2024, driven by higher U.S. comps and international revenue expansion.
Although Walmart experienced a store count decline within this period, it currently holds strong against tough competitors by matching prices, automating fulfillment centers, expanding e-commerce, and bolstering Walmart+ subscriptions. Analysts expect Walmart to grow its revenue and EPS at a compound annual growth rate of five and 17% respectively from fiscal 2024-2027, yet its stock remains expensive at 34 times next year's earnings.
Costco's revenue surged by 17% in fiscal 2021 due to the pandemic, but decreased to 5% in fiscal 2024 as it faced inflationary pitfalls and lapped earlier growth rates. Its overall growth remained robust with adjusted comp growth of 5.9% in fiscal 2024, boasting stronger international growth. Costco's e-commerce sales skyrocketed by 16% in this period, although its stock also remains expensive at 47 times next year's earnings.
So, Which One Shines Brightest?
Both Costco and Walmart are promising investments, but their expensive valuations imply an investor should exercise patience before pulling the trigger. For this analyst, if pressed to choose between the two, Walmart would be the preferred pick due to its broader market diversification, reduced dependence on memberships, and a more affordable stock price.
Walmart's strategic decision to sell non-core and overseas businesses in response to the market has helped dissipate some of its financial obligations, freeing up funds for potential investing opportunities.
Investors looking for safer options may find Walmart's more diversified retail portfolio attractive, as it reduces the risk associated with focusing on a single market or product category.
Costco's heavy reliance on membership fees for profits could potentially be a risk during economic downturns, as members may be less likely or able to renew their memberships.
The recent rush in the retail sector, driven by the impact of the pandemic, has benefited both Walmart and Costco, but their investments in e-commerce and fulfillment centers have positioned them well for future financial growth.
