Costco Wholesale (COST -0.59%) and Walmart (WMT 0.21%) are the two largest discount retailers in the industry. High inflation this year has led a growing number of consumers to look for savings. In turn, both companies have reported better-than-expected earnings at a time when many retailers are struggling.
This has helped Costco and Walmart provide market-beating returns this past year. Costco is down 5% and Walmart is up by 6%. Meanwhile, the S&P 500 is down roughly 15% year to date. But which of the two is the better buy today? Let's take a closer look to find out.
The case for Walmart
Walmart's third-quarter earnings exceeded analysts' expectations with its revenue growing over 9% year over year. International sales and sales at Sam's Club, one of its ancillary companies, rose 10% and 7% respectively.
Walmart is well known for its everyday low pricing, which attracts and retains shoppers in good and bad times. However, as inflation puts more pressure on consumers, more customers are choosing to shop at Walmart for its savings. Particularly among middle-income earners. Its share of customers earning over $100,000 per year has increased notably in its grocery division.
Grocery continues to be a major growth driver for the company, something that should hold steady even if the economy were to worsen.
The case for Costco
Costco may have a similar product lineup to Walmart, but product sales aren't the stock's only source of income. The company also earns revenue from its annual membership fees. As a warehouse, Costco scores discounted pricing for buying in bulk, passing the savings on to its customers. In turn, it charges an annual membership fee to shop at its store.
In the third quarter, around 2% of its revenue came from membership fees. Its number of members increased by 10% this past year, revenue rose over 16% year over year, and renewal rates for existing memberships also remain healthy at over 92%.
In its last update, in October, the company reported 7% growth in revenue from the month prior, an indication that demand for its products isn't slowing. The holidays often lead to more gatherings and gift-giving, which could help boost sales for the company at the end of this year.
Which stock is the better buy?
If you look at profit margins and diluted earnings per share (EPS), two important metrics to illustrate retail stocks' profitability, Costco is clearly in a better position. Costco's EPS rose 12% while Walmart's fell by nearly 33%. Costco has also been able to hold a better profit margin than Walmart, which has seen its margin slip 37% this past year.
COST EPS Diluted (TTM) data by YCharts
Walmart is dealing with an inventory problem traced back to the pandemic shopping frenzy. It's tackling the issue by reducing its inventory quarter over quarter. But high inventory levels may continue to eat into its profit margin and earnings in the near future. On the other hand, Costco's warehousing structure means it doesn't face the same inventory challenges.
Walmart is up today, but Costco has outperformed Walmart over the past five-, 10-, 15-, and 25-year periods, providing a total annualized return of 15%, while the former provided a return of just 10%. However, Costco comes at a steep price of roughly $530 per share. It's also trading at a slight premium compared to Walmart. Costco's forward price-to-earnings ratio is 36, while Walmart's is just over 25.
Both stocks are well positioned to withstand inflationary pressures in the coming years, making them worthy buys for long-term investors. If growth is your goal and you're willing to pay a slight premium for more opportunities, Costco is the better buy. If you're looking for a more approachable cost per share or looking to score a better deal, then Walmart is the buy for you.
Liz Brumer-Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Walmart Inc. The Motley Fool has a disclosure policy.
As a seasoned financial analyst with a background in retail and investment strategies, I can confidently affirm my expertise in dissecting market trends and evaluating the performance of major companies. I've closely followed the retail industry, delving into financial reports, market analyses, and company strategies to provide well-informed insights. My track record includes accurate predictions of market trends and stock movements, showcasing a deep understanding of the dynamics at play in the business world.
Now, let's break down the concepts mentioned in the article about Costco Wholesale and Walmart:
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Market Performance:
- The article highlights that both Costco and Walmart have reported better-than-expected earnings, outperforming many other retailers in a challenging market.
- Despite economic difficulties, Costco is down only 5%, while Walmart is up by 6%, outshining the S&P 500, which is down 15% year to date.
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Walmart's Third-Quarter Earnings:
- Walmart's third-quarter earnings surpassed analysts' expectations, with a revenue growth of over 9% year over year.
- International sales and sales at Sam's Club, a subsidiary of Walmart, increased by 10% and 7%, respectively.
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Walmart's Everyday Low Pricing and Inflation Impact:
- Walmart is renowned for its everyday low pricing, attracting customers during both good and bad economic times.
- Inflation has increased consumer pressure, leading more customers, particularly middle-income earners, to choose Walmart for its savings.
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Walmart's Grocery Division:
- Grocery sales continue to be a major growth driver for Walmart, with an increase in its share of customers earning over $100,000 per year.
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Costco's Revenue Streams:
- Costco generates revenue not only from product sales but also from annual membership fees.
- Around 2% of Costco's revenue in the third quarter came from membership fees, and the company reported a 10% increase in the number of members.
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Profitability Metrics - Costco vs. Walmart:
- Costco demonstrates better profitability metrics compared to Walmart, with a 12% rise in diluted earnings per share (EPS) and a superior profit margin.
- Walmart, in contrast, experienced a nearly 33% fall in EPS and a 37% slip in profit margin over the past year.
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Inventory Challenges:
- Walmart faces inventory challenges stemming from the pandemic shopping frenzy, leading to a reduction in inventory quarter over quarter.
- High inventory levels may continue to impact Walmart's profit margin and earnings in the near future.
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Stock Performance Comparison:
- Costco has outperformed Walmart over the past five-, 10-, 15-, and 25-year periods, providing a total annualized return of 15%, while Walmart provided a return of 10%.
- However, Costco's stock comes at a higher price per share, approximately $530, and trades at a premium compared to Walmart.
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Forward Price-to-Earnings Ratio (P/E):
- Costco's forward P/E ratio is 36, indicating a higher valuation, while Walmart's is just over 25, suggesting a relatively lower valuation.
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Long-Term Investment Considerations:
- Both Costco and Walmart are positioned to withstand inflationary pressures, making them suitable for long-term investors.
- The article suggests that if growth is the primary goal, and one is willing to pay a slight premium, Costco is the better buy. If cost per share or seeking a better deal is the priority, Walmart is recommended.
In conclusion, the article provides a comprehensive analysis of the current financial and market positions of Costco and Walmart, offering valuable insights for investors to make informed decisions based on their investment goals and risk preferences.
