Walmart vs. Costco: Which Discount Retailer on the S&P 500 Is a Better Buy?
21 June 2021 - 8:51PM
Finscreener.org
Discount
retailers such as Walmart (NYSE: WMT) and
Costco (NASDAQ:
COST) have delivered consistent returns to long-term investors.
These companies are part of an essential and recession-proof
industry making them ideal bets for those looking to derive steady
returns. Walmart and Costco have also managed to gain traction in
the e-commerce space, a vertical that has grown exponentially amid
the pandemic.
So, which of the two stocks part of the S&P 500 are
better buys right now?
Walmart stock has returned 13% in the last
year
Shares of Walmart are up 15% in the last 12-months. Further, in
the last five years, it has returned 112% and the stock is up 224%
since June 2011. Comparatively, the S&P 500 Index has
returned 120% and 298% in the last five years and in the last 10
years respectively.
Walmart serves close to 240 million people each week and is a
brand that is associated with low prices. In 2020, its adjusted
sales were up 7.7% at $564.2 billion while operating income rose
9.3% to $23.4 billion.
In 2021, Walmart’s management has forecast sales to grow by low
single-digit percentages. However, the retail giant continues to
invest in e-commerce and other digital initiatives that include
developing a robust supply chain, automation, and customer-centric
technologies. The company already introduced an online subscription
service called Walmart+ allowing it to directly compete with market
leader Amazon (NASDAQ: AMZN).
Walmart has approximately 10,500 stores spread across 24
countries. In Q1 of 2021, it reported sales of $138.3 billion and
adjusted earnings per share of $1.69. Comparatively, Wall Street
forecast sales of $132 billion and earnings of $1.21 in the March
quarter.
Its bottom-line growth of 42% can be attributed to Walmart’s
improvement in gross margins as well divestiture of weaker
businesses in international markets in the U.K. It also benefitted
from a sales mix shift towards higher-margin products while
international operating income rose 48% to $1.2 billion.
Its predictable cash flows have allowed Walmart to increase
dividends for close to 50 consecutive years. The stock market might
seem overvalued and vulnerable right now given the possibility of
higher inflation as well as rising interest rates coupled with
macro-economic uncertainties. But, Walmart is a stock that has a
rock-solid business and a strong brand name making it a top asset
to hold in good times and bad.
Costco reports another stellar quarter
In the third quarter of fiscal 2021, Costco’s adjusted
comparable sales rose 15.1% year over year after accounting for
tailwinds such as high gasoline prices and a weaker dollar. Total
sales were up 21.7% at $44.4 billion while membership fee income
rose 10.6% to $901 million. This allowed the company to expand
earnings per share by a healthy 46% year over year to $2.75 easily
above consensus estimates of $2.34.
In the fiscal second quarter, Costco’s earnings were up just 2%
and 13% below estimates due to pandemic-related costs and lower
gasoline sales. While Costco is not a growth stock its revenue has
surged 50% in the last five years while earnings have grown 154% in
this period. This has allowed Costco stock to crush the S&P
500 as it has returned 528% in the last 10 years and 174% in the
last five years.
Costco’s annual sales are close to $200 billion and it has
significant opportunities to keep driving revenue higher. Its
unmatched buying power allows Costco to dominate the discount
retail space and undercut peers including Walmart.
In 2020, it acquired Innovel Solutions which has been rebranded
to Costco Logistics allowing Costco to rapidly grow sales of bulky
items including electronic appliances and furniture. Currently, 700
of Costco’s 809 warehouses are located in North America giving the
company enough room to grow at a solid pace in 2021 and beyond. The
company’s huge economic moat, expansion opportunities and continued
growth make it a top S&P 500 company to bet on right
now.
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