Buy Better: Costco vs. Walmart
Costco (NASDAQ: COT) and Walmart (NYSE: WMT) are both resilient retailers who have resisted Amazon‘s (NASDAQ: AMZN) onslaught as other brick and mortar retailers withered. Over the past decade, Costco shares have jumped nearly 400% as Walmart shares doubled.
Both retailers have leveraged their size to stay relevant. Costco’s wholesale model allowed it to sell products at wholesale prices while strengthening its margins through membership fees. Walmart, owner of Costco rival Sam’s Club, has matched Amazon’s prices and turned its stores into a distribution network for online deliveries and pickups.
However, both stocks recently fell with the broader market amid concerns over the coronavirus crisis, the 2020 election and other macro headwinds. Should investors rack up shares of either retailer during the market downturn?
The main differences between Costco and Walmart
Costco generated 98% of its revenue from product sales in the last quarter and only 2% from membership fees. However, his contributions represented 95% of his net profits.
Costco currently operates 785 warehouses. 546 are located in the United States and Puerto Rico, 100 are located in Canada and the rest are located in other overseas markets. It achieved a 90.9% membership renewal rate in the US and Canada last quarter, and a worldwide renewal rate of 88.4%. These high renewal rates give Costco a wide wedge against Amazon, Walmart, and other retail challengers.
Walmart currently operates approximately 11,500 stores under 56 banners in 27 countries and e-commerce websites in ten countries. Sam’s Club has a comparable presence to Costco, with nearly 600 locations in the United States and more than 200 international stores.
Walmart generated nearly 66% of its revenue in its US stores in the last quarter. 24% came from its international stores and 11% from Sam’s Club. Walmart generated most of its profits from its eponymous stores and affiliate banners, and only 7% of its operating revenue came from Sam’s Club.
Which business is growing the fastest?
Costco has generated much stronger revenue growth than Walmart over the past decade, for two main reasons: its smaller footprint has given it more room to open new stores (especially overseas) and its ecosystem. Strong membership has enabled him to increase his annual fees twice in the past nine years.
Walmart struggled against Amazon for several years before CEO Doug McMillion took over in 2014. McMillion implemented an aggressive turnaround plan for Walmart by boosting its e-commerce capabilities, renovating its stores, opening smaller-format locations and increasing the salaries of its employees. .
Costco didn’t implement any aggressive spending plans like Walmart. Instead, its streamlined membership model has delivered consistent profits and allowed it to open new stores. As a result, Costco has consistently generated stronger profit growth than Walmart.
Wall Street expects Walmart’s revenue and profits to grow 3% and 4% respectively this year. Costco’s revenue is expected to grow 7%, with earnings growth of 8%. However, investors should take these forecasts with a grain of salt, as they do not fully reflect the coronavirus epidemic in China, where both retailers operate stores.
Walmart operates 404 Supercenters, 26 Sam’s Clubs and eight neighborhood markets in China. It also has 333 stores in Japan, which is struggling to contain a growing epidemic. Costco operates one store in mainland China, 26 stores in Japan and 16 in South Korea – a market Walmart has failed to break into.
The evaluations and the verdict
Walmart trades at 23 times futures earnings and pays a term dividend yield 1.9%. He has increased that payment every year for 45 consecutive years. Costco has a higher forward P / E of 38 and pays a 0.9% lower forward yield. He has increased this dividend each year for 16 consecutive years.
These valuations suggest that both stocks are a bit foamy relative to their growth estimates, which could be lowered if macro headwinds worsen. I think Costco’s business model is stronger than Walmart’s, but I think Walmart’s lower valuation and higher dividend makes it a safer stock in a volatile market.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.