WMT vs. COST: Which Discount Retailer Is a Better Buy?

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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