Costco Vs Walmart Stock [Big Box Battle]

While they rarely experience growth akin to some high-flying technology names, retailers’ ability to weather market storms have earned them their defensive moniker.

Amid resurgent retail sales, we look into major retailers Costco Wholesale Corporation (NASDAQ:COST) and Walmart Inc. (NYSE:WMT) to determine the better investment.

How is Costco’s Membership Model Faring?

Wholesale retail giant Costco has been flying high for quite some time based on robust fundamentals.

Over the past five years, the stock has gained more than 200%. To put this into context, the SPDR S&P Retail ETF (NYSEARCA:XRT) gained only 75% during the same period.

At a time of high inflation, the company has leveraged its operative capability and stayed ahead of the curve. It did not raise prices for some of its products, such as its infamous $1.50 hot dog and soda combo and its $4.99 rotisserie chicken that have become highly popular.

The company operates on a membership model, working in three tiers: Executive, Business, and Gold Star. Membership numbers have been increasing for the past couple of years.

Between fiscal 2021 and 2022 (the company’s fiscal years end in late August or early September), total cardholders increased by 6.5%, while between fiscal 2022 and 2023, they increased by 7.6%.

In fiscal 2022, Costco’s member renewal rate was 93% in the U.S. and Canada and 90% globally.

Over the past year, the company’s member renewal rate increased to 92.7% in the U.S. and Canada and 90.4% worldwide.

For the fiscal 2024 second quarter (ended February 18), Costco’s total revenue increased by 5.7% from the prior-year period to $58.44 billion due to an increase in comparable sales. Meanwhile, 26 net new warehouses opened since the end of Q2 2023.

Management reported net income of $1.74 billion, up 18.9% year-over-year, reflecting favorably on Costco’s operational efficiency. In other words, Costco’s bottom line has a higher growth rate than its top line.

However, there have been a few signs of fluctuations and slowdown. On a monthly basis, Costco’s net sales have been declining since December. 

Moreover, customers might need to become members to buy Costco’s famed $1.50 hot dog combo when the company starts restricting non-members from its food courts as soon as next month. Excessive crowding was cited as the cause of this move, though concerns have arisen that this may affect net sales.

What Does The Future Look Like For Walmart?

Walmart has returned 27% over the past two years, outperforming the broader SPDR S&P 500 ETF Trust (NYSEARCA:SPY).

The company operates more than 10,500 stores and numerous eCommerce websites in 19 countries and enjoys a wide moat around its operations.

Its brand is associated with low-cost and so it has become THE budget destination for shoppers worldwide, as well as the largest U.S. grocer. Since 2020, the company has expanded annual top line numbers by single-digit percentage levels on a year-over-year basis.

In the last fiscal year (ended January 31, 2024), total revenues increased by 6% year-over-year to $648.13 billion. Like Costco, Walmart’s bottom line expanded at a higher annual growth rate of 32.8% to reach $15.51 billion.

Last year, the company also recognized lower general merchandise prices. Food prices were also lower in key areas like eggs and apples.

Walmart’s membership program is not as extensive as Costco’s. Its Walmart+ membership offers additional benefits such as free shipping, early access, fuel savings, and video streaming with Paramount+. Last year, Walmart’s membership and other income revenues increased by a modest 1.5% year over year.

On January 30, the Board of Directors announced a 3-for-1 stock split, as the retailer was trading close to its all-time high. This move was not due to liquidity requirements but rather to allow employees under Walmart’s Associate Stock Purchase Plan to increase their stock holdings.

Walmart is increasingly betting on automation and investing in remodeling and supply chain automation. The company plans to remodel 928 stores and clubs globally in the near term.

As a testament to its commitment toward progress, Walmart is on track to have approximately 55% of its fulfillment center volume and about 65% of its Supercenters serviced by automation by the end of fiscal year 2026.

Another notable development in the line is Walmart’s $2.3 billion pending acquisition of VIZIO Holding Corp. (NYSE:VZIO).

The reasons for this big-budget purchase range from accelerating the company’s media business in the U.S. to making money by leveraging Vizio’s advertising prowess.

A strong ad business has the potential to enable Walmart to compete in the ad space with, Inc. (NASDAQ:AMZN), which has been growing its ad business hugely in recent years.

Costco or Walmart Stock, Which Is Best?

According to analysts, Costco is the better stock to buy with 11.8% upside to fair value of $766.62 per share while Walmart has 10.7% upside to its intrinsic worth of $64.99 per share.

It’s probably fair to say that there might well be retail corners that offer higher growth than Costco or Walmart but these two big box retailers offer relative stability with robust, albeit not skyrocketing, returns. Moreover, both stocks show significant shareholder commitment through stable dividend payments.

Costco has a record of 19 consecutive years of dividend growth, along with periodical special bumper payments. It last paid a $1.02 per share quarterly dividend on February 16. At current prices, its annual dividend of $4.08 yields 0.56%. The company also has a conservative payout ratio of 27.06%.

Walmart’s record has been stellar in terms of dividend payments. The company has been growing its dividend every year since declaring its first dividend in 1974. This cumulates to a 50-year consecutive growth record.

Most recently it declared a dividend of $0.21 per share while its forward annual dividend of $0.83 yields 1.37% at prevailing prices. Although higher than Costco at 34.34%, its payout ratio is still highly sustainable.

Most analysts covering each stock rate them as Buys. In terms of forward non-GAAP P/E, Costco is trading at 46.01x, which is quite stretched while Walmart is trading at 27.43x, lower than Costco but somewhat elevated. When expected growth is factored in, though, we can see that Costco’s forward non-GAAP PEG stands at 5.03x, while Walmart’s is at 3.81x.

So, the bottom line is while analysts consider Costco to be slightly more undervalued, Walmart might be a better buy due to valuation relative to its growth prospects, longer history of dividend growth, and prospects to grow its ad business.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.