Sam Walton started his retail business in 1950, launching a single location that he named Walton’s 5 & 10. Since then, Walmart has since become nothing short of a retail empire, with more than 11,700 locations in 28 countries. Other companies have followed Walmart’s lead by mirroring the big box store design and offering a huge product selection under a single roof. For better or for worse, the days of mom and pop grocers are an endangered species.
Massive supermarkets and big box stores dominate this section of the retail market. Deciding where to invest depends on your investment strategy, risk tolerance, and even sensitivity to social issues. Below, we compare two of the most popular big box options: Costco (NASDAQ: COST) and Walmart (NYSE: WMT).
The Pros and Cons of Investing in Retail Stocks
As a group, retail stocks present an interesting paradox. Consumers will always spend money, at least for essentials, so you can count on solid demand for product.
However, the value of retail stocks may still decline as a result of other factors. Some of these include real or perceived weakness in the economy, changes in labor laws, and competitive challenges presented by e-commerce.
A shift in the political climate can dramatically affect retail stock value, as new policies impact profits and consumers rethink their willingness to spend. Fortunately, you can make solid investment decisions if you know how to measure indicators of strength in specific businesses.
When possible visit one or more of the company’s locations. Are stores clean, well-lit, and appealing? Are they busy? Do the same with the company’s e-commerce site. Is it well-designed and user-friendly? What is the tone of promotions? Are stores encouraging customers to enjoy products with an excellent value proposition, or are they begging customers to stop by for a massive price reductions?
Check out gross margin trends, both sequentially and year-over-year. A decline in either can mean trouble down the road. Look at sales per square foot to ensure business leaders are marking the most of their space. The higher this number is, the better for you.
Look at trends related to inventory and receivables. Both should be increasing at roughly the same rate as revenues. A mismatch can indicate a lot of inventory going unsold, or customers aren’t paying their bill on-time – or at all. Either of these issues points to a potential for decline in future revenue.
Is Costco Stock Worth Buying?
Price Club launched in 1976 as an exclusive savings destination for small businesses. The first Costco opened in 1983. The two merged in 1993 to form a network of more than 200 locations. Many consider this organization to be the original warehouse club, and it has enjoyed decades of success.
Costco (NASDAQ: COST) makes its employees a priority, offering some of the highest hourly rates and best benefits in the industry. Investors who make decisions based on social and community responsibility often choose Costco for its commitment to excellent working conditions.
By the numbers, this company appears on its way up, and analysts are taking notice.
Costco is outperforming the market, and a range of respected financial experts believe that Costco is currently in a bullish position.
Earnings per share for third quarter are expected to be $1.60, which is an increase over earnings of $1.36 per share in the same quarter last year.
Income investors are generally pleased with the reliability of dividend payments.
Costco’s biggest challenge, according to its leaders, is the obstacles that impede plans for expansion. It is difficult to secure appropriate real estate for new locations, and the company has indicated that enrolling members in new markets is not always easy. However, despite these obstacles, the company has continued to enlarge its footprint. Today, there are 766 locations, which includes 235 outside the United States.
Is Walmart Stock a Buy or a Sell?
Though Walmart (NYSE: WMT) essentially founded the big box style retail store, its model is currently in a state of flux.
For many years, the company’s strategy was to saturate the market, undersell the competition, and create an army of loyal consumers. This strategy was extremely successful for a long time, as evidenced by revenues and the earnings realized by investors. In fact, stock prices doubled between October 2015 and October 2017.
Walmart suddenly hit a wall as 2018 approached.
One of the biggest issues facing the company is creating demand for its e-commerce business. Of course, in true Walmart style, business leaders are facing this challenge head-on. The company has invested a fortune in its existing platform, and it has acquired disruptive technology startups like Jet.com and Flipkart.
Groceries make up more than 50 percent of Walmart’s total revenue, and the business is looking to capitalize on a combination of essential products and e-commerce. More than 2,000 grocery pickup stations are now in operation, and consumers couldn’t be happier.
Wrap Up: Costco vs. Walmart Stock
These two massive organizations are intensely focused on maintaining their positions of leadership. Walmart has demonstrated – and continues to demonstrate – its ability to adapt in an ever-changing marketplace. Meanwhile, Costco continues to outperform Walmart in sales and profit growth.
Many analysts have said that either is a solid choice, depending on your investment goals. Consider social responsibility, valuation, and ability to meet the demands of a changing marketplace as you make your decision.
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