Walmart (NYSE: WMT) and Costco (NASDAQ: COST) have certain attributes in common. Both retailers have achieved great success through giving shoppers low prices. And they’ve rewarded shareholders handsomely over the years.
They have simple businesses with management that execute very well. Both appear well positioned for the future.
But which one offers investors the better opportunity?
Walmart
Since opening its first discount store more than six decades ago, Walmart has remained focused on keeping costs down and passing these savings on to customers in the form of low prices. It has adapted over the years by offering omnichannel capabilities and a subscription service to keep pace with online retailers such as behemoth Amazon (NASDAQ: AMZN).
Walmart has a reputation as the low-cost retailer. Since everyone loves low prices, this draws customers in all kinds of economic environments. In fact, people find it especially compelling during sluggish economic times as people crave saving money.
It continues to grow revenue and profits. In its fiscal fourth quarter, which ended on Jan. 31, adjusted revenue grew 4.9% to $172.1 billion. This removes foreign currency translation effects. Adjusted operating income increased 10.9%.
Management continues to push Walmart forward. This includes its advertising business, which grew 28% to $3.4 billion last year. It seeks to give the business a boost with the recently announced $2.3 billion acquisition of Vizio. The maker of smart televisions makes money from advertising in a variety of ways.
Walmart’s share price has gained over 34% in the past year. Despite the gain, the stock’s price-to-earnings (P/E) ratio remains at 31.
While the stock had an impressive increase, it’s kept pace with the S&P 500‘s gain. The market sells at a 23 P/E multiple. While Walmart’s stock has a higher valuation, the company has consistently grown profitability and recently expanded its advertising business.
Costco
Costco also offers value to customers, but it has a different way of doing business. It charges members an annual fee to shop at its warehouses. These huge spaces offer many goods and services — practically everything under the sun. Costco generally sells high-quality goods, often in bulk, at attractive unit prices.
It continues to attract new members and retain old ones. Membership grew from 72 million to 73.4 million over the last three months. And retention consistently hovers around 90%.
Costco continues to grow revenue and profitability. Its fiscal second-quarter revenue rose by 5.7% to $58.4 billion, and operating income increased by 8.4% to $2.1 billion. While management has put off an increase in membership fees, when it does decide to implement one, that will likely further improve revenue and profits. Members don’t seem likely to balk, given the high retention, and it’s been seven years since the last fee hike.
Members continue to find Costco’s membership proposition worthwhile. That’s helped it produce consistently higher profitability, even during challenging economic times. That means the shares, which have risen 56% over the past year, aren’t cheap.
Costco’s stock has a P/E of 50, up from 36 a year ago. No one would argue that’s a cheap valuation. But the company continues to grow sales and profits. And it has more potential growth as it steadily opens new warehouses annually.
Decision
Walmart and Costco have strong businesses. That makes this a tough decision.
Despite the stock’s richer valuation, I favor Costco’s stock over Walmart’s shares. It continues to have growth opportunities, and it opened four warehouses in the last quarter. Management has held off on price increases, which I find commendable given the impact inflation has been having on people. But it will raise membership fees at the appropriate time, and that will further boost profitability growth.
Paying a higher valuation seems worthwhile given Costco’s strong attributes.
Should you invest $1,000 in Walmart right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lawrence Rothman, CFA has positions in Costco Wholesale. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Walmart. The Motley Fool has a disclosure policy.
Best Stock to Buy Right Now: Walmart vs. Costco was originally published by The Motley Fool
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