Costco Wholesale Corporation (NASDAQ:COST) and Wal-Mart Stores, Inc. (NYSE:WMT) are both heavy hitters when it comes to discount shops, but the two companies have very different business models. For investors looking to beef up the retail section of their portfolio, determining which of the two is a better buy is essential. When stacked up head to head, Walmart stock and Costco stock are both good investment options, but WMT gets my vote for the better buy.
On paper, COST may look like a better buy. The firm’s sales growth over the last five years has far surpassed that of WMT and the company also boasts a more favorable debt-to-equity ratio at 34.08% versus Walmart’s 55.86%.
Those figures suggest that Costco is running a much tighter ship, and that appears to be true when you look at Costco’s business model.
Costco’s Advantage
The majority of Costco’s operating profits come from membership dues. Those fees represent nearly pure profit for COST, and renewals are even more lucrative because they require virtually no marketing spend.
However, this model only works if Costco is able to get, and more importantly, keep new members every year. So far, the company appears to be doing this relatively well.
In the second quarter, Costco’s renewal rates around the globe came in at 87.6% and in the U.S. and Canada that figure was 90.4%. Both of those numbers fell by a tenth of a percentage point from the previous year, and while that does raise some concerns, those are still pretty solid figures.
Walmart Stock’s Strength
Costco’s business model has proven to be a profit machine, but COST is also much more expensive than Walmart stock — WMT’s price-to-earnings ratio is just 15.69% versus Costco’s 29.87%. Walmart also pays a much higher dividend with a yield of 2.74% compared to Costco’s 1.14%, so Walmart stock offers value investors a much more compelling deal.
Not only that, but Walmart appears to be setting itself up for a bright future a bit better than Costco has. Both stores have fallen prey to Amazon.com, Inc.’s (NASDAQ:AMZN) growing popularity, but Walmart appears to be doing more to counter this threat. Walmart has been working to improve its e-commerce options, and last quarter’s results showed that those efforts are paying off as online sales grew by 11.8%. The firm also recently acquired Jet.com; a move that many believe will boost WMT’s online presence even further.
Amazon still has the clear advantage when it comes to online shopping, but Walmart is playing to its strengths (think, thousands of physical locations and huge warehouses) by offering services that Amazon can’t — like a click-and-collect grocery service. WMT has also stepped up to the plate against Amazon’s Prime membership by offering an unlimited 2-day shipping membership of its own, for nearly half the price of a Prime membership.
Costco, on the other hand, has done very little to beef up its own online offerings. This could end badly for COST because other than a pleasant in-store experience, Costco members may find very few reasons to continue their memberships in the years ahead. Already, WMT is able to rival Costco on price, and at Walmart, customers aren’t locked in to buying in bulk. If online shopping continues to gain momentum, Costco may struggle to hold on to members who are unwilling to pay a membership fee without the convenience of free shipping.
The Bottom Line on WMT vs COST
For investors looking far into the future and those looking for a value play, Walmart stock is a better pick. The discount retailer is struggling to come out from under Amazon.com’s shadow, but if WMT can successfully bolster its online presence, then the firm has the potential to regain its place at the top of the retail food chain.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
