walmart (NYSE:WMT) and costco (NASDAQ:COST) have certain common attributes. Both retailers have found great success in offering low prices to shoppers. And they have rewarded shareholders handsomely over the years.
They run a simple business and the management team executes it very well. Both seem well-positioned for the future.
But which one offers a better opportunity for investors?
walmart
Since opening its first discount store more than 60 years ago, Walmart has remained focused on keeping costs down and passing those savings on to customers in the form of lower prices. It has adapted over the years by offering omnichannel capabilities and subscription services to keep pace with the online retail giants. Amazon (NASDAQ:AMZN).
Walmart has a reputation as a low-cost retailer. It attracts customers from all economic backgrounds because everyone likes low prices. In fact, people find it especially appealing during economic downturns, as they are anxious to save money.
Sales and profits continue to increase. Adjusted sales increased 4.9% to $172.1 billion in the fiscal fourth quarter ended Jan. 31. This eliminates the effects of foreign currency translation. Adjusted operating profit increased 10.9%.
Management continues to move Walmart forward. This includes its advertising business, which grew 28% last year to $3.4 billion. The company is looking to jump-start its business with the recently announced $2.3 billion acquisition of Vizio. Smart TV manufacturers make money from advertising in a variety of ways.
Walmart stock has risen more than 34% over the past year. Despite the rise, the price-to-earnings ratio (P/E) remains at 31 times.
Stock prices have shown a remarkable rise, but S&P500is the profit. The market sells for a 23 PER multiple. Although Walmart stock has a high valuation, the company has consistently grown profits and recently expanded its advertising business.
costco
Costco also provides value to its customers, but they do business differently. Charge members an annual fee to shop at the warehouse. These huge spaces offer many goods and services, offering almost everything under the sun. Costco typically sells high-quality products in large quantities at attractive unit prices.
We continue to attract new members and retain old members. In the past three months, membership has increased from 72 million to 73.4 million. And our retention rate has always hovered around 90%.
Costco continues to grow sales and profits. Second quarter sales increased 5.7% to $58.4 billion, and operating income increased 8.4% to $2.1 billion. Management has decided not to raise membership fees, but if they actually do so, it is likely that sales and profits will further improve. Members aren't likely to hesitate given his high membership retention rate, and it's been seven years since he last raised prices.
Members continue to find value in Costco membership. This has allowed us to consistently generate high profitability, even during economically difficult times. That means the stock isn't cheap, having risen 56% over the past year.
Costco stock has a P/E ratio of 50 times, up from 36 times a year ago. No one would argue that this is a cheap valuation. However, the company continues to grow sales and profits. Additionally, we are steadily opening new warehouses each year, so there is potential for further growth.
decision
Walmart and Costco have strong businesses. So this will be a difficult decision.
I prefer Costco stock over Walmart stock, even though the stock has a richer valuation. The company continues to see growth opportunities, and last quarter he opened four warehouses. Management has refrained from raising prices, which I think is commendable given the impact inflation is having on people. However, the company plans to increase membership fees at the appropriate time, which should further boost revenue growth.
Given Costco's strong attributes, it seems worth paying a higher valuation.
Should I invest $1,000 in Walmart right now?
Before buying Walmart stock, consider the following:
of Motley Fool Stock Advisor Our analyst team has identified what they believe Best 10 stocks Investors can buy now…and Walmart wasn't among them. These 10 stocks have the potential to generate impressive returns over the next few years.
stock advisor We provide investors with an easy-to-understand blueprint for success, including guidance on portfolio construction, regular updates from analysts, and two new stocks every month.of stock advisor Since 2002, the service has more than tripled S&P 500 returns*.
See 10 stocks
*Stock Advisor returns as of March 11, 2024
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool's board of directors. Lawrence Rothman, CFA, works in his wholesale department at Costco. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Walmart. The Motley Fool has a disclosure policy.
Best Stocks to Buy Now: Walmart vs. Costco originally published by The Motley Fool
