Retail giants Walmart(NYSE: WMT) and Costco(NASDAQ: COST) are recognized for offering shoppers bargain prices with a long history of generating massive shareholder returns. Despite different business models, both companies are having a record year with stronger-than-expected sales sending shares to an all-time high.
Let's explore whether the rally in Walmart and Costco can keep going and which stock may be a better buy today.
Image source: Getting Images.
The case for Walmart
Walmart stock is up 53% in 2024, propelled by a backdrop of resilient global macroeconomic conditions. Following a challenging post-pandemic era, easing inflationary cost pressures alongside financial efficiency initiatives have translated into a new round of earnings momentum.
In the second quarter (for the period ended July 31), Walmart reported a 9.8% increase in adjusted earnings per share (EPS) as the gross margin climbed to 24.4%, the highest level since fiscal 2022.
Comparable sales in the U.S. increased by 4.2% year over year, highlighting Walmart's outperformance at a time when smaller discount stores like Dollar Tree and Dollar General are struggling. A major theme has been the trend of upper-income households seeking deals at Walmart, which management cites as contributing to its retail share gains.
It appears Walmart's investments in technology within its omnichannel strategy are paying off. Global e-commerce sales have been a growth driver, increasing by 21% in Q2, bringing in a climbing level of advertising income.
What I like about Walmart is its underappreciated diversification. The international business has ramped up with a strong performance in China where sales increased by 18% last quarter. The Sam's Club segment is also contributing to profitability. These layers of Walmart with significant infrastructure synergies can lead to structurally higher margins in the future.
For the full year fiscal 2025, Walmart expects revenue growth between 3.75% and 4.75%, with an EPS midpoint target of $2.39 representing an increase of 8% from last year.
That earnings guidance implies Walmart stock is trading at a forward price-to-earnings (P/E) ratio of 34, above the five-year average for the multiple closer to 29. Still, there is a case to be made that the company's transformation with e-commerce playing a greater role in the business supports the valuation expansion.
WMT PE Ratio (Forward) data by YCharts
The case for Costco
Costco Wholesale stands out as a pioneer in the membership-based club retail concept, charging customers an annual fee. In turn, shoppers secure deep discounts on products typically sold in bulk while receiving additional savings on travel services and gasoline. The business model has proven highly successful with a network of 891 locations worldwide and more than 75 million paying members.
In the last reported fiscal fourth quarter (for the period ended Sept. 1), Costco reported adjusted comparable sales growth of 6.9%. The big story was an acceleration of its e-commerce segment where comparable sales climbed 19.5%.
Efforts to control expenses have lifted margins, which drove a 17% EPS increase to $16.56 for the full year. The results were good enough to send shares up 60% over the past year with management projecting confidence into 2025 and a plan to open 26 new stores.
The attraction of Costco stock as an investment is its membership loop, where loyal shoppers increasingly shop within the ecosystem. That includes the growing online business, which allows Costco to generate higher margins as it scales internationally.
On the other hand, investors are paying a hefty premium for Costco's cash-flow consistency and earnings quality. Costco shares are trading at 50 times its consensus 2025 EPS of $17.82 as a forward P/E ratio, which is objectively pricey, even compared to Walmart. That level can be justified based on the company's rock-solid fundamentals and positive outlook.
The better buy: Walmart
There's a lot to like about these two blue chip stocks that should both continue rewarding shareholders. At the same time, I believe Walmart is the better buy right now with its stock offering better value and more upside compared to Costco.
In a scenario of declining interest rates, Walmart may stand to benefit from its broader exposure to improved discretionary consumer spending, which could be a catalyst for earnings to outperform expectations into 2025. Ultimately, Walmart can work for investors with a long-term time horizon within a diversified portfolio.
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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. The Motley Fool has a disclosure policy.
