The outlook of GDP is optimistic for the coming year. Improved GDP reflects better spending capacity of consumers. Shoppers may control their spending on certain luxuries, but they will not be able to go without groceries and other important household items. The retail industry thus remains a very lucrative and defensive stock in which to invest even in a sluggish or reviving economy.
Walmart (WMT, Financial) is one such giant, dealing in groceries, household goods, electronics and other products that has established itself as a low-cost retailer trading on high-volume and low-margins. Walmart has a huge customer base with umpteen number of product offerings. The growth for the company is expected to be good, at a rate of 9%, in the coming year. Company’s ROE has consistently been above 20% and is fairly valued at its current price of $69 with a P/E ratio of 14.25 which is much lower than the industry P/E of 21.45 showing the potentials of growth from valuation point of view.
Walmart already has a very wide market coverage domestically thus stagnating growth opportunities in local market. The company’s international growth might be hindered because of the WalMex scandal and also due to allegations of bribery in India, China and Brazil. Walmart’s questionable behavior might worry investors but keeping in mind the size and resources available at its disposal, this ship should sail through the turmoil and provide a safe shore to its investors.
Is Costco costly?
Costco Wholesale Corporation (COST, Financial) is trading at a premium with a P/E of 24.67 compared to the industry average of 21.45. Based on P/E, the stock definitely looks expensive but there are a number of reasons that makes it a great fetch.
The growth is expected to continue in the coming years, and revenue should be around $140 billion plus in the year 2017 mainly on account of increase in number of stores and comparable store sales increase.
Costco’s diversification in many international markets like the United States, Canada, the United Kingdom, Mexico, Japan, Australia, Taiwan and Korea reduces the risk of uncertainties for the company’s revenue growth. The company has an interesting business model that ties up customers by taking an upfront fee and subsequently offering heavy discounts on purchases. This helps the company in deriving multiple benefits like steady cash receipts and sustainable revenue upfront, customer loyalty and future sales security.
The company currently has market dominance and potential to grow further. The company’s one-time upfront fee collection and selling goods at deep discounts brings customers to its stores and warehouses. Costco’s business is mainly concentrated in the U.S. and with the economy just stepping on revival mode the consumers will be cautious while spending and discounts will come in handy to attract them. This money saving consumer tendency will increase sales of the company along with the increase in the membership.
Target, the Innovator
Target (TGT, Financial) is a major competitor of both Walmart and Costco in the retail and discount and variety store industry. Target has innovated its way out to attract customers through its REDCard program and remodeled PFresh stores. REDCard holders are entitled to an additional 5% discount and an extra 30 days return benefit for goods purchased online or from stores. PFresh stores offer 50% to 200% more food products than traditional general-merchandise stores and have gained great success as a concept. This should improve consumer-loyalty for target stores and thereby impact its revenue positively in the long run.
The company has progressed internationally too with an overwhelming response from its stores in Canada as consumers have spent more than expected. Target also caters to more affluent customers than its competitors like Costco and Walmart which gives it an edge. While competitors providing goods at low margin have to always put their profits on stake to remain competitive, Target with its differentiated customer base has its own separate market.
Conclusion
Walmart is a stock for people who are planning an early retirement. Consistent dividend with gradual growth and tremendous market hold makes it a lucrative company to invest in. Target on the other hand has its own innovative model to lure customers and has a stable dividend that is slightly better than Walmart. Target, too, looks a fine fetch according to me. Costco is trading at a premium in its industry but has further opportunity in terms of revenue growth, internationally and domestically. Though it might not provide out regular payments as it has recently paid $7 as dividend, it should still provide enough price appreciation thereby proving its worth.
