Walmart (WMT, Financial) and Costco (COST, Financial) are two retailers which have had stellar 10-year financials. Both have increased cash flows and net income at double digit rates. A crucial measure where the two have diverged, however, is capital expenditures. Both companies cut back on capital expenditures after the financial crisis, but in the years prior Walmart had been increasing its capex while Costco was cutting back.
The figures below are in $ billions
Capital expenditures are necessary to sustain continued operating cash flow growth. Buildings, equipment and other goods have to be maintained or replaced and expansion is facilitated through additional capital expenditures. Costco now spends about 25% less on capex compared to what it did in 2001. Meanwhile in the same period Walmart has increased its capex by nearly 50%. By cutting back on capital expenditures free cash flows can be augmented, but this interruption in capex may yet show up in Costco’s future earnings.
The chart below shows the total number of stores both companies had at year end.
Walmart’s growth has come primarily outside the U.S. and while Costco does have international operations, it hasn’t been as aggressive as Walmart in expansion. Despite positioning itself for future growth, Walmart’s stock trades at a much lower price to earnings than does Costco.
An earlier article highlighted the edge Costco has in its rapid turnover, but it pointed out that the company had much higher returns to capital than its peers. I haven’t examined returns to capital, but returns to equity which is a fairly close ratio was much higher with Walmart. Walmart’s 10 year average of return on equity was in the low 20’s while Costco's was in the low teens. Walmart’s turnover is not far behind Costco, but their margins are much higher.
One explanation for the low price to earnings may be that analysts expect Amazon to erode Wal-mart’s relatively fat margins. Walmart has certainly recognized the threat and has shifted away towards grocery which does not lend itself to the internet. Grocery and foods also happens to be the main driver for Costco and it accounts for over 50% of its sales. Though the two companies generally serve different markets, Walmart’s push in that direction should make Costco shareholders concerned.
Disclosure: Long WMT
Josh Zachariah
The figures below are in $ billions
Capital expenditures are necessary to sustain continued operating cash flow growth. Buildings, equipment and other goods have to be maintained or replaced and expansion is facilitated through additional capital expenditures. Costco now spends about 25% less on capex compared to what it did in 2001. Meanwhile in the same period Walmart has increased its capex by nearly 50%. By cutting back on capital expenditures free cash flows can be augmented, but this interruption in capex may yet show up in Costco’s future earnings.
The chart below shows the total number of stores both companies had at year end.
Walmart’s growth has come primarily outside the U.S. and while Costco does have international operations, it hasn’t been as aggressive as Walmart in expansion. Despite positioning itself for future growth, Walmart’s stock trades at a much lower price to earnings than does Costco.
An earlier article highlighted the edge Costco has in its rapid turnover, but it pointed out that the company had much higher returns to capital than its peers. I haven’t examined returns to capital, but returns to equity which is a fairly close ratio was much higher with Walmart. Walmart’s 10 year average of return on equity was in the low 20’s while Costco's was in the low teens. Walmart’s turnover is not far behind Costco, but their margins are much higher.
One explanation for the low price to earnings may be that analysts expect Amazon to erode Wal-mart’s relatively fat margins. Walmart has certainly recognized the threat and has shifted away towards grocery which does not lend itself to the internet. Grocery and foods also happens to be the main driver for Costco and it accounts for over 50% of its sales. Though the two companies generally serve different markets, Walmart’s push in that direction should make Costco shareholders concerned.
Disclosure: Long WMT
Josh Zachariah
