Walmart(NYSE: WMT) and Costco(NASDAQ: COST) are both recession-resistant retailers. Walmart’s scale enables it to sell its products at lower prices than many of its competitors, and it leverages its brick-and-mortar stores to fulfill its online orders. Costco’s warehouse stores lock in shoppers with bulk discounts and sticky membership plans.
Over the past three years, Walmart’s stock rose more than 90% as Costco’s stock rallied over 60%. The S&P 500 only advanced 23% during that period. Let’s see why these two retailers beat the market — and which one is the better buy right now.
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Walmart is a more diversified retailer than Costco. It operates its namesake superstores in the U.S., Mexico, China, and other overseas markets, while its smaller members-only Sam’s Club banner competes against Costco in the warehouse club market. It also owns other brick-and-mortar banners and e-commerce websites across 19 countries.
Walmart operates over 10,600 stores and warehouse clubs around the world, but it still generated more than 80% of its revenue from its Walmart and Sam’s Club’s stores in the U.S. in fiscal 2024 (which ended in January 2024).
Costco only operates members-only warehouse clubs, which sell discount and bulk products. It can afford to sell many of its products at low margins because it generates most of its profits through its higher-margin membership fees.
Costco’s growth cycle is mainly fueled by gaining new members, maintaining high renewal rates, raising its fees every few years, and opening new warehouses. It operated 897 warehouses at the end of its latest quarter, with 617 locations in the U.S. and Puerto Rico and the rest spread out across Asia, Europe, Australia, and New Zealand.
Walmart’s revenue rose 7% throughout the pandemic in fiscal 2021, but only grew 2% in fiscal 2022 as it divested some of its non-core and overseas businesses. Its revenue rose 7% in fiscal 2023 as those headwinds dissipated. Revenue grew another 6% in fiscal 2024, as its U.S. comps rose 5.6% and its international revenue increased 13%.
Walmart’s total store count declined from fiscal 2021 to fiscal 2024 as it divested some of its overseas banners, but its core domestic business is still keeping pace with Amazon and other tough competitors. It’s maintaining that steady growth rate by matching its competitors’ prices, automating its processing volumes at its fulfillment centers, expanding its e-commerce ecosystem, and locking more shoppers into its Walmart+ subscriptions for free deliveries and other perks.
From fiscal 2024 to fiscal 2027, analysts expect Walmart to grow its revenue and earnings per share (EPS) at a compound annual growth rate (CAGR) of 5% and 17%, respectively. Those growth rates are healthy, but its stock looks historically expensive at 34 times next year’s earnings. Its low forward yield of 1% also won’t attract any serious income investors in this high-interest-rate environment.
Costco’s revenue rose 17% in fiscal 2021 (which ended in August 2021) as the pandemic drove more people to stock up on packaged foods and household goods. Its revenue grew another 16% in fiscal 2022, 7% in fiscal 2023, and 5% in fiscal 2024.
Its overall growth slowed down as it lapped the pandemic-driven tailwinds and faced tougher inflationary headwinds for consumer spending. Its total adjusted comps (excluding currency exchange rates and fuel sales) still increased 5.9% in fiscal 2024, as its stronger overseas growth outpaced its U.S. growth. Its e-commerce sales surged 16% as more shoppers pivoted from its stores to its online marketplace.
Costco is also gaining new members and maintaining high renewal rates. In the first quarter of fiscal 2025, its total cardholders grew 7% year over year to 138.8 million, as its worldwide renewal rate only dipped 10 basis points to 90.4%. It’s still opening new stores around the world, and it recently raised its membership fees for the first time in seven years.
From fiscal 2024 to fiscal 2027, analysts expect Costco’s revenue and EPS to grow at a CAGR of 7% and 11%, respectively. But like Walmart, Costco’s stock isn’t a bargain at 47 times next year’s earnings. It also pays a tiny forward dividend yield of 0.5%.
Costco and Walmart are great long-term investments, but their multiples are currently being inflated by expectations for lower rates and a rotation toward safer evergreen stocks. Therefore, I wouldn’t rush to buy either of these stocks right now. But if I had to choose one over the other, I’d buy Walmart over Costco. Its business is more broadly diversified, it’s less dependent on recurring memberships, and its stock is cheaper.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Walmart. The Motley Fool has a disclosure policy.
