Which retailer attracts consumers in a context of rising inflation?

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Rising inflation is a growing concern for most retailers as consumers cut spending budgets, leading to lower sales for the former.

However, retailers like Costco (NASDAQ: COST) and Walmart (NYSE:WMT) are up as more customers resume shopping at these stores following the rollout of vaccines and the easing of COVID-19 restrictions.

Tighter consumer budgets due to rising inflation have driven more and more shoppers to these stores, which offer steep discounts.

As a result, consumers continue to flock to these huge stores, boosting sales for these retailers despite supply issues related to container delays, rising labor and transportation costs and other constraints affecting deliveries.

Similarly, shares of Costco and Walmart have gained more than 10% in the past month, significantly outperforming benchmark performance.

Let’s compare Walmart and Costco and discuss what Wall Street analysts think about the prospects for these two retail giants.

walmart

Walmart Inc. is an American multinational corporation that operates a chain of hypermarkets, discount department stores, grocery stores as well as Sam’s Club retail warehouses. As of January 31, 2022, Walmart had 10,593 stores and clubs in 24 countries.

Walmart posted upbeat fourth quarter results in mid-February on the back of a surge in demand driving solid momentum across all three business segments, as well as a 2% rise in its annual dividend for the 49th consecutive year at $2.24 per share, reflecting a quarterly dividend of $0.56 per share.

Similarly, through the $9.8 billion worth of stock repurchased in FY22, Walmart returned a whopping $16 billion to shareholders including dividends, implying an impressive return of 3.9% of the company’s current market capitalization for shareholders over a 12-month period. The company also announced share buybacks of at least $10 billion in the current fiscal year.

Recently, Morgan Stanley analyst Simeon Gutman reiterated a buy rating on Walmart with a price target of 167 (upside potential of 11.43%).

Gutman drew investors’ attention to Walmart’s fintech startup ONE, which he calls an “affordable and broadly accessible digital platform.” He predicted that ONE’s “super financial services app” would potentially create a $1.6 billion revenue opportunity.

It further promotes the impressive array of alternative revenue streams at Walmart, including advertising, healthcare, fulfillment/delivery services, and its third-party marketplace.

The rest of the Wall Street community is cautiously bullish on the stock, with a moderate buy consensus rating based on 17 buys and seven holds. Walmart’s average price forecast of $163.48 implies upside potential of 9.1% from current levels.

COSTCO

Costco Wholesale Corporation is an American retailer that operates members-only big-box discount stores, including warehouse clubs or wholesale clubs.

Bulk quantities of merchandise are sold at deeply discounted prices to Costco club members who pay an annual membership fee. The company operates 829 warehouses in the United States.

Costco recently announced stronger than expected results for the second fiscal quarter ended February 13, 2022.

Coming off a positive from a virtual call with COSTCO Chief Financial Officer Richard Galanti, Oppenheimer analyst Rupesh Parikh raised the price target on Costco Wholesale to $620 from $580. The price increase implies a 7.6% return for investors from current levels.

Costco remains a “top choice” for Parikh as it favors the company’s “strong value proposition amid a highly inflationary environment, a thriving fuel business and the reopening of tailwinds in categories such as travel and apparel” .

The company known for deep discounts offers gas for $3.87, well below the price at most stations at $4.15 and above, as noted by Parikh.

The analyst agreed that while the price differential may negatively impact Costco’s margins, “strong gallonage growth and store traffic gains” will be able to offset the margin squeeze.

Another analyst, Scot Ciccarelli of Truist Securities, agrees and expects gasoline sales/blend to increase significantly in the coming months due to rising gasoline prices and the increase in sales volume “as customers seek Costco’s lowest prices”.

Ciccarelli reiterated a Buy rating with a price target of $603.00 on Costco Wholesale, implying 4.6% upside potential.

Overall, street sentiment on Costco stock is bullish, with a strong buy consensus rating based on 12 buys and four takes. Costco’s average price target of $583.73 suggests stocks are fairly valued at current levels.

Conclusion

According to stock comparison tool TipRanks, Costco stocks have outperformed Walmart stocks over the past year. In good times, consumers buy from Costo, and they buy even more during bad times.

Costo is the best place to get things at even cheaper prices as consumers look to cut spending budgets, especially in these tough times of rising inflation and other uncertainties.

Meanwhile, Walmart’s continued return of value to shareholders through increased dividends and buybacks, as well as its diversified business model remains attractive to investors.

Given its strong value proposition offered to its members, especially in the current inflationary environment and bullish high street stance, Costco appears to be a better choice than Walmart in the retail space.

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