Costco Wholesale Corp’s (NASDAQ: COST) main competitors in the highly competitive retail market of large discount stores are Walmart Inc. (NYSE: WMT) and Target Corporation (NYSE: TGT). These companies are also sometimes classified as consumer defensive stocks.

Costco

Costco, in conjunction with its subsidiaries, operates membership warehouses where a wide variety of consumer goods are sold wholesale. Both brand name and private-label products are sold across a vast array of merchandise categories, such as snack foods; dry/prepackaged foods; tobacco; alcoholic and nonalcoholic beverages; cleaning supplies: electronics; health and beauty aids; office supplies; deli and produce; and apparel.

Costco also operates pharmacies, photo centers, food courts, gas stations, and several additional services. As of Nov. 2019, Costco operates 785 warehouses, with approximately 546 in the United States and Puerto Rico combined. The company also has warehouses in Canada, Mexico, the United Kingdom, Japan, Korea, Taiwan, Australia, and Spain. Previously known as Costco Companies, Inc., Costco was established in 1976 and is headquartered in Issaquah, Washington.

Costco Financial Data

Costco has a market capitalization of $131.8 billion. Its net income for the 52-week fiscal year which ended Sept. 1, 2019 was approximately $3.7 billion. As of Nov. 26, 2019, the price/earnings-to-growth, or PEG, for the company was 4.26, which is higher than the industry average of 2.39. The dividend yield offered with Costco stock is 0.86%, which is in line with the industry average of 0.83%. The return on equity, or ROE, for the company is 24.9%, which is approximately the same as the industry average.

Inventory turnover is an important metric for retail stores, as it can provide a good indication of how efficiently a company manages its ordering and inventory. The inventory turnover ratio can also measure the quality of a store's inventory and the amount of inventory that is out of date or obsolete. There is also the fact that every turnover of inventory marks another chunk of gross profit earned. Costco's inventory turnover ratio is approximately 12, meaning it roughly turns over its entire inventory monthly. This indicates high inventory quality and relatively efficient ordering management.

Key Takeaways

  • In the highly competitive large discount store segment, Costco's main competitors are Walmart and Target.
  • For retail stores, an important metric is inventory turnover because it indicates the quality of the store's inventory and whether it's outdated or obsolete.
  • Costco rates the best of the three for inventory turnover, followed by Walmart and then Target.
  • Target's dividend yield of 2.1% outpaces both Walmart's and Costco's, along with surpassing the industry average.
  • For the fiscal year 2019, Walmart's net income of $7.2 billion almost doubled Costco's net income of $3.7 billion.

Reviewing Costco Competitor: Walmart Inc.

Walmart Inc. is one of Costco's main competitors, operating retail stores around the world through three primary segments: Walmart U.S., Walmart International, and Sam's Club. Sam's Club most closely resembles Costco’s sales format; however, Costco is still considered to be in direct competition with both Walmart and its subsidiary.

Walmart stores offer a variety of goods including deli and bakery items; meat; produce; frozen foods; dry groceries; health and beauty aids; photo processing; pharmaceuticals; apparel; hunting products; automotive goods; and consumer electronics. Walmart has its own cellular phone service, StraightTalk, that provides service primarily through Verizon's towers.

The company also provides some financial services and products including money orders, prepaid cards, check cashing, and bill payment. Both brand-name and private-label goods are sold in Walmart stores and via its website. As of 2020, Walmart operates over 11,500 stores under its three subsidiaries in 27 countries. Walmart, Inc. is headquartered in Bentonville, Arkansas, and was founded in 1962.

Walmart Financial Data

At $7.2 billion for its most recent fiscal year, 2019, Walmart has a substantially higher net income than Costco. However, Walmart’s price-to-earnings ratio, or P/E ratio, at 23.8 is lower than Costco’s at 36.3 but remains in line with the industry’s average at 23.6. This is a possible indication of lower anticipated earnings increases for the future of Walmart. The dividend yield for Walmart stock is approximately 1.78%, a yield that outperforms Costco.

Walmart's inventory turnover ratio is approximately eight, compared to Costco's ratio of 12. Walmart's inventory quality may be slightly lower than Costco's, but its turnover rate is still well within acceptable figures, and this indicates Walmart likely does a good job of keeping its inventory current and clearing outdated or obsolete items.

Reviewing Costco Competitor: The Target Corporation

Target is another Costco competitor and is a general merchandise discount retailer operating in the U.S. This chain offers household essentials; pharmaceuticals; personal care items; cleaning and paper products; apparel; accessories; sporting goods; electronics; and food items, along with furniture and other products. Target also offers REDcard debit and credit cards that provide consumers with a 5% discount on purchases. Target utilizes brick-and-mortar locations and e-commerce for sales of its goods. As of 2019, Target operates 1,868 stores in the United States and has international locations in India. The Target Corporation was founded in 1962 and is based in Minneapolis, Minnesota.

Target Financial Data

Target's dividend yield, at 2.1%, is higher than Walmart's and substantially higher than both Costco’s and the industry average. As of Nov. 26, 2019, Target's PEG ratio is the lowest of all three companies at 2.68, compared with Walmart's PEG ratio of 5.06 and Costco's PEG ratio of 4.26. This is significant because it indicates Target's stock price is not outpacing its growth rate.

Target has the lowest inventory turnover ratio of the three, at about five, indicating it only turns its inventory about half as often as Costco and less often than Walmart. The relatively lower ratio may indicate that, on average, Target carries a somewhat more dated inventory than Walmart or Costco.