Costco Wholesale Corp’s (NASDAQ: COST) main competitors in the highly competitive retail market of large discount stores are Wal-Mart Stores, Inc. (NYSE: WMT) and Target Corporation (NYSE: TGT). These companies are also sometimes classified as consumer defensive stocks.
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 2014, Costco operates over 650 warehouses, with approximately 470 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 has a market capitalization of nearly $61 billion. Its net income in 2014 was approximately $2.3 billion. The five-year expected price/earnings-to-growth, or PEG, for the company is 2.8, which is slightly higher than the industry average of 1.6. The dividend yield offered with Costco stock is 1.2%, which is well above the industry average of 0.8%. The return on equity, or ROE, for the company is 19.9%, which is 2% higher than 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 The inventory turnover ratio can also measure the quality of a store's inventory and the amount of inventory that is out of date or obsolete.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.
1) Wal-Mart Stores, Inc.
Wal-Mart Stores, Inc. operates 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 and 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 2015, Walmart operates nearly 12,000 stores under its three subsidiaries in 27 countries. Wal-Mart Stores, Inc.
is headquartered in Bentonville, Arkansas, and was founded in 1945.
At just over $15 billion for its most recent fiscal year, 2014, Wal-Mart has a substantially higher net income than Costco. However, Wal-Mart’s price-to-earnings ratio, or P/E ratio, at 13.1 is lower than Costco’s at 26.5 and the industry’s average at 14.3. This is a possible indication of lower anticipated earnings increases for the future of Wal-Mart. The dividend yield for Wal-Mart stock is approximately 3.1%, an impressive yield that not only outperforms Costco and Target but the overall stock market as well.
Wal-Mart's inventory turnover ratio is approximately eight, compared to Costco's ratio of 12. Wal-Mart's inventory quality may be slightly lower than Costco's, but its turnover rate is still well within acceptable figures, and this indicates Wal-Mart likely does a good job of keeping its inventory current and clearing outdated or obsolete items.
2) The Target Corporation
The Target Corporation 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 2015, Target operates just under 1,800 stores in the United States, and has international locations in India. The Target Corporation was founded in 1902 and is based in Minneapolis, Minnesota.
Though slightly lower than Wal-Mart’s, Target's dividend yield, at 2.9%, is substantially higher than both Costco’s and the industry and overall market average. The five-year expected PEG ratio for Target is the lowest of all three companies at 1.58, and is lower than the industry’s average of 1.6. This is significant because it indicates Target's stock price is not outpacing the company’s actual projected growth rate.
Target has the lowest inventory turnover ratio of the three, at six, indicating it only turns its inventory half as often as Costco and slightly less often than Wal-Mart. The relatively lower ratio may indicate that, on average, Target carries a somewhat more dated inventory than Wal-Mart or Costco.