Who Wins the Battle of Costco vs. Target?

NASDAQ: COST | Costco Wholesale Corporation News, Ratings, and Charts

COST – Although high inflation and supply chain issues affect the retail industry, resilient consumer spending for general merchandise at relatively low prices from discount stores should benefit discount retailers Costco Wholesale (COST) and Target (TGT). But which of these stocks is a better buy now? Read more to find out….

Costco Wholesale Corporation (COST) and Target Corporation (TGT) are two renowned discount store operators. COST operates wholesale membership warehouses and e-commerce sites that offer branded and private-label products in a range of merchandise categories worldwide. It sells food, automotive supplies, hardware, sporting goods, jewelry, electronics, apparel, and health and beauty aids.

On the other hand, TGT is a general merchandise retailer that offers food assortments, apparel, accessories, home decor products, electronics, seasonal offerings, and beauty and household essentials through its stores and digital channels.

Given the surging inflation and continued supply disruptions, consumers rush to discount stores to buy general merchandise at relatively lower prices, benefitting discount retail store operators. Resilient consumer spending and a tight job market should help discount retailers stay afloat.

While TGT lost 1.3% over the past month, COST surged 8.7%. COST is a clear winner, with 9.8% returns over the past nine months versus TGT’s 37.2% loss. But which of the two stocks is a better buy now? Let’s find out.

Recent Financial Results

COST’s total revenue for its fiscal 2022 third quarter ended May 8, 2022, increased 16.2% year-over-year to $52.60 billion. The company’s operating income came in at $1.79 billion, representing a 7.7% rise from the year-ago period.

While its net income increased 10.9% year-over-year to $1.35 billion, its EPS grew 10.6% to $3.04. As of May 8, 2022, the company had $11.19 billion in cash and equivalents.

COST paid a $0.90 quarterly cash dividend on May 15, 2022. The stock pays a $3.60 per share dividend annually, translating to a 0.73% yield. The company’s dividend has grown at a 12.07% rate over the past five years.

For the fiscal 2023 first quarter ended April 30, 2022, TGT’s total revenue increased 4% year-over-year to $25.17 billion. The company’s operating income came in at $1.35 billion, representing a 43.3% decline from the prior-year period.

Its net earnings came in at $1.01 billion, down 51.9% from the year-ago period. TGT’s adjusted EPS came in at $2.19, indicating a 40.7% year-over-year decline. As of April 30, 2022, the company had $1.11 billion in cash and cash equivalents.

TGT will pay a $1.08 quarterly cash dividend on September 10, 2022. The stock pays a $4.32 per share dividend annually, translating to a 2.99% yield. The company’s dividend has grown at an 8.45% rate over the past five years.

Past and Expected Financial Performance

Over the past three years, COST’s tangible book value and levered free cash flow have increased at CAGRs of 11.3% and 17%, respectively.

Analysts expect COST’s EPS to increase 17.8% year-over-year in fiscal 2022, ending August 31, 2022, and 10.9% in fiscal 2023. Its revenue is expected to grow 15.3% in fiscal 2022 and 8.8% in fiscal 2023. Analysts expect the company’s EPS to rise at a 12.4% rate per annum over the next five years.

Over the past three years, TGT’s tangible book value and levered free cash flow have declined at CAGRs of 1% and 7.6%, respectively.

TGT’s EPS is expected to decline 36.1% year-over-year in fiscal 2023, ending January 31, 2023, and rise 42% in fiscal 2023. Its revenue is expected to grow 3.9% year-over-year in fiscal 2023 and 4.1% in fiscal 2024. Analysts expect the company’s EPS to grow at a 19.6% rate per annum over the next five years.

Valuation

In terms of forward EV/Sales, COST is currently trading at 0.95x, 25% higher than TGT’s 0.76x. In terms of non-GAAP forward PEG, TGT’s 1.06x compares with COST’s 3.23x.

Profitability

COST’s trailing-12-month revenue is twice that of TGT. However, TGT is more profitable, with a 5.5% net income margin versus COST’s 2.6%.

Furthermore, TGT’s ROE, ROA, and ROTC of 45.5%, 9.9%, and 17.2% compare with COST’s 30.6%, 8.5%, and 18.1%, respectively.

POWR Ratings

While COST has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, TGT has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

COST has been graded a B in terms of Growth, which is in sync with its higher-than-industry growth rates over the past year. COST’s EBITDA has grown 24.5% over the past year, 404.7% above the industry average of 35.1%. TGT’s D grade for Growth reflects its negative EBITDA growth rates.

COST has a B grade for Sentiment, which reflects its impressive earnings growth expectation. COST’s EPS is expected to grow 17.8% year-over-year to $13.06 for fiscal 2022 ending August 31, 2022.

TGT’s C grade for Sentiment is in sync with its lower earnings estimates for fiscal 2022. Analysts expect TGT’s EPS to be $8.67 for fiscal 2023 ending January 31, 2023, representing a 36.1% year-over-year decline.

Of the 38 stocks in the A-rated Grocery/Big Box Retailers industry, COST is ranked #28, while TGT is ranked #34.

Beyond what we have stated above, our POWR Ratings system has graded COST and TGT for Stability, Value, Quality, and Momentum. Get all COST ratings here. Also, click here to see the additional POWR Ratings for TGT.

The Winner

Resilient consumer spending and rising foot traffic at discount stores should help COST and TGT stay afloat. However, rising input costs, excessive inventory, and expected thin profit margins in the second quarter are weighing heavily on TGT. So, COST is a better buy based on favorable analyst sentiment and better financials.

Our research shows that the odds of success increase if one invests in stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Grocery/Big Box Retailers industry.


COST shares were trading at $493.80 per share on Wednesday afternoon, up $3.23 (+0.66%). Year-to-date, COST has declined -12.74%, versus a -19.50% rise in the benchmark S&P 500 index during the same period.


About the Author: Sweta Vijayan


Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...


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