Amid the multi-decade high inflation, consumers are heading to discount stores that offer merchandise at relatively lower prices than traditional retailers. Therefore, discount stores should benefit significantly. Also, given an inelastic demand for their products, the discount stores should perform steadily even if the economy experiences a slowdown. In addition, enhanced delivery services and product offerings should allow the discount retail industry to grow.
Costco Wholesale Corporation (COST) and Target Corporation (TGT) are two leading 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. 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.
While TGT has lost 31% over the past year, COST has surged 17%. Which of these stocks is a better pick 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.
For the fiscal 2022 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.
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.
COST’s EPS is expected to increase 17.6% year-over-year in fiscal 2022, ending August 31, 2022, and 9.9% in fiscal 2023. Its revenue is expected to grow 4% in fiscal 2023 and 3.4% in fiscal 2024. Analysts expect the company’s EPS to rise at a 12.6% 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.
Analysts expect TGT’s EPS to decline 21.8% year-over-year in fiscal 2022, ending January 31, 2023, and rise 25.5% in fiscal 2023. Its revenue is expected to grow 4.1% year-over-year in fiscal 2022 and 4.3% in fiscal 2023. 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 0.93x, 13.4% higher than TGT’s 0.82x. In terms of forward non-GAAP PEG, TGT’s 0.75x compares with COST’s 3.15x.
Profitability
COST’s trailing-12-month revenue is twice TGT’s. Moreover, COST is more profitable, with a 1.6% levered free cash flow versus TGT’s 1.1%.
Furthermore, COST’s ROTC of 18.1% compares with TGT’s 17.2%.
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.
Both COST and TGT have been graded a C for Momentum, consistent with their mixed price performance. COST has lost 9.8% over the past month, while TGT fell 30.8%.
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 EBIT has grown 29% over the past year, 339.7% above the industry average of 6.6%. TGT’s D grade for Growth reflects its negative EBIT growth.
Of the 38 stocks in the A-rated Grocery/Big Box Retailers industry, COST is ranked #26, while TGT is ranked #33.
Beyond what we have stated above, our POWR Ratings system has graded COST and TGT for Value, Quality, Stability, and Sentiment. Get all COST ratings here. Also, click here to see the additional POWR Ratings for TGT.
The Winner
Increasing consumer spending and foot traffic at discount stores should allow COST and TGT to profit substantially in the coming months. However, higher profitability makes COST a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings 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 $471.10 per share on Monday afternoon, down $5.15 (-1.08%). Year-to-date, COST has declined -16.76%, versus a -13.05% 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.
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