Big-box retailers such as Walmart (NYSE:WMT) and Costco (NASDAQ:COST) have outpaced the broader markets by a sizeable margin in the last two decades. After accounting for dividend reinvestments, Walmart and Costco have returned 433% and 3,140%, respectively, while the TSX index has gained “just” over 400% since May 2004.
As past returns don’t matter much to future investors, let’s see if Walmart and Costco remain top investment choices right now.
The bull case for Walmart stock
Walmart stock has popped over 20% year to date compared to the 12% gains of the S&P 500 index. In fact, earlier this month, Walmart was the first Dividend King to surpass a market cap of US$500 billion. A Dividend King is a company that has raised dividends for 50 consecutive years.
Despite a challenging macro environment, Walmart’s sales increased by 6% year over year in the fiscal first quarter (Q1) of 2025 (which ended in April), while adjusted earnings soared 22.4%.
Previously, Walmart forecast to end fiscal 2025 with net sales growth between 3% and 4% and adjusted earnings between US$2.23 and US$2.37 per share. It also expected operating income to increase by 5%. Due to its stellar Q1 results, Walmart emphasized that it is on track to beat its original guidance for sales, earnings, and operating income in fiscal 2025.
Investors might be worried about Walmart’s high forward earnings multiple of 27 times as its earnings are forecast to rise by 8.2% annually in the next five years.
However, there are multiple growth drivers for Walmart. First, its high-margin e-commerce sales in the U.S. rose by 22% year over year due to online orders and store pickups. Second, the retail giant launched Walmart+ in 2020, a subscription for free home delivery. This segment continues to grow by double digits due to its affordable price and convenience.
Is Costco stock a good buy right now?
Costco reported sales of US$242 billion in fiscal 2023 (ended in August), showcasing its massive scale, which allows it to benefit from favourable pricing on products purchased from suppliers. Costco transfers a significant portion of these savings to consumers, making it a popular destination for essentials.
While its low-margin business model might make investors nervous, you must understand that Costco generates a major portion of its operating income from membership fees. In the last 12 months, Costco added 5.3 million households, up 8.2% year over year. Its membership renewal rate stands at 90.5%, resulting in customer loyalty and repeat purchases.
Between fiscal 2013 and 2023, Costco increased its net sales by 131%. During this period, it has struggled with a global pandemic, supply chain disruptions, inflation, and elevated interest rates.
Costco’s massive outperformance has meant the retail stock trades at 49.5 times forward earnings, which is really steep as analysts expect earnings to expand by 10% annually through fiscal 2028.
The Foolish takeaway
Both Walmart and Costco are blue-chip companies part of recession-resistant sectors. Investors can consider buying shares of both these heavyweights that are positioned to deliver outsized returns. Alternatively, you can gain exposure to Walmart and Costco by holding a diversified exchange-traded fund that tracks the S&P 500 index.
