Analysts on a consensus basis anticipate Costco Wholesale Corporation (NASDAQ:COST) to grow earnings per share by 13.44% on average over the next five years. The company’s growth strategy is fairly solid, and revenue growth is projected at 6.9% for the full year.
Comparatively, Wal-Mart’s earnings are projected at 9.29% on average over the next five years.
Undervalued play in retail
Safeway had been getting spanked by Wal-Mart Stores, Inc. (NYSE:WMT). But now Safeway has effectively moved itself away from everyday low pricing to luxury. The company has remodeled its stores to make the shopping experience more luxurious. You cannot compete directly with Wal-Mart on the basis of price. You can perhaps compete with Wal-Mart on convenience. But it is no more convenient to shop in a store the size of Safeway than it is to shop at a Wal-Mart. Therefore, Safeway Inc. (NYSE:SWY) took on a three-step process to growing earnings.
Safeway closed 46 stores. The company then remodeled or replaced 17 stores. The company then priced its products at a higher price in order to increase profitability. These measures turned Safeway Inc. (NYSE:SWY) around and allowed the company to grow earnings by 21% in fiscal year 2012.
Conclusion
Wal-Mart Stores, Inc. (NYSE:WMT) is still an effective retailer. While we may not necessarily agree with all of Wal-Mart’s retail practices and the negative effects it could potentially have on local communities, we have to remember that Wal-Mart is a company that only adheres to one principle, which is to sell products at everyday low prices. The company doesn’t extort its customers by cranking up profits as the company’s profit margins have remained the same for 20 years (3% to 3.85%).
Wal-Mart, Costco Wholesale Corporation (NASDAQ:COST) and Safeway operate on different business models, therefore, generate different rates of growth. No method is better than the other. Costco Wholesale Corporation (NASDAQ:COST) has customer service and better labor standards, but it has to operate at greater economies of scale. Wal-Mart offers product selection at the lowest possible price in as many markets as possible. Safeway is strictly focusing on convenience stores and building a luxury grocery chain (similar to Fry’s and Whole Foods Market, Inc. (NASDAQ:WFM)).
I would still invest in Wal-Mart, Safeway and Costco. All three deserve to be a part of an investor’s portfolio.
The article Wal-Mart and Costco Are Like Apples and Oranges originally appeared on Fool.com and is written by Alexander Cho.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale (NASDAQ:COST). The Motley Fool owns shares of Costco Wholesale. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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