Wal-Mart Stores, Inc. (WMT), Costco Wholesale Corporation (COST): Are Discount Retailers Good Stocks to Buy?

The American consumer is slowly coming back from the worst recession in decades, but the road to financial health isn’t without a number of potholes. Consumer sentiment continues to improve despite the payroll tax hike and slow-growing economy, meaning Americans are staying resilient in the face of financial distress.

Amid the many headwinds facing the U.S. consumer, discount retailers stand to capitalize because of their lower-end focus. When faced with economic pressures, consumers often scale down their spending levels, meaning retailers such as Costco Wholesale Corporation (NASDAQ:COST), Wal-Mart Stores, Inc. (NYSE:WMT), and Target Corporation (NYSE:TGT) are the major beneficiaries.

In light of this, is the entire group worthy of your investing dollars? Or are there differences between these stocks that investors should take note of?

Thriving in the current environment

Costco Wholesale Corporation (NASDAQ:COST) is doing very well to start the year. Comparable sales over the first 39 weeks of the year, through June 2, are 6% higher than the same period last year.

Moreover, diluted earnings per share rose 18% in the third quarter and 29% over the first nine months of 2012, year over year.

And, Costco grew sales in June as well, by 6% on a comparable-store basis.

However, it’s worth noting that investors are paying up for Costco Wholesale Corporation (NASDAQ:COST)’s strong performance. Costco shares trade at a significant premium to both its industry peers and the stock market as a whole.

The stock changes hands for 25 times trailing earnings and offers a dividend yield of just 1% annualized. Wal-Mart and Target, meanwhile, trade for approximately 15 times trailing EPS, a level that is closer to the market multiple.

Speaking of Wal-Mart Stores, Inc. (NYSE:WMT), this is a company that has a truly remarkable story. Wal-Mart’s financial profile carries some truly mind-boggling numbers. Wal-Mart generated $469 billion in sales in 2012, and is off to a strong start to 2013.

Wal-Mart reported first quarter diluted earnings per share growth of 4.6% year over year, on the back of a 1% increase in consolidated net sales. Wal-Mart Stores, Inc. (NYSE:WMT) recorded nearly $2 billion in free cash flow during the first quarter, and expects at least 3.4% earnings growth in the current quarter.

Fortunately for shareholders, Wal-Mart isn’t shy about returning cash to its investors. Wal-Mart recently increased its dividend by 18%. Wal-Mart Stores, Inc. (NYSE:WMT) has increased its dividend every year since the first declared dividend of $0.05 per share in March 1974. The dividend has doubled over the past five years.

Missing the Target

Target Corporation (NYSE:TGT), for its part, took a step back in its fiscal first quarter. All told, the discount retailer reported just 0.5% sales growth in the first quarter, to $16.6 billion, missing analyst expectations of $16.82 billion. Worse was that same-store sales, which measures only those locations open at least one year, actually fell 0.6% over the first three months year over year. The last time Target’s quarterly same-store sales declined was in the third quarter of 2009.