They’re the three giants of American retailing, Wal-Mart Stores, Inc. (NYSE:WMT) to Costco Wholesale Corporation (NASDAQ:COST) to Amazon.com, Inc. (NASDAQ:AMZN).
They all promise the same thing, the same thing retailers have promised since retailing was invented. They promise savings. But they each deliver it in different ways, Wal-Mart through Supercenters, Costco Wholesale Corporation (NASDAQ:COST) through warehouses, Amazon.com, Inc. (NASDAQ:AMZN) through online delivery.
The question is, where should your money go now?
Wal-Mart targets both rivals
So far this year, Wal-Mart Stores, Inc. (NYSE:WMT) has done better for investors than either of its rivals. The stock is up almost 9.5% since January 1, and unlike either of the other two it pays a dividend, yielding 2.52%.
Here’s what you have to consider before buying shares now.
Wal-Mart Stores, Inc. (NYSE:WMT) has saturated many markets and it’s huge, with annual sales of nearly $470 billion. Even though it increases its sales $25 billion/year, that’s still barely a 5% bump, so your upside is limited.
Wal-Mart is all about logistics. That’s why Amazon.com, Inc. (NASDAQ:AMZN) sticks in management’s craw. The company has tried all sorts of things to catch up, and is now experimenting with lockers in stores that will handle deliveries for on-the-go consumers. The company claims online sales of $9 billion/year, which makes them the second-largest online retailer behind only Amazon, but not big enough that they didn’t lead the charge to impose sales taxes on its rival.
The company’s problem is its labor costs. Despite everything it has done to limit those costs, it still takes arms to stock the shelves, while an e-commerce player can pick stock with robots. Bloomberg reports that Wal-Mart Stores, Inc. (NYSE:WMT) is now starting to lose customers due to its focus on low head count, but there’s method to the madness. Wal-Mart’s store count is up 13% over the last five years its headcount is actually down 1.4%.
Forget the charges of bribery in Mexico. Wal-Mart is going to become a bargain after it works through these problems, and it will work through them. It’s too big not to be one. You can live with the yield while waiting for the capital gain.
Costco goes upscale
Go back five or even 10 years and Costco Wholesale Corporation (NASDAQ:COST) is a much better investment than Wal-Mart Stores, Inc. (NYSE:WMT). The stock is up almost 68% in the last five years, while Wal-Mart is up just 40%.
The key to understanding is one word: upscale. Costco may look like a store for penny-pinchers, with its huge aisles and mass quantities, but its target market is the upper-middle class, not Wal-Mart’s lower-middle class. This means Costco stocks a wide range of luxury goods, even business services, which it sells very profitably.
One thing these customers like is that Costco Wholesale Corporation (NASDAQ:COST) workers seem happy, and why shouldn’t they be? The company has endorsed a $10/hour minimum wage while recording record profits because it pays its people well, with full benefits. A Costco worker makes almost three times as much as one with Wal-Mart, and the smiles help build the brand.
Another key to Costco Wholesale Corporation (NASDAQ:COST) profit is site selection. The company specializes in suburban and high-income urban locations, and it doesn’t overload markets, either. In Atlanta, for instance, the company has stores along the northern arc of freeways, where the wealthy live, and recently turned its southside store into a “business center,” competing with restaurant supply houses and featuring items packaged for resale.
This is why the company racks up sales gains of a steady 10%/year. Even though the gross gain of $11 billion is smaller than Wal-Mart’s annual gain of $25 billion, it’s bigger in percentage terms and thus better for the investor. The dividend isn’t as good, yielding just 1.03%, but I’ve had it in my own portfolio for less than a year and scored a gain of nearly 20% from it.
Amazon: When a retailer is not a retailer
Amazon.com, Inc. (NASDAQ:AMZN) has done the best of these names by far over the long run, increasing almost 850% over the last 10 years, against 260% for Costco and just 52% for Wal-Mart Stores, Inc. (NYSE:WMT). For the year so far, however, Amazon’s gains trail those of its larger rivals, with the shares meeting headwinds around the $260/share level, up just 5% so far.
Forget about dividends. You’re not even going to see profits. Amazon.com has sales of $62 billion for 2012, more than twice the $24.5 billion level of just three years ago. This is a growth story, nothing but.
It’s also not a retailing story. Amazon.com, Inc. (NASDAQ:AMZN) is priced as a tech stock, specifically a cloud stock. Amazon Web Services is the dominant public cloud, and since opening it for use by other businesses Amazon has brought nothing to the bottom line, so intent is it on investing in its computing systems and keeping prices low.
There’s no real comparison between a company that has $2.50 in equity for every $1 in sales and a regular retailer – both Costco and Wal-Mart have far more sales each year than equity value. But if you want growth, Amazon.com, Inc. (NASDAQ:AMZN) is where you’ll find it.
To CEO Jeff Bezos computing is just another form of logistics, and selling cloud is not that much different from handline another online store’s deliveries and sales tax collections. The company’s sales are even more business-oriented than Costco Wholesale Corporation (NASDAQ:COST)’s, and delivered at razor-thin margins that aim to take the competition out of the game.
Which should I buy?
There is an investment here for every taste. If you like dividends, buy Wal-Mart Stores, Inc. (NYSE:WMT). If you like retailing growth and a sustainable business model, buy Costco. If you want growth, find a place where you can buy Amazon.com.
Each of these companies pursues growth in a different way, and each is barely on the others’ radar. All of them should be on your investment radar. They’re the best long-term plays in retailing, by far, for the 21st century investor.
The article Wal-Mart, Costco, or Amazon.Com? originally appeared on Fool.com and is written by Dana Blankenhorn.
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