Multinational retail giant Costco Wholesale Corporation (COST) in Issaquah, Wash., typically sells dry, packaged foods, groceries, appliances, and electronics. The company also operates through its e-commerce website in several countries. In comparison, Big Lots, Inc. (BIG) in Columbus, Ohio, serves as a retailer that offers products under various merchandising categories. The company offers furniture, fashion and utility bedding, and food and grocery.
Consumer prices have been increasing at their fastest rate in decades. The Consumer Price Index (CPI) jumped 7.9% in February relative to the prior year, marking its largest 12-month increase since January 1982. But after a three-day slide, the equity market rebounded due to a rise in defensive stocks, such as consumer staples.
The consumer defensive sector typically generates stable earnings, faces steady demand for its products, and generally tends to do better during inflationary spells. Furthermore, soaring grocery prices are expected to take some time to come down. Both COST and BIG are well-known names in the big retail field and so might benefit from the current situation. Over the past year, COST’s stock has gained 64.1% in price, while BIG has declined 47.4%. Over the past month, COST has gained 5.5%, while BIG declined 3.8%. However, BIG has gained 15.4% intraday, while COST gained 3.1%.
Click here to checkout our Retail Industry Report for 2022
But which stock is a better buy now? Let’s find out.
Latest Developments
On January 20, COST announced a quarterly dividend on its common stock of 79 cents per share, which was payable to shareholders on February 18. This reflects the company’s ability to pay back its shareholders.
On March 3, BIG declared a quarterly dividend of $0.30 per common share for the first quarter of its fiscal year 2022, payable to shareholders on April 1, 2022. This reflects upon the company’s ability in cash generation.
Recent Financial Results
For its fiscal second quarter, ended February 13, COST’s total revenue increased 15.9% year-over-year to $51.90 billion. Its net income attributable to COST and net income per share attributable to COST rose 36.6% and 36.4%, respectively, from the prior-year quarter to $1.30 billion and $2.92.
For its fiscal fourth quarter, ended Jan.29, 2022, BIG’s net sales decreased 0.3% year-over-year to $1.73 billion. Its net income and earnings per common share declined 49.1% and 37.1%, respectively, from the prior-year period to $49.84 million and $1.63, respectively.
Past and Expected Financial Performance
COST’s revenue and net income have grown at a CAGR of 12.6% and 16.9%, respectively, over the past three years. Analysts expect its EPS to increase 7.7%, 17.8%, and 9.6% for its fiscal quarter ending August 31, 2022, the fiscal year 2022, and fiscal year 2023, respectively. Its revenue is expected to increase 9.8%, 12.4%, and 7.8%, respectively, for the same periods. COST’s EPS is expected to increase 11.3% per annum over the next five years.
BIG’s revenue and net income have grown at a CAGR of 5.5% and 4.3%, respectively, over the past three years. The Street expects its EPS to decline 56.5% for the quarter ending April 30, 2022, 15.6% for the quarter ending July 31, 2022, and 13.1% for its fiscal 2023. The consensus revenue estimate for the quarter ending July 31, 2022, indicates a 1.2% year-over-year decrease. BIG’s EPS is expected to decline 5.2% per annum over the next five years.
Profitability
COST’s $210.22 billion, trailing 12-month revenue is 34.2 times what BIG generates. COST is more profitable in terms of its levered FCF margin, at 2.59% compared to BIG’s 1.32%.
COST’s ROE, ROA, and ROTC of 30.98%, 8.56%, and 18.15%, respectively, compare with BIG’s 15.56%, 3.76%, and 5.13%.
Therefore, COST is relatively profitable here.
Valuation
In terms of its forward EV/Sales, COST is trading at 1.05x, which is 138.6% higher than BIG’s 0.44x. COST’s 102.4% forward EV/EBIT multiple is 102.4% higher than BIG’s 14.33.
Therefore, BIG is relatively affordable here.
POWR Ratings
COST has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. In contrast, BIG has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
COST has a B grade for Sentiment, which is in sync with its favorable analyst expectations, while BIG has an F grade for Sentiment, justifying its unfavorable analyst sentiments.
COST has a Stability grade of B, which is consistent with its 0.66 five-year monthly beta. In contrast, BIG has a D grade for Stability, which is in sync with its 2.23 beta.
In the 39-stock Grocery/Big Box Retailers industry, COST is ranked #24, while BIG is ranked #37. The industry is rated A. Click here to see the additional POWR Ratings for COST. To see the additional POWR Ratings for BIG, click here.
Winner
With rampant inflation and recessionary fears, the consumer defensive market might perform well, given the stable demand it faces for its products. Both COST and BIG are well-known big-box retail players and might benefit from this environment. However, favorable analyst sentiments and greater stability we think make COST the better buy here.
Our research shows that odds of success increase when one invests in stocks with an overall rating of Strong Buy or Buy. View all the top-rated stocks in the Grocery/Big Box Retailers industry here.
Click here to checkout our Retail Industry Report for 2022
COST shares were trading at $541.31 per share on Wednesday afternoon, down $1.01 (-0.19%). Year-to-date, COST has declined -4.50%, versus a -8.80% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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