Why Costco is walloping Wal-Mart

In anticipation of the warehouse store's earnings, it's worth noting there's much more to its stock than low prices.

By InvestorPlace Oct 2, 2011 8:24PM
By Jeff Reeves, InvestorPlace.com

Costco (COST) is America's largest wholesaler by revenue and is watched closely by investors and consumers alike as a sign of how the economy is doing in general. If folks flock to Costco for deals in bulk, it's probably not good news for most family budgets. If Americans spend more on name-brand and upscale products instead of the no-frills items at Costco, it's a sign consumers have more money to burn.

It should come as no surprise that Costco has been doing pretty well recently amid high unemployment and consumer spending woes. COST is up about 15% so far in 2011.

But more interesting is the fact that Costco isn't just riding this broader economic trend to bigger profits -- it's also stealing customers from low-price rivals, including Wal-Mart (WMT).

Here are three reasons Costco is beating Wal-Mart:

1. A clear focus on low-cost deals. Wal-Mart just killed off an ill-advised focus on selection and quality earlier this year. The retailer had apparently been trying to emulate Target (TGT), but obviously consumers weren't buying the new branding and the exercise was a flop. Costco has never strayed from its no-frills, low-cost focus.

2. Urban reach. Costco has warehouses in cities, while Wal'Mart is still by and large a store that thrives in the suburbs and rural America. While Costco is too big to capitalize in very dense areas the way Dollar General (DG) and other strip-mall discounters do, it is still much more an urban operation.

3. Plush membership dues. While Wal-Mart may be the king of squeezing suppliers, Costco charges (and strictly enforces) membership dues, a great source of revenue. Couple that with low overhead (pallets of goods often are just placed unceremoniously on bare concrete floors), and you can understand why the company manages to squeeze out high returns on its asset base despite a "race to the bottom" pricing mentality.

The strength of Costco earnings shows in recent numbers. The company saw 9% revenue growth in 2010 and sales should grow an estimated 13% this year. Earnings have been moving handily upward, too, from $2.47 EPS in fiscal 2009 to $2.92 in 2010 and $3.30 targeted for 2011. That's 18% earnings growth in 2010 and 13% targeted for this year.

Surely some of this growth has been because of cost-conscious consumers moving away from higher-priced options. But Costco clearly has more to offer than just price.

In August, Wal-Mart suffered its ninth consecutive quarter of same-store sales decline in the U.S. That’s more than two years of falling sales and across a period when, let's admit it, consumer spending hasn't exactly been on the rebound. The stagnant sales have resulted in stagnant shares. WMT is down about 3% this year and has been basically flat since early 2009.

So will the same story bear itself out this week with Costco's year-end report and subsequently with Wal-Mart's numbers a month later? Probably. According to Thomson Financial, in the past 30 days, three Wall Street analysts have upwardly revised their earnings targets for Costco on the quarter, with five analysts raising the bar on full-year expectations. Considering the already impressive growth that is plotted for Costco, further upward revisions are a good sign.

And Wal-Mart? Well, the retailer is also plotting revenue and earnings growth for the quarter. But the most recent analyst move was a from Deutsche Bank, which initiated coverage on Wal-Mart with a "sell" rating and a target of $48. That's an additional 8% decline from here.

Expect this trend to continue, including more pep for Costco shares after what should be an impressive year-end report this week, and more trouble ahead for Wal-Mart.

Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

Related Articles

Oct 3, 2011 12:44PM

Why shouldn't we shop at Wal-mart? Good question. There are several answers.


Beginning about 18 years ago, as Walmart's management could see their market and merchandising strategies were working and that the company could sucessfully take over the lion's share of retail markets, they began to petition their suppliers to go to China and do all of their manufacturing over there. They threatened their suppliers with losing their business at Walmart, if they didn't do it, citing that they would no longer be price competitive with competing suppliers and hence Walmart would not be able to make large enough profit margins from their products versus the competition.


Here's an example...the maker of say vacuum cleaners had to go see the buyer at Walmart, who decided what brands and models of vacuum cleaners would be sold in all Walmart stores. For a vacuum cleaner manufacturer, it was important to get onto Walmart's shelves and have their products sold there. The buyer would point out that "made in USA" lines of vacuums were no longer going to offer enough profit margin versus those made overseas. They told them to either open plants in the Far East or have their products made there by a Chinese company and thenshipped back to the U.S. , claiming that their competitors were doing that.


In this way Walmart could have a bigger gross profit margin to play games with in pricing its merchandise, which would enable them to sell a machine at a lower price than a competing store and still make more profit margin on it than the retail competitor (say K-mart or Target or Sears). This has been going on since about 1993 or 1994 and this strategy was pulled on all of Walmart's suppliers, except for a few who had such highly auotmated production processes that labor wasn't a significant cost factor (ie food and health care products). Dumb Americans have been losing their jobs ever since, every time they go to shop at Chinamart, they just stoke the fire!


It's no big secret that the Walton clan are staunch anti-unionists and anti-worker masters like good old SAM was when he was alive. He taught his children well, like Koch daddy! Their workers make poverty wages, including the dept. managers. Store management not so much so, but everyone else is paid nothing. Of course Walmart has driven the bulk of small business competitors out of business in many small towns, so they are the only place for their people to work who want to be in retail. I mean how many independent pharmacies, clothing stores, photo stores, hardware stores, etc. are even left in small town America? Very few. Walmart wants its hand in everything including auto dealers, insurance and banks now.


Also remember that the Waltons have no problem buying out our government. They are heavy supporters of the Republican Party. They are involved with propping up the hunta of Gov. Rick Snyder in Michigan, which rapidly implemented what is essentially a totalitarian government in that state, but that's another story! Trust me, the Waltons are right with the Koch brothers in buying out right wing politicians everywhere.


What is left for us to do? Don't shop at or do business with Walmart or Sam's Clubs. Go somewhere else if you can possibly to do it! Help shut down these greedy bassturds! Glad to see Costco making headway.

Oct 3, 2011 12:07PM

I am a 11 year employee of Costco whole sale corporation. I started at 18 years old. The company worked with me so I could continue on to higher learning. I was able to get a degree which I haven't used instead I opened a business which has been successful. Despite a successful business I keep my employment at Costco. This is why I currently make $ 21.50 an hour at Costco on sunday  OT I make over $31.00 an hour. This has been more than enough to live a middle class life. My wife works there also and makes the same. Most employees of costco own homes have good hygiene and have some formal education. Like wise with there families I have 3 children in braces why because I have excellent insurance .  I feel so sorry for employees of wal mart when I shop there because its clear the company has no interest in there lives besides there productivity. Do I shop there yes for a few things I cant use in bulk...


Make you arguments either way it comes down to supporting a company that doesn't respect or even care about its employees. Costco prices aren't always the lowest I agree but the difference is in quality ! Also Costco return policy is second to none. We carry only premium makes of whatever we sell. ie: a tv well carry the highest model all bells and whistles for just a bit more than the cheap wal mart or sams version.  I hope my opinion is considered bIased .. The facts are costco takes care of its people and its members. This is shown in its market share value which I own over $100,000 of stock which costco has matched my purchase of  how many wal mart employees can say that?  

Oct 3, 2011 2:06PM

I think it is also important to point out the difference in executive pay/employee pay.  In 2010 Walmart's CEO earned a salary of 1.2 million compared to Costco's CEO who's salary was $350,000.  Then when you factor in bonuses and stock options, Walmart's CEO walked away with 19 million!  Compare that to Costco's CEO's total of 3.5 million.  (Source: Companypay.com)  Now compare their pay to the average employee, who at Walmart makes $6 - 7.50 while Cosco employees make $10-17.


Hmmm anyone else see the big difference here?


It seems Costco is able to remain profitable without throwing buckets of cash at the executives.


Oct 3, 2011 4:16PM
I absolutely hate WalMart! I think that it is high time that WalMart is feeling the economic woes. They never have enough check out lines open, even with nearly 30 check out stations available. I have never been in WalMart without seeing 5 to 7 of their employees piled in the electronics area doing nothing while 10-20 customers are in 3 check out lines waiting. If consumers use the store pick up option when ordering on-line, they will regret it. You must go to the back of the store to pick  items already purchased on-line and get treated like a thief when leaving because you have to walk through the whole store with your purchased merchandise. They are attempting to offer more cutting edge technology in the way they serve their customers and FAILING MISERABLY! They are not implementing the changes in technology the way they should and failing their customers. They do NOT offer a variety. They have all kinds of space that is devoted to a few overloaded items. This is because they get kickbacks to the brands that they are devoted to and receive money from these brands for devoting so much space to these few items. They overprice on grocery items. If you want grocery deals, go to KROGER! KROGER KNOWS WHAT THEY ARE DOING! It is said that 3 of the most wealthy people in America are Sam Walton's decendents, yet they do not compensate their employees the way they should. WalMart's owners are out for themselves and I hope that more people wake up and take their business to Kroger, Costco, KMart, and Target. Sam Walton may have had a clue of how to do business, but his kids did not get that memo. Stop feeding this monster! Let it go down in flames.
Oct 3, 2011 12:51PM


There are lots of reasons to shop at Costco and low prices is just ONE of them. Add to the list below the fact that relatives can work at Costco.

“Costco vs. Wal-Mart as reported by the companies.”

Employees covered by company health insurance
Costco 82%
Wal-Mart 48%

Insurance-enrollment waiting periods (for part-time workers)
Costco 6 months
Wal-Mart 2 years

Portion of health-care premium paid by company
Costco 92%
Wal-Mart 66%

Annual worker turnover rate
Costco 24%
Wal-Mart 50%

Costco pays starting employees at least $10 an hour, and with regular raises a full-time hourly worker can make $40,000 annually within 3.5 years. Cashiers are paid $10.50 to $17.50 an hour.

Costco also pays 92% of its employees' health-insurance premiums, much higher than the 80% average at large U.S. companies. Wal-Mart pays two-thirds of health-benefit costs for its workers. Costco's health plan offers a broader range of care than Wal-Mart's does, and part-time Costco workers qualify for coverage in six months, compared with two years for Wal-Mart part-timers.


Oct 3, 2011 12:50PM
Over the years Wal-Mart has forgotten about or they just don't care about their customers. They have no customer service and if you complain they do not listen or care .W/M has a take it or leave it attitude. They seem to feel that you are just one customer and they have so many that they do not need you anyway. In so many rural areas they are the only game in town and they know it.
Oct 3, 2011 10:55AM

There is a simple explanation. Quality of products sold at Costco is much higher than any other store with a very competitive pricing. On the other hand Wal-Mart cares for price only and not the quality. Most of the items it sells are made in China, which are cheap but of worst quality. Stores like Wal-Mart is one of the reasons that China has 30+ billion dollars trade surplus and one of the reasons that we are losing to China.  People need to wake up and make sure that they buy quality goods made in USA.

Costco on the other hand sells more products made in USA and they make sure that quality stays good.

You will be surprised that many people have started buying grocery from Costco as they compete with local groceries as well, and maintain a very high quality.

Oct 3, 2011 12:43PM

I have a membership at Costco and Sams Clubs.  I shop both, due to the brands that I like.  I get my gas from Costco, they usually are cheaper than Sams, but they are literally in my back yard.  Sams is much farther from me.


I also shop WalMart, only because I forget to check out Target.  But, everyone is comparing Costco (a wholesale warehouse) with WalMart, a regular store that would be compared to Target.  WalMart is related to Sams Club, due to the owners of both.  But you all should be comparing Costco with Sams, not with WalMart.  You are comparing apples to oranges.

Oct 3, 2011 12:56PM

I have drifted away from Walmart over the last year or so, due to the huge lack of customer service.  I choose to spend my money somewhere that I can walk in, pick up what I want and not have to spend 30 minutes waiting in a check out line to get out of the store.  We don't have Costco in Oklahoma yet, but there are lots of other options of where to spend my dollars besides Walmart.

Oct 3, 2011 4:04PM
Wal-Mart is and always has been a joke selling way more chinese junk then any other retailer. When you buy a nice TV or electronic item from Costco, you get a far better warranty with it. It doesnt break my heart one bit that Costco is kicking Wally Worlds a ss.
Oct 3, 2011 2:16PM
Well, let's see... Wal-Mart moves into small towns like mine, puts most local options out of business, and keeps customers relatively happy for a few years. 

Now, half of what you want is out of stock.  Products you switch to out of necessity and actually learn to like are no longer carried after their popularity increases.  If you like a particular product, such as a shampoo/conditioner set, soon you will be able to get either the shampoo OR the conditioner, but never both.  The most popular brands that are actually still carried are perpetually out-of-stock.  Meat is no longer cut/packaged in-store so you really never know what you are getting or what has been done to it, not to mention how old it really is.  There are 25 checkout counters but never more than 5 open in the busiest hours, and 2 or 3 of those 5 are express. 

Have the Wal-Mart execs ever thought those numerous problems could be a major contributing factor in business decline?  Of course not.  Why?  Because Wal-Mart execs DON'T SHOP AT WAL-MART!

Oct 3, 2011 8:03PM
I work for Costco. I have been in the retail business since I was fifteen, I am 47 now. I have seen huge corporations take over smaller stores. The one thing corporations do is look at bottom line, they hire people who have never worked in the retail business a day in their lives, with a degree in business. They come in, look at bottom line for profit, never knowing just what got them the success they have in the first place. Costco has the idea that its employees are its number one asset based on Jim Senegal's ideas of hard work. He treats his employees well and it shows, we are always happy to go to work because we can make a LIVING WAGE! 
All Big companies like Wal-Mart know is how to make the cheapest product with the least amount of labor cost. And they wonder why America is in the shape its in. Get a clue! 
Oct 3, 2011 11:09AM

I worked at Wal Mart for 15 years and I can tell you that they treat their people terrible. The only people they take care of is the CEO and upper management. It's obscene that the Walton's are worth over a 100 billion dollars and they don't pay a living wage to their associates.

The tax payers supplement their income with food stamps,housing, medicaid, earned income ,etc..because of the low wages. Most associates can't even afford their medical insurance with the high premiums and high deductions.Wal Mart has it's own insurance so you know it's worthless. They even get large tax breaks for hiring people on assistance.

Top management sent out secret memos telling store management to find a way to get rid of the long term, older workers because they used the  insurance too much. One suggestion was that they could make them bring in heavy carts!!!

Oct 3, 2011 1:12PM
Wal mart has become so dirty and the people that work there look terrible! I feel dirty just walking in there. I have always liked Wal Mart, but only go there now if I really have to.
Oct 3, 2011 5:05PM
The first thing I notice when I walk into a Costco is that the employees seem to be happy like they like their jobs.  That is never the case with Walmart. 
Oct 7, 2011 12:59PM
Costco 's shelves are always stocked, Walmarts are not. If you ask for help at Costco you will get it, at W.M. half the time the clerk will just turn and walk away or they know less than you do. W.M. does not pay their help very well and it shows in the quality of their employee's. When W.M. does get a good employee they treat them so poorly that they leave for somewhere else asap.
Oct 3, 2011 5:46PM
You know it really cracks me up.  Everyone used to think that Wal-Mart was so darn wonderful until Wal-Mart moved into their town and starting closing down all the local optical shops, clothing shops, sporting goods, accessories, and so on and putting their family members out of work.  Of course they could go work at Wal-Mart and make 50% less of what they were making with crummy benefit to boot.  Now, look what the heck has happened.  Our local history is going away because everything is boarded up except Wal-Mart and the few stores that are hanging on.  Anyone with a brain could see this coming 20 years ago, but everyone wanted to save .50 on their shopping so they thought Wal-Mart was so cool and hip.  Not so hip any longer is it?    I hope everyone is happy with the monster they have created.  You deserve it.  Keep buying all that crap from China, and continue to put more Americans out of work.
Oct 3, 2011 3:27PM
 Wal-Mart will not keep enough check out lines open
Oct 7, 2011 12:50PM

Death to Wal-Mart is a good thing.

Most of their products being "Made in China" is not something I want.

Putting the squeeze on Chinese imports will slow their purposely undervalued Yuan.

We need more "Made in America".....like it used to be. We were self-sufficient once, before Clinton screwed up with NAFTA.

We need to be that way again.

Oct 3, 2011 5:33PM

I took a job with WalMart (at a warehouse)...due to a mass layoff and very few employment choices in my area, and (ever since) I have been so unhappy with my decision to work there.  The WalMart CULTure demands that we chant their insanely childish cheer every day...Give me a W-A-L...who's number one?  The Customer (yeah right)  try shopping at the store...getting zero customer service...an hour in a check-out line (because they only have a few lines open)...low quality merchandise (hey...everything in almost every store everywhere is from China...but WalMart supplies the cheapest garbage China produces).  Ohhh yeah...sure the customer is number one!?!


Lets talk about one of the WalMart standards...Respect For The Individual.  I call it...Harass The Individual.  Every day at work...in the two meetings held during the shift...we are told 15 different ways how we can get fired...always negative...every time...every day.  "Now sign this paper that states another way you can get fired from WalMart."  It is harassment in its purest form.  I feel like WalMart says...how dare you even work here!  There is no feeling of pride in working there.  


WalMart is so secretive about jobs within their organization.  When I applied for the job, I was given a short (written) job description...which was fine...but I was not shown the facility...I wasn't shown the working conditions (which are fine...aside from the constant reminder of how WalMart would like to fire its employees)  In fact...I wasn't even give a tour of the warehouse until 3 days into my brainwashing "on-boarding" process.  They made me sign my life away before they even showed me the where the bathroom was.  Had WalMart been more open about the daily life of employment within their company, I would have never taken the job.


I am educated...I have a degree...I have 20 years of experience (in my trade)...I am responsible...I show up for work...I have a clean record (zero arrests...I abide by the law)...I pay my bills...I perform my job in a safe and timely manner...yet WalMart treats (me) and its other "valued" employees like we are throw-away items...like we are fools for even thinking of working there.


I have never been so insulted by an employer.  I will not spend one dime of my paycheck at the WalMart stores (even though I get a discount).  I refuse to recirculate any money back to the store. 


I look forward to the time my community rebounds from this economy, and I pray for the moment a new opportunity presents itself.  I will not let that WalMart door hit me in the ***!

Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123 rated 1
262 rated 2
480 rated 3
651 rated 4
649 rated 5
629 rated 6
616 rated 7
496 rated 8
346 rated 9
111 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.