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ADITYA is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Retail is a bellwether industry with a lot depending on micro- and macroeconomic factors controlling the top and bottom lines. Different companies have different fates under economic pressure, but Wal-Mart (NYSE: WMT) is the name that comes to my mind when I think about a company that has come out strong against all odds.

Investors have realistic expectations

In the company’s last reported earnings, in May 2013, there was a lot of hush about “just” a 1% increase in sales. Comparable-store sales were more or less flat. Is it true that Wal-Mart is not as strong as before?

Wal-Mart would be among the top 30 countries in the world if we compare its $460 billion revenue to the GDP of any of the most developed nations. Further, Wal-Mart employs more than two million people across 25 countries around the globe. Do you think any company that huge can grow exponentially forever?

The size of Wal-Mart does not mean that it has become stagnant, or that there is no room for further growth. It only means that investors need to be realistic and understand it cannot grow at the same rate it did a decade or two back.

Let’s analyze the growth potential

Wal-Mart has understood the importance of urban centers as a growth opportunity and is moving toward small-format stores, called as "express stores.” Compared to standard supercenters, these stores are about 10% smaller in size, thus should provide better return on capital as express stores are projected to occupy 8% less space and cost 16% less. Express stores offer about 15,000 daily use items including groceries and are expected to be vital in drawing customers with busy schedules.

Wal-Mart has shifted its focus toward e-commerce as it’s a very important and growing format of business now that customers prefer that convenience in shopping. Wal-Mart has acquired Grabble for its mobile technology and Kosmix for digital advertising to strengthen its position in the online retail business. Further, its investment in Yiahodian, a Chinese online store, just clears its intention to move strongly in the e-commerce industry and target big potential markets.

At present, about 60% of the U.S. population shop for their basic needs at Wal-Mart, and the company realizes that does not leave for much opportunity domestically, thus it is looking for international expansion. The company continued to grow in Canada and is opening 40 new supercenter sites and converting discount stores into supercenters. It is looking forward to grow in Brazil, China, and South Africa with its "Everyday Low Prices" concepts in the emerging economies. Wal-Mart’s acquisition of Massmart in Africa should help it get a strong footing for the long-term.

Talking about Canada, can’t miss Target

One of Wal-Mart’s major competitor, Target (NYSE: TGT) has also entered the Canadian market in this year’s first quarter. Its initial performance in Canada is motivating, thus the company is planning to initiate more stores in the country. The company has already been able to achieve a gross margin of 38% with the help of its REDcard penetration during its early stage of establishing in Canada. REDcard penetration in Canada was quite strong as around 30,000 accounts had already been opened, before Target entered the Canadian market; and it further increased to 44,000 after stores were opened.

Pfresh, too, helped the company’s top line by helping sales in grocery and household categories to surge at an average of 10% in the last three years. Apart from trying to expand internationally, like Wal-Mart, Target also has gone into acquisitions and partnerships with Chef’s Catalog and Cooking.com in order to improve its Omni Channel network, including its online and mobile sales. Further, it has collaborated with Facebook, Google and eBay in order to expand its customer base.

Digging into another competitor

Costco Wholesale (NASDAQ: COST) operates membership warehouses in the U.S. and other places internationally. Costco’s performance has been better in the last quarter than Wal-Mart and Target as it reported a 5% increase in its comparable-store sales where as the other two retailers reported negative comp sales.

Costco’s 19% growth in members, apart from a hike in the fees, clearly points to the fact that it has a loyal customer base which is attracted to its everyday low prices. As the membership fees are collected upfront, the company books almost its entire profit a year in advance and also creates a potential customer base for the future.

Costco also understands the growth potential that e-commerce offers and is working to overhaul its website and its mobile applications. The company is potentially saving itself from the cannibalization effect – which growth in its online sales could have on its store sales – by offering discrete products in stores and its online platform. Further, it is investing profoundly on its private labels, a cheaper alternative to the other established brands, as they have previously driven sales and provide scope for the future too.

Final take

All the stores are realizing the importance of an online format and are thus aggressively moving forward on it. Currently, among the three big-box retailers, Costco seems to be going strong with its comp sales and margins both being on the higher side. All three companies are sound investment options if investors are looking for stability, as that is what these stocks promise to offer.

Costco's low prices haven't just benefited customers -- shareholders have walloped the market, returning 11,000% over the past two decades. However, with prices near all-time highs, is the ride over for Costco investors? To answer that and more, The Motley Fool's compiled a premium research report with in-depth analysis on Costco. Simply click here now to gain instant access to this valuable investor's resource.


ADITYA LADHA has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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