Retail Giants For The Long Term Investor

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

Shopping for electronics and books may be moving online, but we’ll always have the large superstores gracing our highways. Stores such as Wal-Mart (NYSE: WMT), Target (NYSE: TGT), and Costco (NASDAQ: COST) fight every day to earn our grocery dollars, and hopefully sell some electronics or clothes along the way.  

Wal-Mart, Target, and Costco are three of the biggest retailers in the world. All three operate within the United States and all three manage to span outside of the nation’s borders (Target is about to open stores in Canada, Wal-Mart and Costco are already worldwide). The question we must ask as investors is if expansion can continue and if profits will continue to grow, even if the expansion is done. 

Tale of the Tape

  Wal-Mart Costco Target
Yearly Revenues $464.41B $101.22B $71.86B
Yearly EPS $4.88 $4.17 $4.55
P/E 14.3 25.0 13.75
EPS Growth 5YR 9.52% 8.87% 7.65%

It becomes quite clear that Wal-Mart is the largest of these three commerce giants, and also has the best EPS growth over the last five years, but they are likely struggling to find new markets to take over. I would like to think that the U.S. market is pretty saturated, and the Canadian market is too. Let’s delve further into each company to find their merits and weaknesses.

Wal-Mart

As I mentioned, it is the biggest. They are all over North America and have fully saturated the UK market with their Asda stores. The company is also a prominent retailer in Japan, India, Mexico, China, and South America. Overall, the company has some 8,500 stores spread across 15 different nations that operate under 55 different names.

So, is there room to grow? I’m not too sure. I think that the growth prospects are definitely limited for Wal-Mart right now. The company has tried in the past to expand into nations such as Germany and South Korea, but both attempts proved to be unsuccessful. There are still plenty of untapped markets for the company, they just have to look for dense populations and a willingness for people to change up their shopping habits.

Target

Target, as it’s currently known, was formed in 2000 via numerous mergers and acquisitions. The company’s history takes it all the way back to 1902. Over the century Target has grown to over 1,800 stores around the United States, and expansion is underway to bring this company into Canada.

On the personal side of things I’d have to say that Target has a clean, more welcoming feeling to it than Wal-Mart. This could prove to be a key in the retail battle that is brewing in the United States.

I do believe that Target will continue to grow here in the U.S., in Canada, and eventually in Europe. I don’t believe that it will be on the same level as Wal-Mart any time in the near future, though. Things like that take time, but if you’re investing over the long term, you have time! Target may be worth a further look.

Costco

Costco is probably in a different sort of category than both Wal-Mart and Target. While the company is in the retail space, it is a membership program that allows members access into their worldwide discount stores. Costco is a direct competitor to Wal-Mart’s Sam’s Club, which operates on the same principles.

Where Costco has an advantage is its employees. They pay their employees more, a lot more, than competitors do. This company treats their employees especially well, which results in better treatment of customers, increased word-of-mouth marketing from employees, and overall better sales. Paying employees higher salaries doesn’t really effect Costco all that much, as the company still manages $18,802 of net income per employee.

The founder and former CEO of Costco was, without a doubt in my mind, one of the best CEOs this country has ever seen. James Sinegal consistently took flak from Wall Street for paying employees too much, but time and time again he proved them wrong by continuing to grow the company into the huge empire that it is today. If Sinegal were still running the company today I would invest in a heartbeat.

Final Verdicts

Wal-Mart is a great company from an investor's stand point. They may be consistently in the media for their low wages and shady hiring tactics, but they pull through every single time and continue growing profits year-after-year. If that doesn’t put you off the company then I’d say that you should invest, they’re not going to disappear overnight so your money is definitely safe. There’s also a dividend that yields 2.3%, which should be enough to keep you around.

When it comes to Target, I think they offer the best future growth prospects. The company will likely continue expanding over the next decade and is truly the definition of a long term investment. With their low P/E of 13.75, I think that you could do worse things than initiate a position in this future prospect. Target also pays a dividend that yields 2.3%.

Costco is a tough one for me. The company is definitely incredible, and they’ll also continue to expand, but I think that one of the things that kept them on their incredible path was the guidance of Sinegal. I’m not doubting the talents of the company’s new CEO, but I’m a bit wary of his beliefs versus those of Sinegal. I wouldn’t be willing to pay a P/E multiple of 25 right now.


Ash1402 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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