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Better Buy: Costco vs. Clorox

By James Brumley - May 16, 2020 at 8:15AM

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They're both well-respected prospects, but Clorox has an edge on the retailer against the backdrop of uncertainty.

It's difficult not to fall in love with both of these consumer staples stocks.

Clorox (CLX 1.32%) is the name behind cleaning supplies nobody can seem to get enough of in the wake of the coronavirus contagion, with CEO Benno Dorer recently telling Yahoo! Finance that demand for some of its Clorox and Lysol-branded goods was up as much as 500% at times since the outbreak reached the United States in February.

Costco (COST 0.90%), meanwhile, sells Clorox and Lysol-branded goods along with most of the other consumables people were buying in droves as fear of the pandemic took hold. Costco reported a month ago that when not factoring in gasoline sales, March's sales were up an impressive 12.3% year over year, led by a whopping near-50% increase in e-commerce revenue for the month in question.

Permanent changes in how consumers shop after the COVID-19 outbreak abates bode well for both companies' futures too. But if there is only room in your portfolio for one of these names, Clorox may be the better stock bet for three key reasons.

Two hands giving thumbs-up and thumbs-down

Image source: Getty Images.

1. Clorox products are accessible everywhere

It's cliche, but true all the same -- Clorox products are available almost anywhere consumers shop, but consumers don't shop just anywhere. They might shop at Costco, or they might shop at Walmart, or they might prefer Target. If they want Clorox or Lysol, though, they're going to find Clorox and Lysol at any of those three retailers. That puts the crux of the competitive pressure on retailers rather than on product producers in an environment where consumers may be leery of setting foot in any store, but also in an environment where those consumers are going to want plenty of disinfectants and sanitizers.

That's not to suggest Clorox doesn't face competitive pressures. Walmart sells house brand bleach, for instance, under the Great Value label. Consumers may be more loyal to the Clorox brand than the store that sells Clorox goods, though. As an example, its disinfectant wipes consistently rate nearly five out of a possible five stars at the company's product informational website.

2. Costco itself is more vulnerable to economic turbulence

The sheer number of places Clorox goods are sold isn't just a reason to choose the company over Costco as an investment prospect right now. With or without Clorox and Lysol-branded goods, Costco may find a COVID-related economic headwinds prompt people into rethinking the true value of paying an annual fee just to shop in bulk.

That may be especially true of small businesses that are -- or were -- Costco club members. A Main Street America survey taken last month determined that 3.5 million of the United States' 30 million small businesses are at risk of permanently closing by the end of June if the coronavirus contagion isn't brought under control. Almost 7.5 million of them could be shuttered within five months if the COVID-19 outbreak lingers.

It now seems unlikely that economic matters will remain as bad as they were in late March, when lockdown announcements were most frenzied. There's clearly been an economic toll most small business won't be able to simply shrug off, however. It won't take much for the surviving businesses to decide a fee-free shopping excursion to Walmart or Target is good enough for now.

3. Clorox started a DTC business before COVID-19 took hold

Finally, it happened with little fanfare, but Clorox was already working on a direct-to-consumer platform even before the coronavirus pandemic prompted people to stay at home as much as possible. That effort is sure to pay off in spades now, as many consumers have permanently changed how they prefer to shop.

It should be noted that the company's initial DTC move was only meant to promote its NutraNext line of dietary supplements. Consumers can't buy Clorox or Lysol online directly from the company -- at least not yet. But that appears to be the direction things are headed. As NutraNext DTC's vice president of growth Vivian Chang said in an interview with AdExchanger late last year, the end goal is a vehicle through which more Clorox products can be sold straight to their final end-users.

The fallout from the coronavirus outbreak has likely accelerated the company's DTC developmental timeline.

The last word

These three nuances aside, the bullish argument for Clorox was solid enough even before COVID-19 became the world's focal point. The company's product base includes a variety of perpetually marketable consumer goods like Kingsford charcoal, Fresh Step kitty litter, Glad trash bags, and Liquid Plumr drain declogger, just to name a few. It was never just about bleach and disinfectants. That diversity is a key part of the reason the company has been able to log such consistent growth.

Clorox (CLX) revenue and per-share earnings, past and projected

Data source: Thomson Reuters/Refinitiv. Chart by author.

Nothing about that dynamic has changed since the coronavirus rattled the globe in a big way. If anything, consumer basics sold under familiar brand names might actually benefit from the new consumerism norms in a post-COVID world.

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Stocks Mentioned

Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$492.65 (0.90%) $4.39
The Clorox Company Stock Quote
The Clorox Company
CLX
$146.66 (1.32%) $1.91

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