Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: Costco vs. Big Lots

By Demitri Kalogeropoulos – Jul 15, 2020 at 7:14AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Cheaper isn't always better.

Big Lots (BIG -4.29%) and Costco (COST -1.40%) don't share many core investment characteristics even though they both operate in the big-box retailing space. Yet the two chains have recently been added to many investors' watch lists thanks to spiking sales volumes during the COVID-19 pandemic. Both Costco and Big Lots could see persistent sales lifts as consumers prioritize bulk shopping and home furnishings in an era of limited in-person retailing and more stay-at-home time.

With that in mind, let's stack these two retailers against each other to see which might make the better long-term investment.

A man pushing a cart through a supermarket

Image source: Getty Images.

Costco is the more consistent winner

Big Lots easily wins the matchup with respect to short-term growth rates. The home furnishings specialist announced a 10% spike in comparable-store sales in the first quarter, which marked its best performance in nearly two decades. Management sees those gains accelerating into Q2, too, with comps reaching into the mid-20s percentage.

Costco is growing at a more modest 11% rate today, according to its June report. But step back and you'll see much more to like about its long-term performance. It grew comps by 6% in the last full fiscal year compared to Big Lots' 0.3% uptick. The warehouse retailing giant has been steadily winning market share for decades, in fact, which has helped establish it as the second-largest industry player behind Walmart (WMT -1.93%). Big Lots is still struggling to maintain consistently positive sales in a brutally competitive niche.

A clear financial picture

The financial picture also points to Costco as the real winner. While Big Lots enjoys a far higher gross profit margin (40% compared to 13%), it is Costco that generates the stronger earnings. Annual net income has improved to over $3.5 billion from $1.3 billion a decade ago. Big Lots is still producing about the same $220 million of profits it did back in 2010. That annual haul has also vacillated more wildly since most of its profits come from sales markups, while Costco can count on a steady stream of membership income as a buffer.

Costco is also in a league of its own when it comes to cash flow and direct shareholder returns.

Valuation goes to Big Lots

Investors have incorporated these differences into sharply divergent valuations for the two businesses. While they were valued about equally when Big Lots was enjoying some of its best growth in 2013 and 2014, investors now must pay over 37 times earnings for Costco compared to six times earnings for Big Lots. The story is the same with respect to sales, with Big Lots trading for 0.3 times revenue while Costco is valued at nearly 0.9 times its annual revenue haul.

COST PS Ratio Chart

COST PS Ratio data by YCharts.

That valuation gap is well deserved, in my view. Whether it is market share, customer traffic, financial strength, or efficiency, Costco is the stronger retailing business. And with over 90% of its members renewing their subscriptions, the chain is set to continue closing the gap with Walmart as it climbs toward $200 billion of annual revenue.

Yes, you'll have to pay up to own a high-performing business like that. But Costco's premium price has been the worst-kept secret on Wall Street for years -- and it hasn't stopped investors from earning solid returns even over the last decade.

Demitrios Kalogeropoulos owns shares of Costco Wholesale. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$472.27 (-1.40%) $-6.71
Walmart Stock Quote
Walmart
WMT
$129.70 (-1.93%) $-2.55
Big Lots, Inc. Stock Quote
Big Lots, Inc.
BIG
$15.61 (-4.29%) $0.70

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.