Costco (COST +0.09%) and Constellation Brands (STZ 0.73%) are both generally considered stable consumer-oriented stocks. Costco's warehouse clubs sell bulk products at steep discounts, while Constellation is one of the country's top producers of beer, wine, and spirits.
But over the past 12 months, Costco's stock has rallied nearly 20% as Constellation's stock has fallen nearly 10%. Let's see why the former outperformed the latter, and whether or not that trend will continue over the next year.
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Costco rallied through the crisis
Costco operated 795 warehouses worldwide at the end of August, including 552 locations in the U.S. and Puerto Rico, 101 locations in Canada, and the rest in overseas markets. That's up from 783 warehouses a year ago, and makes it one of the few brick-and-mortar retailers still opening new stores.
Costco generates most of its revenue by selling products at its stores, but most of its profits come from its annual membership fees. In other words, it sells its products at low-to-negative margins to generate higher-margin subscription revenue. Its top rivals in the warehouse club market include Walmart's Sam's Club, which operates nearly 600 warehouse clubs nationwide, and BJ's Wholesale Club, a smaller player that mainly operates along the east coast.
Costco's adjusted comparable store sales -- which exclude currency impacts and fuel price changes -- grew 6.1% in fiscal 2019, which ended last September. In fiscal 2020, its adjusted comps jumped 9.2% as pandemic-driven purchases lifted its sales in the first half of the year.
Costco's adjusted e-commerce sales rose 23.3% in 2019, then accelerated to 50.1% growth in 2020. Costco hasn't reported its full-year earnings yet (its full-year comps were include in its August sales update), but analysts expect its revenue and earnings to rise 8% and 5%, respectively.
Constellation's stars fail to shine
Constellation owns over 100 alcoholic beverage brands. Its top beers include Corona, Modelo, and Pacifico; its wines include Kim Crawford, Meiomi, and Copper & Thief; and it spirits include Casa Noble, SVEDKA, and High West.
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Over the past decade, Constellation expanded by acquiring Grupo Modelo's U.S. beer business from AB InBev in 2013, Meiomi wine in 2015, and other smaller brands. It also invested in the Canadian cannabis company Canopy Growth.
Constellation's comparable sales (which exclude new and divested brands) grew 3% in fiscal 2020, which ended in late February. The strength of its beer business, which posted its tenth straight year of rising shipments, was partly offset by lower shipments of its wine and spirits. Its adjusted EPS, which excludes its investment in Canopy, grew 6%.
But in the first quarter of 2021, Constellation's comparable sales dropped 6% year-over-year as pandemic-related disruptions and the closures of restaurants and bars reduced its beer, wine, and spirits shipments. However, its adjusted EPS still grew 2% as it reduced its marketing expenses and reaped some savings from its sale of Ballast Point last December.
Constellation didn't offer any guidance for the year, but analysts expect its revenue and earnings to decline 6% and 2%, respectively, as it works through the pandemic-related headwinds.
The valuations and dividends
Costco trades at 36 times forward earnings, which is a fairly high multiple relative to its projected growth. Constellation has a lower forward P/E ratio of 22, but it also doesn't look cheap relative to its growth. Costco pays a forward dividend yield of 0.8%, while Constellation pays a higher yield of 1.6%.
Neither stock will attract value-oriented income investors, but Costco is arguably a more attractive investment than Constellation, for two reasons. First, Costco's membership-based model is incredibly sticky, and will continue to flourish and lock in shoppers after the pandemic ends. Constellation's beer portfolio should rebound after the crisis ends, but it expects its wine and spirits businesses to remain weak.
Second, the COVID-19 crisis is far from over, and a second wave of infections could easily spark a fresh wave of panic shopping at Costco. By comparison, a continuation of the pandemic will only generate headwinds instead of tailwinds for Constellation, which needs businesses to stay open.
