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Better Buy: Costco vs. Nike

By Neil Patel - Feb 23, 2021 at 9:37AM

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Picking between these consumer favorites is a challenge for any investor.

Choosing to invest in the stock of businesses that wow consumers can prove to be a winning strategy. Costco (COST 1.97%) and Nike (NKE 4.55%) are both great companies in this regard, but they possess their own unique characteristics that warrant digging deeper.

Furthermore, the coronavirus pandemic has had different effects on each, requiring the need to reassess the future outlooks for both businesses. While Costco's stock is up just 12% over the past year, Nike's stock has fared better, climbing 40% during the same time period. Let's find out which of these consumer favorites deserves your capital. 

The king of warehouse clubs 

To say that Costco's business benefited from the coronavirus pandemic would be a huge understatement. After total company sales briefly dipped 1.8% in April of last year, they came roaring back, as consumers viewed the warehouse club chain as a one-stop shop for all their essentials.

Man looking at stock charts and Buy and Sell arrows

Image source: Getty Images.

Almost a year after the coronavirus was declared a health emergency, Costco continues to register impressive gains. January sales were 17.9% higher than the prior-year period, driven by a doubling in e-commerce business. Money that would otherwise be spent on travel and dining out has been redirected toward buying electronics, furniture, exercise equipment, and housewares. 

As the U.S. makes progress on vaccinations, investors are certainly worried that the pandemic boost will fade. But it's important to remember that Costco's business was doing well before the health crisis -- net income in fiscal 2017, 2018, and 2019 increased in the mid-teens in percentage terms versus the prior-year periods. 

The company's ancillary businesses (travel, gas, food courts, etc.), which have been a weakness during lockdowns, will surely bounce back and support the business in a post-pandemic world when demand for core products will slow. Furthermore, Costco is still opening new locations. The total footprint stands at 803 warehouses after eight net new stores were opened in the last quarter. 

With a forward price-to-earnings (P/E) ratio of 35, the stock doesn't scream value. However, the loyal customer base and membership model should keep Costco in the rare category of high-quality businesses. 

The leader in sports apparel

Unlike Costco, Nike's business took a major hit during the pandemic. With 90% of company-owned stores closed for eight weeks during the quarter, revenue fell 38% in fourth-quarter 2020 (ended May 1). But on the backs of its technological prowess and direct-to-consumer strength, the business is back to posting growth. Nike registered sales gains of 9% in the most recent quarter, with digital sales up 84%. 

Nike's Consumer Direct Acceleration strategy, which was announced in June and emphasizes the company's adeptness at utilizing technology to connect more deeply with consumers, seems to be paying off. In first-quarter 2021 (ended Aug. 31), digital sales penetration exceeded the business' goal of 30%, almost three years earlier than anticipated. Nike's brand strength is further evidenced by the fact that the company has added 70 million members on its apps since the pandemic started. 

The company is also using technology to improve its fulfillment process. "We will create a digital-first supply chain, built on a strong technology and analytics foundation in order to optimize service, cost, convenience and sustainability," CFO Matt Friend mentioned on the most recent earnings call.  

Nike is doing a truly exceptional job at ingraining technology into every aspect of its business. A forward P/E ratio of 49 may look expensive, but management's long-term goals of high single-digit revenue growth and mid-teens EPS growth remain intact, which should propel the stock higher. 

The winner

Both Costco and Nike are fantastic businesses with their own merits. While Costco was unfazed by the coronavirus pandemic and was even boosted by it, Nike hit a speedbump before getting back on offense. 

A winning long-term portfolio could certainly own both names, but I give the edge to Nike. I believe Costco's impressive growth will slow once economies open up and things get back to normal. Nike, on the other hand, has taken advantage of the current crisis by doubling down on its digital-first strategy, something that will benefit shareholders for many years to come.

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Stocks Mentioned

Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$484.37 (1.97%) $9.37
NIKE, Inc. Stock Quote
NIKE, Inc.
$112.91 (4.55%) $4.91

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