Costco Wholesale (COST +0.09%) and Nike (NKE 2.95%) are two consumer goods heavyweights that have delivered incredible shareholder wealth over many years. They both have extraordinary brand power and generate high consumer loyalty. If you're looking to invest in a top blue-chip stock, which one of these is the better buy today? Let's take a look.
1. Costco: A no-brainer formula to drive sales
Costco has had an impressive run over the past two years, and its higher-than-usual growth is finally beginning to slow down. But that changes nothing about the inherent business model and value that Costco offers, which is what makes it such a compelling candidate as a stock to own.
Costco is the leader in warehouse-style superstores but only third in U.S. retail according to sales, behind the two largest companies in the U.S., Walmart and Amazon. Costco's formula is simple but powerful: offer the lowest prices through the lowest markups, achieve consumer loyalty, and generate massive sales volume.
NASDAQ: COST
Key Data Points
Performance attests to the success of this strategy. In its fiscal 2023 first quarter (ended Nov. 20), sales increased 8.1% over last year while comparable sales (comps) increased 6.6%.
Membership fees play a crucial role in the company's strategy as well as in growing the bottom line. Fees increased 5.7% over last year in the first quarter to reach $1 billion. Renewal rates stayed above 90%. Cardholders increased 7%, about 3% of which was accounted for by new store openings. Meanwhile, executive members, who contribute a majority of total sales, grew by over 900,000 from last quarter to 30 million.
Sales growth was elevated for about two full years, first when the pandemic started and customers stocked up on essentials, and then when inflation began to rise and shoppers tried to get the best prices they could. At this point, even that has slowed, but Costco's sales continue to rise regardless, although at a slower pace. This attests to its resilience and value in any economic atmosphere.
2. Nike: The unparalleled athletic market leader
Nike is unrivaled in its leadership status within athletic products. Not only did it take in more sales over the past 12 months than all of its major competitors combined, but it's also bigger than any other apparel retailer in the U.S.
Notwithstanding its girth, Nike keeps growing. Although it experienced sales declines and losses at the onset of the pandemic, in addition to ongoing pressure since inflation hit last year, it has been demonstrating a robust rebound. Sales increased 17% over last year in the fiscal 2023 second quarter (ended Nov. 30). Margins are still pressured, but Nike managed a slight (2%) increase in earnings per share vs. last year.
NYSE: NKE
Key Data Points
Its brand value is unbeatable as well. In Piper Sandler's annual Taking Stock With Teens survey, Nike consistently takes first place in both footwear and clothing, and both by a wide margin. That ability to capture the vote of the youth gives it a long growth runway as this cohort ages and makes greater spending decisions.
Nike's pivot to focusing on its direct-to-consumer strategy was a fortuitous decision before the pandemic, and its incredible customer loyalty and engagement helped it recover quickly. The robust omnichannel approach continues to drive traffic and sales as well as promote the brand, and that should lead it to continued dominance.
Valuation and dividends
Nike stock has made a big comeback so far in 2023, and it's now down 13% over the past year, while Costco stock is down 3%. At these prices, Nike's and Costco's stock trade at a similar price-to-earnings ratio. However, if we throw in other valuation metrics, Costco stock looks a lot cheaper.
COST PE Ratio data by YCharts
Let's compare their dividends. Costco pays $0.90 per share, yielding 0.75% at the current price. Nike pays $0.34 per share, yielding 1.1% at the current price. Both have been raised a similar amount over the past 10 years.
In Costco's favor, it has paid a large special dividend, ranging between $5 and $10, four times over the past 10 years. Management has made it clear that it intends to continue issuing special dividends at opportune times.
Interestingly, Costco and Nike shares have both gained virtually the same amount over the past 10 years: 374%. So what's the verdict? Costco and Nike are both powerhouse stocks that offer different benefits. But considering Costco's reliability, valuation, and dividend (special included), I would go with Costco.
