People have to spend their money somewhere, and many are choosing budget-friendly favorites, Walmart (WMT 0.96%) and Costco (COST 0.81%). These retail giants generate almost $1 trillion in combined revenue each year, but they have different business models.
Costco focuses on membership warehouses and has 914 locations worldwide . You don't need a membership to enter one of Walmart's 10,750 retail stores , but you do need a membership to enter one of the company's 600 Sam's Club locations . Both retailers use their scale to offer affordable prices on various products, including essentials like groceries.
Both retail giants have outperformed the S&P 500 over the past five years. Some investors may want to diversify into both stocks, but if you could only choose Walmart or Costco, there is a clear winner.
Walmart gets digital
Walmart's business strategy has revolved around opening as many discount retail stores as possible. That formula has worked well for decades, but Walmart's future growth opportunities come from e-commerce and online ads.
E-commerce sales increased by 25% globally in the second quarter, as Walmart continues to penetrate into Amazon's (AMZN +9.77%) domain. The company's retail chain works to its advantage since store-fulfilled pickup and delivery are the driving forces behind Walmart's e-commerce success.
Walmart's global advertising business is also growing quickly, showing a 46% year-over-year improvement in the second quarter. It's still a small part of Walmart's overall business. Advertising accounted for $4.4 billion of Walmart's $681.0 billion in fiscal 2024 revenue. However, advertising has higher margins than Walmart's retail business, which can translate into higher net income growth.
Costco retains customers better than most retailers
Image source: Getty Images.
Costco doesn't have as many stores as Walmart, but its customers come back more often and spend more money. That's based on Costco's rising comparable sales growth, a metric that shows how much Costco's existing stores grew year-over-year. In other words, a retailer can't game this number by doubling their store count in a short period of time.
Costco posted 5.7% same-store sales growth in Q4 FY25 . International stores are growing at a faster rate than Costco's U.S. locations, which is a common trend among retail giants. You can also find the same trend with Walmart's comparable sales growth, but Walmart's growth rate is lower than Costco's, coming in at 4.3% year-over-year in the second quarter.
The wholesaler also has a growing e-commerce segment that was up by 15.6% compared to last year. Costco's September report indicates that the business is still growing at a healthy clip, with comparable sales up by 5.7% year-over-year . September's sales report is the first one that lumps e-commerce into the new "Digitally Enabled" segment, which includes all sales initiated with a digital device, whether it's fulfilled at a warehouse or a distribution center. Costco Travel sales are also included in this metric, which was up by 26.1% compared to September 2024.
Choosing between Walmart and Costco
Walmart and Costco are the two clear leaders in the retail industry, offering a wide range of affordable products. Both stocks have outperformed the S&P 500 over the past five years and give dividends to their shareholders.
Costco delivered 8% year-over-year revenue growth in its fourth quarter, which edged out Walmart's 4.8% year-over-year revenue growth rate. Costco also has higher comparable sales growth than Walmart.
Revenue growth is a key factor when comparing stocks, but it doesn't tell the whole story. Walmart's growing advertising business gives the company a better shot at expanding its profit margins in the long run. Higher profit margins can help Walmart grow its net income faster than Costco, even if Costco continues to deliver higher revenue growth.
Walmart's net income jumped by 56% year-over-year in the second quarter, which was much higher than Costco's 10.9% year-over-year net income improvement. This difference partially explains why Walmart has been the better-performing stock year-to-date.
Investors also have to consider each stock's valuation, and if you're looking at the popular P/E ratio, Walmart is the clear winner. Walmart currently trades at a 40 P/E ratio compared to Costco's 51 P/E ratio.
While Costco has higher revenue growth, Walmart's profits are growing at a faster rate, and WMT shares have a low valuation. Combining that with Walmart's high-margin advertising growth makes WMT stock the better buy right now.