Costco (NASDAQ:COST) and Kroger (NYSE:KR) have a lot in common. They each boast massive retailing reach, with about $100 billion in yearly revenue. Both companies have also cracked the code on growing in a tough selling environment. Costco's latest 8% comparable-store sales growth figure trounced Sam's Club's 0% gain. Kroger, meanwhile, grew faster than Whole Foods for the first time this past quarter.
But which stock is the better buy right now? The warehouse club that just logged a record high member renewal rate, or the grocery store chain that recently posted its 43rd consecutive quarterly sales improvement?
Sales and profit performance
There's no question that Costco is the faster grower. Sure, Kroger's 10% sales boost this year beat out Costco's 7%, but that's mostly thanks to the grocery chain's revenue-juicing 2013 purchase of Harris Teeter. Over the longer term, investors are used to seeing Costco post growth that its rivals, Kroger included, just can't beat.
In 2013 for example, Costco's overall revenue improved by 6%, as compared to Kroger's less than 1% gain. And if you strip out new store openings the picture looks even more favorable for Costco. Comparable-store sales growth was 6%, 8%, and 10% for 2013, 2012, and 2011. Kroger only managed 3.6%, 3.5%, and 4.9% over the same period.
Profits tell a similar story. Costco's net income has doubled over the last five years to an annual pace of $2 billion. That's currently just a bit higher than Kroger's $1.5 billion of yearly profit. But the real difference shows up when you look at the volatility in those respective earnings.
While Kroger's profit has swung wildly from year to year, Costco's marches steadily higher. That's one of the big benefits of having most of your earnings come from membership fees, which don't tend to change as fast as consumer sentiment can.
So Costco has the stronger profit profile and the better growth picture, but are investors paying too high a price for those desirable qualities? They could be. Valued at 28 times last year's earnings, it's hard to make a case for Costco being cheap right now.
Kroger's P/E of 17, by contrast, is on par with the overall market, which makes it much less likely that you'd be overpaying by purchasing the stock here. And the valuation difference is even more dramatic on a price-to-sales basis. By that metric Costco is valued at twice Kroger's price.
Put another way, you can snap up Kroger's $100 billion business for about $25 billion, or 0.25 times sales. But you'd have to pay more than $50 billion to own Costco's similar revenue stream at today's market prices.
Given Costco's stronger business, I think investors have been right to assign that higher valuation to the retailer's stock. And as a shareholder myself, I'm not considering selling.
But the big premium also means that the stock will have a tough time outperforming. In fact, Kroger's shares have beaten Costco's over the last one-year and five-year periods. They're also up 31% so far in 2014 as compared to Costco's 5% rise. I believe that outperformance is likely to continue from here, simply because Costco's stock is valued so richly at the moment.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Demitrios Kalogeropoulos owns shares of Costco Wholesale and Whole Foods Market. The Motley Fool recommends Costco Wholesale and Whole Foods Market. The Motley Fool owns shares of Costco Wholesale and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.