Wholesale company Costco (COST), headquartered in Issaquah, Washington, operates member warehouses in US, Puerto Rico, Canada, UK, Mexico, Japan, Korea, Australia, Spain, France , Iceland, China and Taiwan. It offers branded and private label products in a range of merchandise categories. By comparison, Dollar General Corporation, based in Goodlettsville, Tennessee (DG) supplies a variety of commodity products to the South, Southwest, Midwest, and Eastern United States. Its offerings include consumables, seasonal items, home products and clothing.
Discount stores have seen a significant drop in foot traffic last year due to the COVID-19 pandemic. However, with substantial progress on the immunization front, students returning to school and workers returning to their jobs, retail sales are increasing this year. According to a preliminary estimate by the US Census Bureau, retail sales in September exceeded analysts’ expectations, despite inflationary pressures. Thus, discount stores offering merchandise at reduced prices are expected to attract more customers, and COST and DG are both well positioned to take advantage of the recovery in demand.
COST shares have gained 24.6% over the past six months, while DG is down 1.4%. In terms of last year’s performance, COST is the winner again with gains of 21.1% against GM’s 3.6% drop. Additionally, COST’s 22.6% price gains year-to-date compares to DG’s 1.6% returns.
But which stock is a better buy now? Let’s find out.
Latest developments
On October 13, COST declared a quarterly dividend of 79 cents per share, payable on November 12, 2021 to shareholders of record as of the close of business on October 29, 2021.
In September, DG announced its expansion into Idaho, increasing its presence in its 47th state. The store is scheduled to open in the spring of 2022. This decision should allow the company to expand its customer base while strengthening its position in the market. DG operated more than 17,600 stores as of July 2021.
Recent financial results
COST’s net sales increased 17.5% year-on-year to $ 61.44 billion in the fiscal fourth quarter ended Aug. 29. Its operating profit was $ 2.28 billion, up 17.9% from the same period last year. Its net profit attributable to COST increased 20.2% from its value a year ago to $ 1.67 billion. The company’s EPS increased 20.1% year-over-year to $ 3.76.
For the second quarter ended July 30, DG’s net sales declined slightly from their value a year ago to $ 8.65 billion. Its operating profit was down 18.5% from its value a year ago to $ 849.57 million, while its net profit was down 19.1% from the same period. last year to $ 637.02 million. The company’s EPS fell 13.8% year-over-year to $ 2.69.
Past and expected financial performance
COST’s net profit and EPS have grown at CAGRs of 16.9% and 16.7%, respectively, over the past three years. Analysts expect COST’s revenue to grow 8.5% in the current year and 7.5% the following year. The company’s EPS is expected to grow 10.4% in the current quarter, 9.4% in the current year and 9.4% next year. In addition, its EPS is expected to grow 9.7% per year over the next five years.
In contrast, DG’s net profit and EPS have grown at CAGRs of 13.4% and 17.5%, respectively, over the past three years. Analysts expect the company’s revenue to grow 1.5% in the current year and 7.4% next year. The company’s EPS is expected to decline 13.4% in the current quarter and 3.9% in the current year; However, its EPS is expected to grow 10.1% the following year. DG’s EPS is expected to grow 6.6% per year over the next five years.
Profitability
DG is more profitable with gross margin and EBITDA margins of 32.08% and 11.93%, respectively, compared to 12.88% and 4.60% for COST.
In addition, the respective ROE and ROA of 37.53% and 8.29% of DG compare to 27.62% and 7.86% of COST.
So, DG is more profitable here.
Evaluation
In terms of advance VE / Sales, DG is currently trading at 1.85x, which is 49.2% higher than COST, which is currently trading at 0.94x. However, COST’s forward EV / EBITDA ratio of 21.20 is 22.8% higher than DG’s 16.37.
POWR odds
COST has an overall rating of B, which is equivalent to Buying in our property POWR odds system. In contrast, DG has an overall rating of C, which translates to Neutral. POWR scores are calculated by considering 118 separate factors, each factor being weighted to an optimal degree.
Both stocks have a stability rating of B, due to their beta below one. COST has a beta of 0.64, while DG has a beta of 0.51.
COST has an A rating for Sentiment, which is in line with analysts’ expectations of a stable increase in revenue and EPS in the current quarter. By comparison, DG has a C rating for Sentiment. This is justified because analysts expect its EPS to decline in the current quarter, while its revenue is expected to increase over the same period.
Out of the 41 shares rated A Grocery Stores / Big Box Retailers Industry, COST is ranked # 18, while DG is ranked # 32.
Beyond what we have stated above, we have also evaluated stocks for growth, momentum, quality and value. Click here to display TOC odds. Also get all DG ratings here.
The winner
Despite concerns about the continued spread of the COVID-19 Delta variant, supply chain disruptions and rising inflation, retail sales are on the rise. As people gain confidence in in-person shopping, inventory at COST and DG discount stores is expected to perform well over the coming months. However, we believe their solid growth in revenue and bottom line makes COST a better buy here.
Our research shows that the chances of success increase when investing in stocks with an overall strong buy or buy rating. View all of the best rated stocks in the Grocery / Department Stores sector here.
COST shares were trading at $ 463.19 per share on Tuesday morning, up $ 1.24 (+ 0.27%). Since the start of the year, COST has gained 23.67%, compared to a 21.28% increase for the benchmark S&P 500 during the same period.
About the Author: Subhasree Kar
Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After obtaining a master’s degree in economics, she acquired knowledge in equity research and portfolio management at Finlatics. Following…
