With no more than just a passing glance, the two companies look exactly the same. Sure, Kroger is a more traditional grocery store while Costco Wholesale provides a membership-based, bulk-oriented shopping experience. But food sales which are amazing if you are looking to stock bulk items. But the question is which store offers the best?
Now, for the investors though, these two traders are vastly different, even more than usual at the moment. One of them is about to fall off an impressive growth slope and start doing things he was said not to care about. The other hasn’t grown as fast as of late, but it’s only just starting to reach its full stride after the pandemic.
While, if we start comparing two similar companies can be difficult. Comparing Costco to Roger is no exception. Investors have come to accept that they are paying a high price for Costco shares because the warehouse model works so well. Conversely, Kroger cannot support higher valuations because its business is a bit more volatile. Each stock mostly reflects the relative risk of each company.
However, Costco is on the verge of being caught in headwinds that could catch too many shareholders by surprise, while Kroger sets the stage for pleasant surprises. Part of the headwind for Costco is the timing of the COVID-19 pandemic in the United States. It took hold in earnest in March of last year, and the club’s retailer has boasted of year-on-year sales growth in the percentages of mid-teens every month since it managed to regroup from the initial coronavirus shutdowns. Making this achievement even more impressive is that Costco managed this growth without adding the roadside haulage service that competitors like Kroger, Walmart and Target had already provided at the time, but expanded to meet the growing need. As CFO Richard Galanti explained in earnings call last year, “We still want you to come. You’re going to buy more things when it comes, period.” This is an argument that Galanti replicated a year later. In-store receipt for some online orders is seen as a compromise to keep customers on board.
While, we near the end of a year of the pandemic that has led to massive increases in similar sales, however, the company is strangely rethinking the value of this feature. Meanwhile, Kroger continues to quietly work on a three-year initiative put in place in 2017 that went off the radar last year once the pandemic broke out. The initiative dubbed “Restock” was calling for investment in digital technologies, improved customer engagement, and new SKUs (just to name a few) gaining traction before the pandemic. With the dust finally over the challenges of 2020, those plans and their impact are back in focus. This is the first year that we will be able to see the benefits of Restock not influenced by investments nor artificially supported by a global infection. They should be good. It may be better than most investors expect. Kroger is not immune to new problems, and Costco is not doomed to failure. But the competition is not among grocers. The competition is between the two stocks, and their prices are subject to perceptions as far as results.
To that end, Costco’s shares – valued at 36 times the expected earnings for this year – have been priced richly, especially given the uncertainty that the company will be able to maintain the strong sales growth pace of the past year. Any whiff of weakness in this regard could be a problem for the stock. On the flip side, it is priced at 10 times the expected earnings for this year and 12 times the expected earnings for next year – profits that arguably reduce the company’s readiness for the post-pandemic environment – Kroger is a low-risk, best-buy right now. Now, what is your thoughts on it? Let us know in the comment section below