Better Buy: Costco vs. Dollar General

Costco (NASDAQ: COST) and General dollar (NYSE:DG) are both resilient retailers. Both companies opened new stores as other brick-and-mortar stores succumbed to the ongoing retail apocalypse, and they easily weathered the COVID-19 pandemic over the past year.

Over the past 12 months, shares of both companies have risen more than 30% as S&P500 advanced by about 16%. Let’s see why Costco and Dollar General outperformed the broader market last year, and see if one is a better overall investment today.

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How have Costco and Dollar General survived and prospered?

the retail apocalypsewhich began after the Great Recession of 2008-09, was mainly caused by the rise in Amazon (NASDAQ:AMZN) and other e-commerce options, the expansion of hypermarkets like walmart (NYSE: WMT)and the excessive expansion of malls and other physical businesses in urban and suburban areas.

Costco’s warehouse club business, which derives most of its profits from membership fees instead of product sales, has been shielded from these headwinds for two reasons. First, its products were generally cheaper when purchased in bulk, especially after factoring in shipping costs from online marketplaces. Second, its membership platform blocked buyers.

Dollar General isn’t a true dollar store, but it still sells most of its products at lower prices than Walmart, Amazon, and other major retailers, making it a go-to destination during tough times. economic downturn. It opens most of its stores in rural areas rather than urban and suburban areas, allowing it to avoid direct competition with big box stores and other retailers.

When the pandemic started, many shoppers flocked to both retailers to stock up on essentials. This trend helped Costco and Dollar General grow as smaller brick-and-mortar businesses closed.

Both companies opened new stores throughout the crisis. Costco ended its last quarter with 803 warehouses worldwide, up from 785 locations a year ago. Dollar General ended its latest quarter with 16,979 stores in 46 states, up from 16,094 stores a year earlier.

How fast is Costco growing?

Costco’s adjusted same-store sales increased 9.2% in fiscal 2020, which ended August 30, with growth of 9.2% in the U.S., 7.4% in Canada and 11.2% in its other international markets. His comps. e-commerce grew by 50.1%.

A grocery cart in a supermarket aisle.

Image source: Getty Images.

In the first quarter of 2021, Costco’s adjusted comps increased 17.1% year-over-year, with growth of 17% in the U.S., 16.8% in Canada and 17.7 % in its other international markets. Its e-commerce comps jumped 86.2%. He attributed this acceleration mainly to tailwinds related to the pandemic.

Costco’s renewal rate remains above 90% in the United States and Canada, and in the 1980s internationally. These high renewal rates indicate that its shoppers are fiercely loyal, which should keep it from losing ground to Amazon, Walmart’s Sam’s Club and other competitors.

Analysts expect Costco’s revenue and profit to rise 10% and 15% respectively this year. Next year, they expect its revenue and profit to rise 6% and 9%, respectively, as it faces tougher post-pandemic comparisons.

How fast is Dollar General growing?

Dollar General’s same-store sales increased 3.9% in fiscal 2019, which ended Jan. 31, marking its 30th consecutive year of positive same-store sales. In the first nine months of 2020, its same-store sales were up another 17.5% as a pandemic-induced spike in average ticket size offset a slight decline in its in-store traffic.

Like Costco, Dollar General attributed the acceleration to the pandemic, which triggered robust sales of its consumables, seasonal products, home products and apparel. During this period, it recorded its strongest year-over-year growth in home product sales.

Dollar General’s gross margin also increased year-over-year in the nine months, driven by fewer markdowns and a growing mix of higher-margin non-consumables. This trend should ease concerns about competition or tariffs on Chinese products weighing on its margins.

Analysts expect Dollar General’s revenue and profit to rise 21% and 59% respectively this year. Next year, they expect its revenue to rise just 1% and profits to fall 6% against tougher year-over-year comparisons.

Costco trades at 38 times forward earnings, while Dollar General has a much lower forward P/E ratio of 22. Both stocks pay forward dividend yields of around 0.7%, which doesn’t probably won’t attract serious investors.

The winner: Dollar General

I believe both Costco and Dollar General are strong long-term retail investments. Both companies have a loyal customer base and their businesses are understandably isolated from Amazon and Walmart.

However, Costco’s high P/E ratio will probably limit its gains this year, especially as the pandemic passes and its growth slows. Therefore, I would pick Dollar General right now for its lower valuation, and only consider hoarding a few shares of Costco after its valuations cool down.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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