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Better Buy: Costco vs. Best Buy

There aren't too many brick-and-mortar chains holding their own these days, but Costco Wholesale (NASDAQ: COST) and Best Buy (NYSE: BBY) are near the top of the list. They have been thriving for years, even as consumers flock to e-commerce solutions.

Costco and Best Buy run big-box retail outlets with exposed ceilings in a warehouse setting. You can buy consumer electronics at both chains, but the business similarities pretty much end there. Costco offers a broad range of products and services beyond consumer electronics, even though Best Buy will naturally have the better selection in its area of specialty. Costco also operates as a warehouse club, where only paid members in good standing can usually shop at its physical locations.

Investors have been served well by both investments, but what about the future? Is Costco or Best Buy the better buy? Let's look at both concepts to see which investment belongs in your portfolio right now.

Image source: Getty Images.

Living up to its name

Best Buy seemed destined to follow Circuit City into the ranks of consumer electronics superstores to falter, but then the chain brought turnaround expert Hubert Joly into its fold in 2012. He championed a new strategy, called Renew Blue, that was able to improve customer satisfaction; workforce morale; and ultimately revenue growth, margins, and share price.

The company never looked back, even with Joly stepping down as CEO in the springtime of last year. Best Buy completed 12 consecutive quarters of positive comps before the pandemic briefly disrupted the winning streak earlier this year. But it's rolling again. Revenue soared 21.4% in its latest quarter, Best Buy's strongest year-over-year growth in more than 18 years.

The company suspended its dividend back in March, but the $0.55-PER-SHARE quarterly payout is back to give the stock a decent 2.1% yield in this climate.

It's not the income that attracts investors to Best Buy. The stock is up a respectable 22% in 2020 through Monday's close, but it's a blistering 11-bagger since the end of 2012, when Joly initiated the chain's turnaround.

Also living up to its name

Costco is also rocking right now. The stock's 29% year-to-date gain through Monday is better than Best Buy, but it's just shy of being a five-bagger since the 2013 starting line we just used for its retail challenger.

Costco's chain of 803 warehouse clubs didn't skip a beat when the pandemic started, like Best Buy, as comps and sales remained positive for the leading warehouse club operator. Its latest quarter was also a bar-raising performance. The nearly 16.7% growth it posted in its latest financial update earlier this month is its strongest top-line gain since the summer of 2011.

Costco may not seem like a magnet for income investors with its 0.8% yield, but it did just pay out a $10-per-share special dividend that boosts its total 2020 distributions to 3.5% of its current share price. Costco has declared beefy one-time distributions four times over the past nine years.

Costco and Best Buy aren't afraid of the future. They have seen their e-commerce sales skyrocket lately. In terms of valuation, Best Buy is the cheaper play across most measuring sticks. It's trading for less than 14 times next fiscal year's earnings, a sharp contrast to Costco at 33 times next year's bottom-line target.

I own Costco. I don't own Best Buy. They are both elite retail stocks. But given the recent growth rates for both companies and its own cheaper earnings multiple, it's hard to not give Best Buy the nod here. Costco will be less risky because of its all-weather appeal, but Best Buy is the better buy right now.

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Rick Munarriz owns shares of Costco Wholesale. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool has a disclosure policy.


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