Even as artificial intelligence and data center computing drive a historic stock market rally, the top U.S. grocer Walmart and club membership retailer Costco have outrun many of the top technology names.
The 62-year-old Walmart, the king of retail superstores, has seen its shares roar 82% this year. Among stocks in the Dow Jones Industrial Average, it has led all but Nvidia's 187.6% gain. Walmart stock made new highs each day over the past week amid robust industrywide holiday e-commerce sales.
E-commerce king Amazon, the great retail disrupter and another Dow Jones name, holds a year-to-date gain of 49%.
Meanwhile, the 41-year-old Costco Wholesale is in the midst of a modest digital reinvention. Costco stock has hashed out a 50% gain, edging past Amazon and easily outpacing AI innovators Microsoft and Apple.
"We really like the discounters, the value retailers," said Joe Feldman, a retail analyst at Telsey Advisory Group. "As you just saw with the election, the No. 1 issue was the economy. And despite the fact that economic activity is actually quite healthy in the U.S., the majority of Americans think it's pretty lousy, and they are really struggling to make ends meet and get food on the table."
The advisory has a buy rating on Walmart stock and Costco, as well as on Amazon and Target. Feldman was among 13 analysts who raised their price targets on WMT stock to 100 or above after the latest Nov. 19 earnings, according to FactSet. That suggests at least a modest upside for the Dow Jones retailer's shares after their big rally. Walmart closed Friday near 96.
E-Commerce Embrace Nudges Costco And Walmart Stock
Walmart is famous for low prices and large stores. Costco is known for great value and high-volume warehouse shopping. But the traditional brick-and-mortar retail giants transformed themselves over the past several years, particularly Walmart. Both companies embraced technology to facilitate commerce and make operations more efficient.
Walmart's profits surprised to the upside in the last 10 quarters. Costco has racked up five straight surprises.
In their most recent reports, Walmart and Costco increased e-commerce sales a respective 27% and 19% vs. total sales growth in the low-to-mid-single digits. Their growth outpaces the overall U.S. e-commerce market as well as Amazon's e-commerce sales. Those are growing at around 9% each.
Target, mired in a three-year slump, grew e-commerce sales 11% in its latest quarter, with total sales up just 1%.
Walmart went on the offensive by using e-commerce sales to power newer and higher-margin businesses. Those include digital advertising, fulfillment services, consumer data, membership income and marketplace sales.
"They are kind of a near mirror image to Amazon" in terms of that flywheel effect, Feldman told Investor's Business Daily. Growth powered by online sales, including groceries, is making the Amazon comparisons more relevant.
Despite the difference in scale, Amazon and Walmart go head-to-head as the nation's two largest e-commerce retailers. They are also the two biggest U.S. online grocery retailers.
Walmart was just a middling player for most of the 24 years it has been in the e-commerce space. It ramped up efforts with the $3.3 billion Jet.com acquisition in 2016. It then received a serious boost when pandemic lockdowns led consumers to go online to buy food and essentials.
Black Friday Shoppers Skip Stores For Mobile Devices
That shift was apparent in the latest Black Friday sales. Led by Amazon and Walmart, 2024 Black Friday e-commerce sales soared almost 15%, driven by steep discounts, according to the latest annual Mastercard SpendingPulse report. Sales far outpaced eMarketer's forecast for a 5.5% increase. By comparison, in-store sales nudged up 0.7%.
Trends driving the holiday e-commerce boom included mobile shopping, buy now pay later and genAI chatbots, eMarketer said. Moreover, online carts were twice the size of in-person carts, according to payment firm Block. Amazon reported record Black Friday week to Cyber Monday (Nov. 21-Dec. 2) sales.
On Friday, CFRA equity analyst Arun Sundaram hiked his price target on buy-rated Walmart stock by $16 per share to a Street-high $112. Store growth has slowed, the analyst said. But new, digitally driven revenue streams are driving margin expansion, he added.
Walmart Stock Rises As Retailer Mirrors Amazon
For Walmart, e-commerce growth is actually down from more robust pandemic levels. And Amazon still dominates e-commerce sales by a mile.
But Bentonville, Ark.-based Walmart is on track to generate $100 billion in 2024 e-commerce sales, according to eMarketer. Though that would be less than a fifth of its total anticipated annual sales and well behind Amazon's projected $487 billion, it's a steady advance from $83 billion in 2023 and $68 billion in 2022.
E-commerce profits remain elusive. But Walmart, the world's largest retailer, is seeing e-commerce losses narrow as years of investments pay off.
In Q3, more than 30% of online orders came from customers who chose to pay a convenience fee to receive their delivery within three hours. Meanwhile the company slashed its delivery cost per order by 40%.
Management now expects the U.S. e-commerce business to become profitable in a year or two. Many factors have helped, including the use of physical stores to fulfill online orders, not to mention Walmart's 37% share of total U.S. online grocery sales.
In the latest October-ended quarter, Walmart's global e-commerce sales surged 27%, speeding up from 21% in the prior two quarters. Advertising sales climbed 28%. Membership income advanced 22%. In the U.S. market, store-fulfilled deliveries jumped 50%. Marketplace, which allows third-party sellers to list their products on Walmart's website, surged 42%.
"The rapid growth from these newer businesses is helping us strengthen our business model," Walmart CEO Doug McMillon said on a Nov. 19 quarterly earnings call.
For consumers, options like store pickup and curbside pickup of online orders have blurred the lines between e-commerce and traditional retail. Retailers call this an omnichannel strategy.
"Omni is our life, which we love," McMillon told analysts on the Nov. 19 call. "We think it's an advantaged position."
Walmart Plus members get free unlimited shipping for $98 per year, a lower cost than Amazon Prime. They also get benefits that Amazon Prime can't match, such as free home delivery after shopping at Walmart's more than 5,000 U.S. stores.
Those stores, located within 10 miles of 90% of the American population, are rapidly evolving. They have doubled up since late 2019 as fulfillment centers for online orders, with more than half their volumes now automated.
"We have a great and huge store and club business around the world that is profitable," McMillon said in August. Further, he added, "We make money in food. We make money in consumables. We make money in general merchandise." The Walmart chief vowed: "And we'll eventually make money in e-commerce."
McMillon reiterated in November that Walmart is not in a "race" for e-commerce profits. Telsey Advisory's Feldman took a similarly measured view.
"People like the market share gains Walmart is making online and are excited about the opportunity," he said. "When they do turn to profitability, that should help a lot."
Retail Stocks Brace For Trump, Holidays
Walmart stock has continued to rally after an easy third-quarter earnings beat on Nov. 19. Costco stock also continued higher, heading into the company's Dec. 12 earnings report.
The gains are notable amid what has overall been a tepid holiday shopping season. Also, days after the Nov. 5 Election Day, Neil Saunders, managing director at retail consultancy GlobalData, told IBD that Trump's presidential victory brings "a mixed bag" for retail stocks.
The main positives? Tax cuts that will boost consumer spending, lower energy prices and less regulation. The biggest downside? Proposed tariffs on imported goods, which would again force retailers to either absorb a massive hit on profits or raise prices, when shoppers have had quite enough.
"The uncertainty here is how much of Trump's views are threats as part of a negotiating position, and how much are settled policy views," Saunders said in a Nov. 11 email. "No one completely knows the answer to that."
The retail industry also stared at the specter of fresh supply disruptions. Some reports suggested retailers and manufacturers were already scrambling to bring forward shipment orders. Other reports said they are waiting for the Trump tariffs picture to become clearer.
"Most are undertaking risk assessments and looking at potential mitigations, but few have taken decisive action to date," he said.
Tariffs could cause all kinds of disruptions — pushing up shipping rates, increasing warehousing costs, and tying up more capital, Saunders said. Target, Best Buy, Five Below, Dollar Tree and Dollar General got clobbered the day after Trump's win on the tariff threat.
But Walmart and Costco stock held up relatively well. The two chains can use their size to navigate cost pressures. Kroger, the No. 2 grocer behind Walmart and ahead of Costco, spiked.
Costco And Walmart Stock Are Inflation Winners
Meanwhile, Christmas imports data, seasonal hiring trends and holiday spending forecasts all point to a subdued close to 2024 for the retail industry.
In November, Walmart gave an upbeat holiday season outlook. But Target and some other retailers went the other way.
The nature of the businesses explains the difference. "Walmart is a grocery store that sells other stuff," said analyst Zak Stambor of digital market research firm eMarketer. "Target is a store that sells other stuff and also sells groceries."
That focus on staples made Walmart and Costco stock inflation winners. But there's also a bit more to it.
"Walmart has made clear inroads with a more affluent customer base," Stambor said.
As shoppers hunt for value, there are signs that some are falling in love with Walmart at the expense of Target. Walmart has copied that rival's playbook to expand into higher-end private-label brands and affordable duplicates of premium products.
Walmart's McMillon said on the Nov. 15 earning call that households earning more than $100,000 made up 75% of the company's Q3 market share gains.
"In the U.S., in-store volumes grew, curbside pickup grew faster, and delivery sales grew even faster than that," McMillon said. "Becoming more convenient for our customers and members is helping drive our growth."
Walmart And Costco Are Crowding Target
Stambor said much of that share was grabbed from Target.
"Walmart says consumers are buying groceries but they are also buying other stuff — the discretionary, nonessential spend that is the boost to the top-line numbers, whereas Target sees some softness in discretionary spending," he explained. Target may be losing some share to Costco as well, he added.
One clue comes from the fact that Target's latest quarterly e-commerce sales grew at about half the rate of Costco's. Costco reports robust growth in nonfood sales. Gold jewelry, gift cards, toys and seasonal items, home furnishings, tires and housewares all rose by double digits in its last quarter, leading the way in comparable sales.
"Our buyers have done a fantastic job finding new and exciting items at great values," Costco CFO Gary Millerchip said on a Q4 earnings call.
Membership income grew 6.5% in Costco's latest quarter. It jumped 16.5% for Walmart. By comparison, Target is just getting started. It entered the paid membership game in March with a new program called Circle 360.
Target Vs. Walmart And Costco
Though stung by inflation, Target has also had its own fumbles. It leaned into value to fight the sales malaise by slashing prices, for example. That put it on turf well-trod by Walmart and, to a lesser extent, Costco.
"Target has been squeezed by that and left without a place to play," Stambor said.
The retail rally shows signs it may be broadening. The end of election uncertainty, the prospect of more Federal Reserve rate cuts and improving consumer sentiment have helped fuel stocks.
"A lot of people anticipate discretionary sales being better next year, so you've seen those types of companies already have a move," said Feldman.
Before an earnings miss sent Target stock to a one-year low on Nov. 20, shares had come well off August lows and were in the black for the year.
Squeezing Out The Best Possible Price
Investors are also watching efforts by Walmart and Costco to expand beyond brick-and-mortar superstores.
But after the big run for Walmart stock, the company must continue to grow its e-commerce sales to justify rich valuations, Wells Fargo analyst Edward Kelly says.
EMarketer retail analyst Stambor said his firm expects Walmart's e-commerce growth to slow to a pace of 15% to 16% over the next two years. That should help Walmart earnings keep growing 11%-12% annually over this period, in line with the current year and roughly double the 5.7% last year.
With Walmart's e-commerce business approaching profits sooner than many expected, the company could close the gap with Amazon in key areas such as global digital ad revenue. And though Walmart may never catch up with Amazon in e-commerce, it will keep that larger online rival wary, the analysts who spoke to IBD agreed.
"Walmart is really the only retailer with the size, the scale, the competitive spirit" to take on Amazon head to head, said Charles Sizemore of Sizemore Capital Management, a Walmart stock investor who also owns Amazon, Costco and Target in client portfolios.
Sizemore spoke to IBD on Nov. 13, the day CPI data showed an uptick in inflation for the first time since March. He noted the numbers suggest this thorny issue for investors will be sticking around to see whether the new Trump administration brings any real relief.
"As long as you have this inflationary pressure, that is not going away," Sizemore said. "It's broadly good for Walmart, for Costco, basically for retailers that are good at squeezing out the best possible price."
Please follow Aparna Narayanan on X @IBD_Aparna for more coverage.
