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Sep 5

Growth Is a Rare Commodity in Retail. Costco and Target Are Cashing In. – Barron’s

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Hedonic adaptation describes the human phenomenon of putting a check on happiness even after the best news, from weight loss to lottery wins. Put another way, in terms of investing: What have you done for me lately? Perhaps then its no surprise that Wall Street always has one eye to the future, no matter how well a company has done in the past and is performing in the present.

Big-box retailers fit that scenario, as investors wonder how long the good times can last. For Costco and Target, the answer is: at least through last month.

After the close of regular trading Wednesday, Costco Wholesale (ticker: COST) reported another month of double-digit comparable-sales growth. Comps climbed 14.5% in August, excluding fluctuations in gasoline and foreign exchange, while e-commerce sales soared more than 100%.

That is par for the course for the discount retailer, which put up similarly strong same-store sales in June and again in July. While the company got a boost from panic-buying in March, flat April sales had some investors worried that demand had simply been pulled forward, and wouldnt rebound. Strong May results showed that wasnt the case. And the fact that Costcos comps have held steady above the 14% mark for three consecutive months shows that the trend has legs.

While some investors may have been concerned to see August levels dip from Julys robust 15.8% rate, the results were still strong, and included e-commerce sales that accelerated from the previous two months, even as more physical locations reopened.

Costcos August report echoes similarly upbeat news from Target (TGT). The company reported strong second-quarter results on Aug. 19, and at the time management said that month-to-date same-store sales were up by percentages in the low double digits.

That helped Targets stock pop, especially because the results contrasted with Walmarts (WMT) just a day before. Walmart said July same-store sales were up just 4%, a deceleration from more than 9% in the quarter as a whole, which it blamed on the fact that most consumers had already spent their government stimulus checks, with no second round in sight.

Of course, it isnt an apples-to-apples comparison, because Walmart didnt provide August data. Still, both Costco and Target saw double-digit same-store sales growth for their most recent quarter as well. Targets comps jumped 24.3%, while Costcos were up 14.1%. Although Costco doesnt report until later this month, it provided preliminary top-line results on Wednesday.

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So although the sustainability of sales growth will remain a major question in retailevery great comp figure becomes a hurdle to pass the next yearcontinued strength in August should provide investors with some level of reassurance that, while consumers may be in a tight spot, the big essential retailers will likely continue to win. It is also reassuring that both saw broad-based gains, demonstrating that shoppers arent just buying low-margin food and sundries.

That isnt to say investors should count Walmart out. The companys sheer size means it cant grow as quickly as its smaller peers, and with the shares up 21% in 2020, it is the best-performing stock, helped by optimism about its bid for TikTok and other initiatives including its Walmart+ subscription service.

Ultimately, there is room for more than one winner. Margaret Reid, senior portfolio manager with the Private Bank at Union Bank, says that all three will continue to succeed, although she thinks that because of Walmarts size, Target and Costco will capture greater market share post-pandemic.

Target is absolutely one of those brands that consumers can look to for value and convenience, she notes, highlighting its strength in areas such as apparel for children, which Barrons also noted it in s back-to-school coverage.

For all its success, Costco still has low market share in the U.S. and globally Reid notes, meaning that it has much more white space than Walmart, and potentially Amazon.com (AMZN). She also likes its value proposition, convenience, and the strength of its supply chain. Its one of those companies that can continue to have a long-term, sustainable growth rate higher than a lot of other[s] in food and apparel retail.

As weve noted before, the stocks might not look cheap, but growth is a rare commodity among traditional retailers these days, one that investors have been willing to pay up forespecially when there is evidence it can continue. And if history is a guide, that premium has been rewarded. All three stocksled by far and away by Costcohave easily outperformed the S&P 500 over the past 20 years.

Write to Teresa Rivas at teresa.rivas@barrons.com

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Growth Is a Rare Commodity in Retail. Costco and Target Are Cashing In. - Barron's

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