Costco vs. Dollar General: Which Discount Store Stock is a Better Buy?

Costco Wholesale Corporation (COST), which is headquartered in Issaquah, Wash., operates membership warehouses in the United States, Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Korea, Australia, Spain, France, Iceland, China, and Taiwan. It offers branded and private-label products across a range of merchandise categories. In comparison, Goodlettsville, Tenn.-based Dollar General Corporation (DG) provides various merchandise products in the Southern, Southwestern, Midwestern, and Eastern United States. Its offerings include consumable items, seasonal items, home products, and apparel.

Discount stores witnessed a significant decline in foot traffic last year due to the COVID-19 pandemic. However, with substantial progress on the vaccination front, students heading back to school, and workers returning to their jobs, retail sales are increasing this year. According to an advance estimate from the U.S. Census Bureau, retail sales in September beat analysts’ expectations, despite inflationary pressures. So, discount stores offering merchandise at slashed prices should attract more customers, and both COST and DG are well-positioned to capitalize on the rebounding demand.

COST's shares have gained 24.6% in price over the past six months, while DG has declined 1.4%. In terms of their past year’s performance, COST is again the winner with 21.1% gains versus DG’s 3.6% slump. Furthermore, COST’s 22.6% price gains year-to-date compare with DG’s 1.6% returns.

But which stock is a better buy now? Let’s find out.

Latest Developments

On October 13, COST declared a 79 cents per share quarterly dividend, payable November 12, 2021 to shareholders of record at the close of business on October 29, 2021.

In September, DG announced its expansion into Idaho, increasing its presence into its 47th state. The store is scheduled to open by spring 2022. The move should allow the company to expand its customer base while also strengthening its market position. DG operated more than 17,600 stores as of July 2021.

Recent Financial Results

COST’s net sales increased 17.5% year-over-year to $61.44 billion in its fiscal fourth quarter, ended August 29. Its operating income stood at $2.28 billion, up 17.9% from the same period last year. Its net income attributable to COST grew 20.2% from its year-ago value to $1.67 billion. The company’s EPS increased 20.1% year-over-year to $3.76.

For the second quarter ended July 30, DG’s net sales declined marginally from its year-ago value to $8.65 billion. Its operating profit decreased 18.5% from its year-ago value to $849.57 million, while its net income declined 19.1% from the same period last year to $637.02 million. The company’s EPS decreased 13.8% year-over-year to $2.69.

Past and Expected Financial Performance

COST’s net income and EPS have grown at CAGRs of 16.9% and 16.7%, respectively, over the past three years. Analysts expect COST’s revenue to increase 8.5% in the current year and 7.5% in the following year. The company’s EPS is expected to grow 10.4% in the current quarter, 9.4% in the current year, and 9.4% next year. Furthermore, its EPS is expected to grow 9.7% per annum over the next five years.

In contrast, DG’s net income and EPS have grown at CAGRs of 13.4% and 17.5%, respectively, over the past three years. Analysts expect the company’s revenue to increase 1.5% in the current year and 7.4% next year. The company’s EPS is expected to decline 13.4% in the current quarter and 3.9% in the current year; However, its EPS is expected to grow 10.1% in the following year. DG’s EPS is expected to grow 6.6% per annum over the next five years.

Profitability

DG is more profitable with a gross profit and EBITDA margins of 32.08% and 11.93%, respectively, compared to COST’s 12.88% and 4.60%.

Furthermore, DG’s 37.53% and 8.29% respective ROE and ROA compare with COST’s 27.62% and 7.86%.

Thus, DG is more profitable here.

Valuation

In terms of forward EV/Sales, DG is currently trading at 1.85x, which is 49.2% higher than COST, which is currently trading at 0.94x. However, COST’s 21.20 forward EV/EBITDA ratio is 22.8% higher than DG’s 16.37.

POWR Ratings

COST has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. In contrast, DG has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Both stocks have a B Stability grade, owing to their less than one beta. COST has a 0,64 beta, while DG has a beta of 0.51.

COST has an A grade for Sentiment, which is consistent with analysts’ expectations of a stable rise in revenues and EPS in the current quarter. In comparison, DG has a C grade for Sentiment. This is justified because analysts expect its EPS to decline in the current quarter, while its revenue is expected to grow over the same period.

Of the 41 stocks in the A-rated Grocery/Big Box Retailers industry, COST is ranked #18, while DG is ranked #32.

Beyond what we’ve stated above, we have also rated the stocks for Growth, Momentum, Quality, and Value. Click here to view COST ratings. Also, get all DG ratings here.

The Winner

Despite the concerns about the continuing spread of the COVID-19 Delta variant, supply chain disruptions, and rising inflation, retail sales are increasing. As people gain confidence in in-person shopping, discount store stocks COST and DG should perform well in the coming months. However, we think its solid top-line and bottom-line growth make COST a better Buy here.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Grocery/Big Box Retailers industry here.

COST shares were trading at $463.19 per share on Tuesday morning, up $1.24 (+0.27%). Year-to-date, COST has gained 23.67%, versus a 21.28% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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