We recently compiled a list of the 7 Best Department Store Stocks to Buy Now. In this article, we are going to take a look at where Costco Wholesale Corporation (NASDAQ:COST) stands against the other best department store stocks to buy now.
Holiday Shopping Season and Consumer Sentiment
The holiday shopping season is in full swing in the United States. On December 2, Jessica Moulton, senior partner at McKinsey & Company, appeared on CNBC to discuss Black Friday spending and its effects on consumer sentiment. She said that while 2024 was a challenging year for retailers, the numbers rolling in from the holiday season seem promising. High hopes were especially placed on Black Friday sales, and while the numbers aren't all in, they look pretty good. This trend holds particularly true online, where sales seem to be up by 15% or so compared to last year in many markets. According to CNBC, the total Black Friday e-commerce spending was around $10.8 billion. However, Moulton said that footfall in stores wasn't so good, and continued to be flat year-over-year.
She said the trends in the sector are changing, with around 75% of shopping journeys starting online at the outset. Although some of them end up with consumers paying visits to the brick-and-mortar stores, much of the shopping journeys end with sales happening online. Furthermore, the retail sector is showing consumer behavior that tends to undertake a multiple retailer journey these days. If it is a bigger purchase, most consumers prefer checking out four to five retailers, either online or offline. This poses a significant change in the sector as compared to around two decades ago.
Is Black Friday Becoming the Biggest Thing in Retail?
Moulton said that consumers have consistently shown the industry in many ways that they are experiencing the effects of the cost of living crisis. However, recent survey data by McKinsey shows that consumers have started to feel more confident, which is expected to be reflected in the busier Christmas period this year compared to the last couple of years. She is optimistic about the future, saying that although we are still in a tricky place, there is light at the end of the tunnel. McKinsey's estimates show that around 63% of consumers are expected to have an increased e-commerce spending forecast this holiday shopping season. The e-commerce spending forecast for around 27% of consumers is expected to remain the same, while it may decrease for 4% due to cutbacks.
Black Friday and Cyber Monday are increasingly becoming more significant in the holiday shopping season, especially compared to Christmas shopping. Mouton said that the retail industry is seeing more and more concentration of sales in the days around Black Friday. That is tough for retailers, as it puts a significant amount of weight on the fairly narrow set of items that retailers work hard to put great deals against. The retail results for the 29th November weekend mark the culmination of nine months of work by most retailers. This includes sourcing good value, marketing their items, watching the trends in the days before the weekend itself, detecting the items getting more traffic, and more. Since the changing trends keep concentrating more and more sales in the precious Black Friday weekend, the stakes are high for retailers.
Generative AI and Retail
Talking about the increasing role of generative AI in retail, Moulton said considerable experimentation is going on in the industry. However, she considers the present time to be too early to see it at scale. She said that several leaders are leveraging generative AI the right way, which means that the strongest are getting stronger. They are taking early advantage of such new capabilities. This holds special importance since cookies are now much less easy to use because of their increased regulation. This makes Gen-AI a substitute that leaders are leaning into.
A customer in a warehouse aisles, browsing the wide range of branded and private-label products.
Our Methodology
We sifted through stock screeners and financial media reports to compile a list of 10 department store stocks. We then selected the 7 stocks that were the most popular among elite hedge funds, as of Q3 2024. The list is sorted in ascending order of hedge fund sentiment.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Costco Wholesale Corporation (NASDAQ:COST) operates membership-only big box warehouse club stores, and is one of the most popular department stores in the US. It offers an extensive collection to its customers, including furniture, electronics, clothing, consumables, and much more. The company is expanding its operations, recently opening a new store in Maine and consolidating its presence in 47 US states. It attained its target of opening 30 new warehouses in fiscal 2024. It is also expanding its presence internationally, and has plans to take on 12 of its 29 planned openings outside the US.
Apart from its expansion strategy, the company is improving its member experience by boosting delivery times, streamlining merchandise assortment, and scheduling functionality. It reported membership fee income of $1.512 billion, reflecting a growth of $3 million on one less week year-over-year.
Costco Wholesale Corp's (NASDAQ:COST) renewal rate in the US and Canada was down one-tenth of a percent in fiscal Q4 2024 compared to fiscal Q3 end. It stood at 92.9% and underwent this slight decrease due to the effect of the online membership promotion that the company ran in fiscal year 2023 for a short while.
However, improvement in the worldwide membership renewal rate offset the decrease in the US. The company ended fiscal Q4 2024 with around 76.2 million paid household members and 136.8 million cardholders. These numbers reflect a year-over-year increase of 7.3% and 7%, respectively. Costco Wholesale Corporation (NASDAQ:COST) takes the third spot on our list of the 7 best department store stocks to buy now.
Madison Sustainable Equity Fund stated the following regarding Costco Wholesale Corporation (NASDAQ:COST) in its Q3 2024 investor letter:
"Costco Wholesale Corporation (NASDAQ:COST) continues to demonstrate its commitment to sustainability by lowering its emissions. For example, it has converted its Kirkland Signature laundry packs from plastic tubs to a pouch. This has reduced plastic packaging by 80%. It has also moved to localize production of bulky items such as water, paper, and laundry detergents. Manufacturing these goods closer to the countries in which they are sold reduces emissions associated with shipping."
Overall, COST ranks 3rd among the 7 best department store stocks to buy now. While we acknowledge the potential of department store stocks, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than COST but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
