Though the stock market has shown signs of coming to life this year, seven weeks into 2023 we’re still in a bear market. Recent economic data showed inflation was stronger than expected in January and the labor market continues to be red-hot, a sign that the Federal Reserve will have to continue raising interest rates to bring inflation down to its goal of 2%.
If you’re looking for safe retail stocks to buy in the current market environment, two that come to mind are Costco Wholesale (NASDAQ: COST) and Williams-Sonoma (NYSE: WSM). Both have a strong brand name and a long history have steady growth and profits. Which one is the better buy today? Let’s hear from both sides of the argument and you can decide.
Costco has served customers well and increased loyalty
Parkev Tatevosian: Costco has been one of the better-performing businesses of the last decade. Even before the pandemic, the company was growing revenue and operating income at a healthy rate. Of course, Costco thrived during the earlier stages of the outbreak as consumers had fewer places where they could spend their time and money.
Between 2013 and 2022, Costco increased its revenue at a compound annual rate of 8.6%. That’s impressive in itself, but even more so when you consider that Costco is a brick-and-mortar retailer. Supposedly, consumers don’t go to stores in person anymore and do all their shopping online. Tell that to Costco, which capitalized on the growing sales to boost operating income from $3 billion in 2013 to $7.8 billion in 2022.
Costco has earned a reputation among consumers for providing bulk items at bargain prices. The store isn’t for a single person shopping for the day’s meals. Instead, it serves families looking to save money by buying in bulk. Folks are convinced enough of the value that Costco offers that they are willing to pay annual dues for the privilege to shop at its warehouses.
While other brick-and-mortar stores have difficulty attracting customers for free, Costco’s customers are willing to pay to shop at its stores. Thankfully for investors, Costco’s stock is not prohibitively expensive. Trading at a forward price-to-earnings ratio of about 35, it’s a reasonable valuation for an excellent business. People will likely get solid long-term investing results by purchasing excellent businesses at fair prices, and that’s what you have here with Costco stock.
A top brand with an undervalued stock price
Jeremy Bowman: Williams-Sonoma was founded back in 1956, but today the namesake brand makes just a small percentage of the company’s total revenue.
The retailer also owns Pottery Barn and West Elm, both of which generate more revenue than Williams-Sonoma. That multipronged approach gives the company a wide range of styles, including farmhouse, modern, and classic, primarily at a higher-end price point, enabling the company to generate strong margins and maintain an aspirational brand. It’s a popular staple on wedding registries, for example.
Williams-Sonoma has also differentiated itself with its focus on e-commerce. The company now generates roughly 70% of its sales through the digital channel and has steadily reduced its store footprint as e-commerce sales have grown, saving it on fixed costs.
The home-goods retailer’s recent performance speaks for itself. In a difficult environment for the home-goods sector coming off the boom during the pandemic, the company posted strong results on the top and bottom lines in the third quarter.
Comparable sales rose 8.1% in the third quarter, up 25% on a two-year basis, and nearly 50% over the past three years, showing the company continues to make gains even after sales skyrocketed during the pandemic.
On the bottom line, it reported an operating margin of 15.5% with earnings per share rising 13% to $3.72.
In addition to growing its core business through the e-commerce channel, the company also sees opportunities in the B2B segment, selling to commercial businesses, and with its emerging third-party marketplace.
Finally, the best reason to buy Williams-Sonoma today may be its price. It currently trades at a price-to-earnings ratio of just 8 and offers a dividend yield of 2.4%. For a stock with Williams-Sonoma’s track record and reputation, that price looks like an absolute bargain.
10 stocks we like better than Costco Wholesale
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Jeremy Bowman has no position in any of the stocks mentioned. Parkev Tatevosian, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Williams-Sonoma. The Motley Fool has a disclosure policy.