Investors shopping around the stock market may want to pick up a few shares of
Goldman Sachs revisited its ratings on big-box discount stores, downgrading Wal-Mart to neutral, from buy, while upgrading Costco to buy and raising its target price to $136 from $127. Costco shares rose 1.5% and Wal-Mart shares dipped 0.6% Tuesday.
In a note to clients, the firm explained the rise of e-commerce has prompted customers to see less value in general merchandise stores with large product assortments. Shoppers now prefer a combination of value and convenience, which analysts said they have found in narrow-assortment retailers like dollar stores, drug stores and warehouse clubs.
The competition for the broader chains isn't going away either. Monday's announced takeover of
Analyst Matthew Fassler said Costco is on the “right side of the emerging divide in discount retailing.” Membership-only clubs, which are stealing market share from super-stores like Wal-Mart and
Although Costco is confident in its prospects and even started to buy back shares, it is still vulnerable to long-term threats from online competition. Amazon has entered the large-volume grocery space with its “subscribe and save” program, which offers customers the added bonus of convenience. Costco has yet to launch a buy online and pick-up in store option, a strategy other stores have employed as a simple solution to the hassle of volume shopping.
Despite these risks, Goldman Sachs thinks Costco is a solid bet unlike competitor Wal-Mart. The bank initially encouraged investors to scoop up Wal-Mart shares in September under the assumption that the retailer would follow a “margin-driven earnings algorithm.” Much to their chagrin, Wal-Mart has pursued strategies that center on growth and investment rather than returns.
“The company’s primary imperatives now involve investing in online and in small stores … While they are understandable decisions, the time when the company is executing against them is not necessarily the most rewarding to own the stock,” Fassler said.
The super-store's decision to refine its online and neighborhood presence is understandable, especially amid changing consumer tastes, but these initiatives can dilute its brand and fail to be profitable. In light of these considerations, Goldman maintained Wal-Mart’s $83 target price but lowered its 2016 earnings forecast by 5 cents to $5.95.
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