Walmart Joins BofA US-1 List While Costco is Removed

Bank of America (BofA) has made significant changes to its US-1 list by adding Walmart (NYSE: WMT) and removing Costco (NASDAQ: COST). This decision was announced on Thursday and reflects the bank's analysis of the retail market.

BofA analysts have praised Walmart for its robust share gains across various product categories and demographic segments, particularly noting an increase among higher-income consumers. The retailer's omni-channel strategy, which encompasses an expansion of online services, store remodels, and growth in Walmart+ memberships, has greatly enhanced its competitive edge in the market.

Walmart's Strong Performance and E-commerce Growth

According to BofA, Walmart is well-positioned to continue benefiting from extensive market share gains. The bank anticipates that these trends will persist, especially with the upcoming holiday season, where Walmart's digital capabilities are expected to excel due to a rise in online shopping.

Additionally, Walmart's increasing focus on digital advertising is expected to improve its profit margins. BofA noted that the retailer has successfully reduced its U.S. e-commerce losses, with net delivery costs per order decreasing by 40% year-over-year. This shift has helped offset the challenges posed by the sales mix, where general merchandise sales have lagged behind the lower-margin grocery and health/wellness categories.

Costco's Current Standing

While Costco remains a strong performer in the retail space, BofA has decided to remove it from the US-1 list. The firm has maintained a Buy rating on Costco, but they recognize potential challenges. These include tough comparisons with past performance, responses from competitors, and limited gains in earnings per share (EPS) following a recent increase in its membership fees.

With Costco's Price-to-Earnings (P/E) ratio reaching an all-time high of around 50x, BofA analysts believe there is now less potential for further growth in its valuation, especially compared to Walmart's ongoing transformation that justifies its current higher valuation of 33-34x earnings.

Outlook for Walmart and Costco

BofA's outlook suggests that Walmart's digital transformation, along with margin improvements, position it for sustained profitability and potential growth in valuation multiples. Conversely, while Costco continues to excel in certain areas, the limitations on its growth prospects have led to its removal from the US-1 list.

These changes highlight the dynamic nature of the retail sector, where companies must continuously adapt to changing market conditions and consumer preferences.

Walmart, Costco, BofA