Walmart Joins BofA US-1 List While Costco is Removed

Bank of America (BofA) analysts have made some notable changes to their US-1 list. This week, they added Walmart (NYSE: WMT), citing the company's impressive share gains, growth in profitable ancillary businesses, and enhancements in its e-commerce operations. On the other hand, Costco (NASDAQ: COST) has been removed from the list, although BofA continues to hold a Buy rating for the stock.

According to BofA, Walmart is experiencing broad share gains across various product categories and income groups. Notably, they are seeing significant traction among higher-income consumers. Walmart's omni-channel strategy, which includes expanding online offerings, store remodels, and an increase in Walmart+ memberships, is expected to sustain this momentum.

As the holiday season approaches, analysts from the bank anticipate that Walmart's digital capabilities will perform exceptionally well, fueled by rising online shopping trends. Furthermore, the company's expanding digital advertising business has played a crucial role in enhancing its margins during this period.

In a statement, BofA noted, "We expect continued gross margin expansion for Walmart, as the growth in high-margin ancillary businesses—including digital advertising, third-party marketplace fees, and fulfillment services—helps offset challenges from the sales mix. General merchandise sales have been lagging behind the lower-margin grocery and health/wellness categories, yet these ancillary businesses now account for about one-third of total EBIT."

Additionally, Walmart has made strides in minimizing its e-commerce losses, with net delivery costs per order down 40% compared to last year. BofA acknowledges that while Walmart's valuation of 33-34 times earnings exceeds historical averages, the ongoing transformation of the retailer justifies this premium.

Analysts project that Walmart's digital shift and margin enhancements will set the stage for long-term profitability and potential expansion in its earnings multiple.

In contrast, BofA describes Costco as a solid performer but one that is currently facing some hurdles. Analysts highlight the challenges Costco faces with tough comparisons and competitive responses, potentially limiting further growth in its earnings per share following a recent membership fee increase. With Costco's P/E ratio reaching an unprecedented high of around 50 times, BofA believes there is less room for valuation growth compared to Walmart.

Walmart, Costco, BofA