Our confidence in Costco is not shaken by Walmart's woes. Here's why

Published Tue, Jul 26 20222:43 PM EDTUpdated Tue, Jul 26 20223:30 PM EDT

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

All retailers are not created equal. While our faith in Walmart (WMT) is shaken after the Club holding cut its full-year profit outlook for the second time in roughly two months, we remain steadfast believers in Costco (COST). Not only does Costco's membership model and cost-saving ethos make it the right retail stock for this environment — a view echoed Tuesday by analysts at Jefferies — but we think it has the foundation for long-term success, too. Bottom line Resist the temptation to join the rest of the Costco sellers on Tuesday. It's no surprise Costco and other retailers are getting hit Tuesday on the heels of the negative Walmart news after the closing bell a day earlier. But dumping COST into the weakness is an ill-advised approach. At their lows of the day, Costco shares were down nearly 4%. We recognize Costco could be feeling some of same issues weighing on Walmart's operations — namely a changing sales mix as must-have items like groceries take up a larger share of consumers' budgets due to the higher prices that come with decades-high inflation. However, we believe Costco has done a better job than Walmart at navigating the inventory side of the equation. Other key differences exist between the companies, potentially limiting Costco from experiencing the bottom-line erosion that Walmart warned investors about late Monday. We have a 1 rating on Costco, which means it's a stock we like here. The Club didn't buy shares Tuesday on the pullback because we already have a sizeable position relative to the rest of the portfolio. WMT vs. COST In Walmart's case, not only has its shoppers been spending more money on lower-margin things like food, but the big-box retailer also has an inventory glut, especially in apparel. In an attempt to help those excess products sell, Walmart has decided to put items on sale. While those discounts on apparel and other goods benefit the consumer, they dent Walmart's profitability — that's how Walmart could both slash its earni