Walmart and Costco are at the top of the retail food chain, but one of these might be running low on gas

Two of the major players within the retail segment continue to gain market share across all income levels by maintaining substantially high barriers to entry and a strong value proposition to price-sensitive consumers. Walmart (NYSE:WMT) has the advantage over competitors thanks to its focus on price, convenience, and assortment, while Costco’s (NASDAQ:COST) warehouse model offers a wide variety of merchandise and services, both of which continue to command a rich share premium. However, Truist analyst Scot Ciccarelli sees Walmart’s (WMT) share trajectory continued to be fueled by higher-margin revenue streams like advertising, membership, and marketplace, while Costco’s (COST) meteoric rise (+64% year-over-year vs +29% for the S&P 500) may be running out of gas.

Costco’s (COST) business remains strong, and likely has the highest barriers to entry in all of retail, Ciccarelli says. But recent changes have led him to downgrade the stock to Hold from Buy, as these “little changes” could add some friction to the shopping experience and create a modest sales headwind. Ciccarelli views the company’s decision to scan membership cards on entry (rather than simply looking at them) and packaging their famous rotisserie chickens in bags rather than more sturdy plastic containers (creating a mess for consumers) as inconsequential. But with the elevated stock valuation, there is little room for error on Costco’s part. Additionally, catalysts like the membership rate hike and $15 special dividend are now “in the rearview mirror” leaving fewer “incremental catalysts” on the horizon to drive further multiple expansion.

Walmart (WMT) is taking market share from almost everyone, Ciccarelli says, and thanks to the company’s continued efforts to adapt to a changing consumer landscape with initiatives such as free home delivery, subscription services, and extreme value categories, these factors should lead to a new, higher valuation paradigm for Walmart (WMT) shares.

“Faster growth of higher margin segments should result in higher earnings growth and command a higher multiple,” Ciccarelli says, adding that the number of companies that are market leaders, with embedded margin enhancers, with both offensive and defensive characteristics where an investor can pour massive amounts of capital is “extremely limited.”

In consideration of the share gains in Walmart (WMT), scarcity value and profit expansion, Ciccarelli upgrades the stock to Buy from Hold and hikes his target price by 14% to $89, representing an 11% premium to Monday’s close.