Critical Review: Fred’s (FRED) & Costco Wholesale (COST)

Fred’s (NASDAQ: FRED) and Costco Wholesale (NASDAQ:COST) are both retail/wholesale companies, but which is the superior business? We will contrast the two companies based on the strength of their dividends, institutional ownership, valuation, profitability, analyst recommendations, earnings and risk.

Institutional and Insider Ownership

99.9% of Fred’s shares are owned by institutional investors. Comparatively, 71.4% of Costco Wholesale shares are owned by institutional investors. 27.2% of Fred’s shares are owned by company insiders. Comparatively, 0.6% of Costco Wholesale shares are owned by company insiders. Strong institutional ownership is an indication that hedge funds, large money managers and endowments believe a company is poised for long-term growth.

Earnings and Valuation

This table compares Fred’s and Costco Wholesale’s top-line revenue, earnings per share and valuation.

Gross Revenue Price/Sales Ratio Net Income Earnings Per Share Price/Earnings Ratio
Fred’s $1.81 billion 0.04 -$150.18 million N/A N/A
Costco Wholesale $129.03 billion 0.70 $2.68 billion $5.82 35.59

Costco Wholesale has higher revenue and earnings than Fred’s.

Analyst Ratings

This is a summary of recent ratings and recommmendations for Fred’s and Costco Wholesale, as reported by MarketBeat.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
Fred’s 0 1 0 0 2.00
Costco Wholesale 0 5 20 0 2.80

Fred’s currently has a consensus target price of $4.00, suggesting a potential upside of 84.33%. Costco Wholesale has a consensus target price of $201.47, suggesting a potential downside of 2.73%. Given Fred’s’ higher probable upside, research analysts plainly believe Fred’s is more favorable than Costco Wholesale.

Risk and Volatility

Fred’s has a beta of 1.39, meaning that its stock price is 39% more volatile than the S&P 500. Comparatively, Costco Wholesale has a beta of 0.95, meaning that its stock price is 5% less volatile than the S&P 500.

Profitability

This table compares Fred’s and Costco Wholesale’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
Fred’s -7.08% -30.90% -10.22%
Costco Wholesale 2.16% 24.67% 7.52%

Dividends

Fred’s pays an annual dividend of $0.06 per share and has a dividend yield of 2.8%. Costco Wholesale pays an annual dividend of $2.28 per share and has a dividend yield of 1.1%. Costco Wholesale pays out 39.2% of its earnings in the form of a dividend. Costco Wholesale has increased its dividend for 14 consecutive years.

Summary

Costco Wholesale beats Fred’s on 9 of the 15 factors compared between the two stocks.

About Fred’s

Fred's, Inc., together with its subsidiaries, sells general merchandise through its retail discount stores and full service pharmacies. The company, through its stores, offers health, beauty, and personal care products; household cleaning supplies, disposable diapers, pet foods, and paper products; and various general merchandise, and food and beverage products to low, middle, and fixed income families located in small- to medium-sized towns. It also sells general merchandise to franchised Fred's stores. As of February 3, 2018, the company operated approximately 584 retail stores, 348 pharmacies, and 12 franchised stores located in 15 states primarily in the Southeastern United States. Fred's, Inc. was founded in 1947 and is headquartered in Memphis, Tennessee.

About Costco Wholesale

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio products; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel business. In addition, the company provides gold star individual and business membership services. As of September 3, 2017, it operated 741 membership warehouses, including 514 warehouses in the United States, Washington, District of Columbia, and Puerto Rico, 97 in Canada, 37 in Mexico, 28 in the United Kingdom, 26 in Japan, 13 in Korea, 13 in Taiwan, 9 in Australia, 2 in Spain, 1 in Iceland, and 1 in France. Further, the company sells its products through online. The company was formerly known as Costco Companies, Inc. Costco Wholesale Corporation was founded in 1976 and is based in Issaquah, Washington.

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