The Tale of Two Retail Giants: Why Walmart Dominated 2025 While Costco Stumbled

The year 2025 delivered a stunning plot twist in the retail sector. Walmart , long dismissed as the slow-moving incumbent struggling to keep pace with digital disruption, emerged as Wall Street's darling with a 25.3% stock surge. Meanwhile, Costco —the beloved warehouse club that had reliably trounced the S&P 500 for decades—found itself in unfamiliar territory, watching its shares slide roughly 4% while the broader market climbed 14-16%.

This wasn't a story of one company failing and another succeeding. Both retailers posted strong operational results. Costco grew revenue 8.3% year-over-year and exceeded analyst earnings expectations. Walmart delivered consistent 5.8% consolidated revenue growth. Yet the market rendered a decisive verdict, rewarding Walmart with multiple expansion while punishing Costco for the slightest hint of deceleration.

Understanding what happened reveals something profound about how investors now value retail businesses—and what it means for shareholders heading into 2026.

The Walmart Transformation Nobody Saw Coming

For years, the investment thesis on Walmart was straightforward: it was the world's largest retailer, a defensive play with thin margins that offered stability rather than growth. That narrative shattered in 2025.

What changed? Walmart successfully executed what executives call the "alternative profit flywheel"—a strategic pivot toward high-margin, technology-driven ancillary businesses that fundamentally altered the company's earnings profile. The centerpiece of this transformation is Walmart Connect, the company's digital advertising platform, which generated $4.4 billion in global revenue with advertising growing 53% year-over-year.

These advertising dollars carry gross margins exceeding 70%, a figure that would make any retailer's CFO weep with joy. When combined with the rapid expansion of Walmart's third-party marketplace, these high-margin streams now account for approximately one-third of the company's operating income. That's not incremental improvement—it's a structural transformation of the business model.

The genius of this approach lies in its self-reinforcing dynamics. Advertising profits subsidize costly investments in quick-commerce infrastructure, drone delivery, and supply chain automation. These investments enhance the customer experience, driving more traffic and transactions, which in turn makes the advertising platform more valuable to brands. The flywheel spins faster with each revolution.

The financial results speak for themselves. Walmart posted net income growth of 33.0% year-over-year—a figure that would be impressive for a tech startup, let alone a $700 billion revenue retailer. This profit leverage is precisely what triggered the stock's re-rating. Investors recognized they weren't just buying a grocery and general merchandise retailer anymore; they were buying a sophisticated omnichannel ecosystem with multiple profit engines.

The Costco Paradox: When Excellence Isn't Enough

If Walmart's story is about transformation, Costco's is about the tyranny of expectations. The warehouse club delivered objectively excellent results: $67.31 billion in quarterly revenue, 6.4% comparable sales growth (beating the 6.0% consensus), and earnings per share of $4.50 that topped analyst estimates. By any reasonable standard, this was a strong performance.

But Costco doesn't trade at a reasonable standard. With a price-to-earnings multiple hovering between 42 and 49 times, the stock demands near-perfection and constantly accelerating momentum. Any deviation from that trajectory gets punished swiftly.

The specific trigger for concern was subtle but significant. Overall comparable sales growth dropped to 6.4% in November from 6.8% in October. More critically, the two-year compounded growth rate for U.S. comparable sales moderated from 12.5% to 10.1%. For institutions parsing every data point for signs of inflection, this moderation signaled a loss of momentum—and momentum, at Costco's valuation, is everything.

This dynamic illuminates a structural constraint of Costco's low-margin retail model. While the company generates massive volume, the core retail operation provides minimal profit cushion. Costco's 8.3% sales growth translated into only 10.9% net income growth—respectable, but a fraction of Walmart's profit leverage. When investors question whether the sales engine is decelerating, they immediately recalculate earnings potential, and the stock adjusts accordingly.

The irony is that by almost every fundamental measure, Costco remains the superior business. Its return on invested capital stands at 33.7%, nearly double Walmart's 17.1%. That metric reveals exceptional operational discipline and capital allocation—the hallmarks of a truly elite retailer. But in 2025's market environment, being elite wasn't enough to justify being expensive.

The Membership Moat Holds Firm

Despite the stock price pressure, Costco's competitive moat showed no signs of erosion. The company reported 79.6 million paid household members with a U.S. renewal rate of 92.7%—a figure that most subscription businesses would envy. When customers renew at that rate, it signals deep satisfaction and genuine value perception.

The September 2024 membership fee increase provided a natural stress test for this loyalty, and the results were emphatic. Fee income jumped 14% year-over-year to $1.33 billion in the first quarter of fiscal 2026, substantially exceeding analyst expectations of 8-10% growth. Customers absorbed the price increase with minimal pushback, validating the fundamental strength of the membership model.

This high-margin fee stream serves as Costco's profit foundation, enabling the aggressive product pricing that justifies the membership in the first place. It's a virtuous cycle: low prices drive loyalty, loyalty drives renewals, renewals fund investments in value, and value reinforces low prices. The mechanism worked flawlessly in 2025, even as the stock price suggested otherwise.

Walmart has its own membership play in Walmart+, which reached an estimated 18.4 million members by July 2025, reflecting 27% year-over-year growth. While still a fraction of Costco's base, Walmart+ is proving effective at driving higher customer loyalty and attracting middle-to-high-income consumers—a demographic traditionally more associated with Costco's warehouses.

Digital Strategies: Dominance vs. Support

The e-commerce approaches of these two retailers reveal fundamentally different philosophies about the role of digital in their business models.

Walmart is pursuing omnichannel dominance, leveraging its 4,700 U.S. stores as fulfillment nodes in an integrated logistics network. The results are impressive: e-commerce surged 27% in the third quarter, with 35% of store-fulfilled orders delivered in under three hours. The company's global e-commerce operation generated over $100 billion in revenue for fiscal 2025, establishing Walmart as a legitimate digital platform competitor rather than merely a traditional retailer with a website.

Costco's approach is better described as digital support—enhancing member convenience without undermining the bulk economics that define the warehouse experience. The company achieved notable acceleration, with digitally-enabled comparable sales surging 20.5% in the first quarter, up significantly from 13.6% the prior quarter. But this growth serves the core physical model rather than replacing it.

Neither strategy is inherently superior; they reflect different business realities. Walmart's massive store footprint becomes a competitive advantage when reimagined as last-mile infrastructure. Costco's treasure-hunt shopping experience and bulk purchasing model don't translate as naturally to digital contexts. Each company is playing to its strengths.

Private Label: Different Approaches to the Same Goal

Both retailers have built powerful private label businesses, though with distinct strategic purposes.

Costco's Kirkland Signature brand represents 32-35% of total sales and functions as a cornerstone of the membership value proposition. By guaranteeing high quality at 15-20% savings versus national brands, Kirkland reinforces why the annual membership fee is worthwhile. The brand has achieved almost cult-like status among members, with products ranging from vodka to golf balls earning devoted followings.

Walmart deploys a broader portfolio strategy, with private labels accounting for approximately 31% of units sold. Rather than concentrating on a single premium brand, Walmart offers options across quality and price points—including newer entries like "Bettergoods," which emerged as one of 2025's fastest-growing private labels. This approach provides flexibility to serve shifting consumer behaviors across income segments.

Looking Ahead: What 2026 Holds for Each Giant

Walmart enters 2026 structurally positioned to realize gains from its technology investments. Analysts project that automated supply chain and AI-driven inventory systems could improve average unit costs by 20% by year-end—efficiency gains that would flow directly to the bottom line while maintaining competitive pricing. The company is also rolling out performance-based raises for hourly workers, aiming to boost retention and ensure seamless store-level execution.

The headwinds are real, though. Tariff pressures, regulatory risks in the pharmacy segment, and an ongoing shift toward lower-margin food and health categories will challenge profit expansion. Perhaps most significantly, with the stock already up substantially, many analysts view current levels as fully valued, suggesting limited upside from current prices.

Costco's 2026 story centers on disciplined global expansion, with plans for 30-plus net new warehouse openings annually. The strategy targets international markets—particularly Canada and other high-income regions—where comparable sales growth has been strongest. Sustaining the recent digital acceleration will be crucial for maintaining investor confidence, as will demonstrating that the fee increase success is structurally durable.

The most interesting divergence appears in longer-term analyst projections. While Walmart won 2025 decisively, the three-year stock return forecast favors Costco at 15.5% versus Walmart's 4.2%. This reflects a belief that Costco's stock will eventually revert to its historical valuation premium, driven by fundamental quality and recurring revenue streams that remain unmatched in retail.

Valuation: The Numbers Behind the Narratives

The valuation picture crystallizes the market's divergent views on these two retailers. Despite Walmart's massive rally, Costco still commands a premium multiple—trading at 42-49 times earnings compared to Walmart's expanded 39-40 times. The gap has narrowed considerably from historical norms, but it persists, reflecting residual faith in Costco's business quality.

Price-to-sales ratios tell a similar story: Costco at 1.4 times versus Walmart at 1.2 times. Investors still pay more per dollar of Costco revenue, recognizing the predictability and quality of membership-driven sales. But the premium has compressed as Walmart demonstrated that its revenue dollars can generate superior profit growth.

The return on invested capital comparison favors Costco decisively. At 33.7% versus Walmart's 17.1%, Costco extracts nearly twice the value from every dollar of capital deployed. This metric rewards the warehouse model's operational discipline: limited SKUs, high inventory turns, minimal store-level labor costs, and a treasure-hunt atmosphere that drives foot traffic without expensive marketing. For investors focused on capital efficiency—often the best predictor of long-term value creation—Costco remains the superior allocator.

Yet markets don't always reward the best allocator in any given year. They reward the best story, and in 2025, Walmart's transformation narrative proved more compelling than Costco's consistent excellence.

What the Smart Money Is Watching

Institutional investors heading into 2026 will monitor several key metrics that could swing sentiment for either retailer.

For Walmart, the sustainability of advertising growth is paramount. A 53% surge is exceptional, but maintaining that trajectory as the base expands will prove challenging. Any sign that Walmart Connect is hitting saturation could undermine the profit leverage story. Similarly, investors will scrutinize whether automation investments actually deliver the projected 20% unit cost improvements—promises are easy, but execution against such ambitious targets is difficult.

For Costco, the two-year comparable sales stack remains the critical watchpoint. Further deceleration, even from strong absolute levels, could trigger additional multiple compression. Conversely, stabilization or re-acceleration would likely prompt a sharp reversal in sentiment. The durability of the membership fee increase also matters; while early results were strong, investors want confirmation that renewal rates hold as the full member base cycles through the higher price point.

Both companies face macroeconomic uncertainties that could reshape the competitive landscape. Tariff pressures could disrupt supply chains and squeeze margins. Consumer spending patterns remain volatile as households navigate persistent inflation in essentials categories. Regulatory scrutiny of large retailers shows no signs of abating. These external factors could create opportunities for one retailer to differentiate—or challenges that test both models simultaneously.

The Verdict: Different Winners for Different Time Horizons

Walmart is the clear winner of 2025's market narrative. The company successfully executed a strategic transformation that fundamentally changed how investors value the business, earning both multiple expansion and stock outperformance. For momentum-oriented investors, WMT delivered precisely what they seek: growth acceleration, profit leverage, and positive price action.

Costco remains the superior quality business—more efficient, more profitable on invested capital, and possessing a more defensible competitive moat. The 2025 stock decline reflects valuation normalization rather than operational deterioration. For long-term investors with patience and conviction, the current setup may represent an opportunity to own an exceptional business at a more reasonable price than has been available in years.

The three-year return projections encapsulate this tension: analysts forecast 15.5% returns for Costco versus just 4.2% for Walmart. The implication is clear—Walmart's good news is already priced in, while Costco's setback has created a potential entry point. Whether that forecast proves accurate depends on execution, economic conditions, and the market's evolving preferences for growth versus quality.

The deeper lesson transcends these two companies. Markets in 2025 rewarded businesses that could demonstrate profit leverage from digital transformation over those that simply delivered consistent operational excellence. The advertising-subsidized retail model pioneered by Amazon and now embraced by Walmart represents a structural shift in how large retailers can monetize their customer relationships.

Whether that preference persists into 2026 will determine whether Walmart's lead extends or Costco begins its recovery. But one thing remains certain: both retailers have demonstrated that the rumors of physical retail's death remain greatly exaggerated. The stores aren't going away—they're evolving into something more valuable than anyone predicted a decade ago.

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