Comparison of Three Different Companies in the US. Retail Industry Based on Beta (-risk) Analysis and Financial Statement Analysis: Costco vs. Walmart vs. Target

Abstract

The purpose of this paper is to analyze the capital structure, business risk (levered vs. unlevered beta ), and financial statements in the U.S. grocery retailers to determine how their unique capital structure, risks, and financial characteristics explain the differences in their performance and investment returns. We chose three U.S. grocery stores: Costco, Walmart, and Target, each with a unique business structure. We conducted a detailed beta () analysis, both leveraged and unleveraged, as well as a dedicate financial statement analysis focused on ratio analysis. Liquidity, profitability, and solvency abilities were examined to determine if they depend on each retailers specific capital structure, risks, and characteristics, and how they would affect investors investment decisions. Our results reveal that the capital structure, or the level of financial leverage, and size of market capitalization play key roles in determining a companys levered and unlevered beta (). In addition, we found that Target has the highest investment return but exhibits substantially weaker sales and has a high liquidity risk. Costco exhibits significant low margins in both gross and operating, but has a lower level of debt and a greater ability to generate free cash flow. Walmart has the largest market capitalization, the lowest business risk () and return, but the large amount of debts it currently holds limits its free cash flow and ability to grow rapidly. Above all, it is advisable to invest in Costco rather than Target and Walmart under todays unprecedented (post) Covid-19 pandemic context.