Hot Picks: Walmart, Costco and Chewy benefit from retail growth

Retail stocks continue to benefit from resilient consumer spending, with companies leaning on e-commerce, advertising and membership programs to support profit growth and margin expansion.

BNN Bloomberg spoke with Arun Sundaram, Senior Vice President at CFRA Research, about why Walmart, Costco and Chewy remain his preferred retail picks as higher-margin revenue streams reshape the sector.

Key Takeaways

• Walmart’s advertising, subscription and fulfillment businesses are becoming key profit drivers as the retailer attracts more higher-income consumers and grows e-commerce sales.
• Costco continues to post strong comparable sales growth while expanding its warehouse footprint and building recurring membership revenue.
• Retailers with higher-margin businesses such as advertising and memberships are better positioned to drive long-term earnings growth.
• Chewy is expanding beyond pet supplies into veterinary services and other higher-margin businesses while improving fulfillment efficiency through automation.
• Resilient consumer spending and stronger tax refunds in the U.S. have continued to support retail demand despite higher gas prices and geopolitical uncertainty.

Read the full transcript below:

LINDSAY: It’s time now for Hot Picks, and today we’re looking at three retail picks. Our next guest has Walmart at the top of the list. Arun Sundaram, senior vice-president at CFRA Research, joins us now. Great to have you with us. Thanks so much.

ARUN: Thanks for having me.

LINDSAY: Before we get into your picks — and we already told everyone Walmart is the first one — I want to talk a little more about the industry in general. We’ve seen inflation ticking up slightly this year. Do you still feel the retail space is a safe place to be?

ARUN: Yes. I cover retailers across consumer staples as well as consumer discretionary names. We’re coming off first-quarter earnings season right now, and many companies had positive commentary.

Despite the war in the Middle East and higher gas and oil prices, consumer spending has been resilient. We’ve seen that not just in staple categories, but even some discretionary categories are performing well.

In the U.S., a lot of that has to do with the fact tax refunds were about 11 per cent higher this year compared with last year. I think that has helped soften the blow from higher gas prices. Generally, we’re seeing resilient consumer spending, and that’s translating into strong growth for many retailers.

LINDSAY: Let’s get into it then. Walmart is your first Hot Pick today. Tell us why you like Walmart.

ARUN: There’s a lot to like about Walmart. It’s been a top pick for a few years now. In the United States, comparable sales are growing in the four to five per cent range, which is quite strong compared with peers.

Importantly, it’s not just groceries selling well at Walmart. General merchandise and discretionary categories are also doing well. Part of that is due to Walmart bringing in more higher-income consumers to its platform, and many of them are signing up for Walmart+, which is its subscription program.

On top of that, Walmart’s e-commerce business is booming. Growth has accelerated over the past few quarters and is growing at nearly a 30 per cent pace right now. Even more importantly, the e-commerce business became profitable last year. It used to lose money, but now it’s profitable and growing at around 30 per cent.

The No. 1 reason we like the stock is because Walmart’s business model is changing. The company is no longer just selling goods inside stores. It’s also selling advertising, fulfillment services and subscription-based services. These are high-margin revenue streams. Right now, about one-third of Walmart’s operating income growth is coming from these higher-margin businesses, which is good for overall margins. Over the next few years, we expect sizable margin expansion at Walmart.

LINDSAY: That’s interesting. They’re also targeting higher-income shoppers. Really interesting stuff. Your next pick is Costco. Tell us why you like Costco.

ARUN: Costco is another one of our top picks. We’ve become increasingly bullish on Costco over the past three to four months because its valuation gap relative to Walmart has narrowed. Costco used to trade at a sizable premium compared with Walmart, but now their valuations are almost on par.

Costco’s comparable sales growth is even outpacing Walmart’s. It remains one of the leaders in retail. Costco also has a strong runway for club expansion, opening about 25 to 30 new clubs each year, with roughly half in the U.S. and half internationally.

Like Walmart, Costco is also moving into higher-margin revenue streams, which should help overall margins.

And finally, Costco has historically paid special cash dividends every few years once its cash balance builds. Its cash balance is now back near the level it was when the company last paid a special dividend of $15 per share. We expect Costco could pay another special cash dividend within the next year or so, which is another reason to own the stock.

LINDSAY: Interesting. Last up is Chewy Inc. Tell us more about Chewy. It deals with pet food and other pet-related products. Why do you like this one?

ARUN: This may be a more underappreciated play because people may not be as familiar with Chewy as they are with Costco and Walmart, but it’s the leader in pet e-commerce.

More importantly, Chewy is no longer just selling pet supplies. It’s moving into higher-margin businesses as well, including health-care services. Over the past year, the company has started opening physical veterinary clinics in the United States. Again, these are high-margin businesses.

If you look at Chewy’s fundamentals, they’re solid. The company is growing its active customer base in the low single digits and expanding margins. It’s introducing more automation into fulfillment centres, which should also help margins.

Lastly, Chewy is free cash flow positive, has no long-term debt and continues to repurchase shares. The stock hasn’t performed particularly well over the past few years, but we think that’s set to change. We have a strong buy rating on Chewy shares.

LINDSAY: It’s interesting because, as we discussed, retail stocks are facing a complex environment this year, but all three of your picks are focused on higher-margin revenue streams. Is that what separates the companies likely to succeed from those that could struggle?

ARUN: Yes, exactly. Within our coverage universe, retail is where we really like the opportunity because of these higher-margin revenue streams.

For many retailers, margins are improving because of these newer businesses, especially advertising. If you think about it, EBITDA margins for advertising are north of 50 per cent, whereas selling groceries in stores generates margins of only two to four per cent.

Clearly, these higher-margin revenue streams are beneficial for the overall business. As companies like Walmart and Costco continue to grow their e-commerce operations, they’ll also expand their advertising businesses. That’s positive for margins, and it’s why we remain bullish on these stocks not just for the next year, but likely for the next three to five years.

LINDSAY: Interesting discussion. We’ll leave it there. Arun Sundaram, senior vice-president at CFRA Research. Thanks so much for joining us.

ARUN: Thanks so much.

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This BNN Bloomberg summary and transcript of the May 7, 2026 interview with Arun Sundaram are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.