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Since January 1990, Costco stock has returned roughly 3497% versus the S&P 500 return of approximately 742%. Not a bad return for a boring business like warehouse shopping.
 

COMPANY PROFILE

One of the most visited, most recognized retail brands in America. With a cult-like following, Costco has become a staple of everyday life for many Americans. Costco envisions that same customer loyalty on a global scale as they selectively continue their international expansion. Costco is one of a handful of retail experiences that hasn’t been disrupted by online stores. Sometimes, the fun is going on an adventure, trying samples and seeing all the electronics. Costco is able to offer lower prices and better values by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing and accounts receivable. We run a tight operation with extremely low overhead which enables us to pass on dramatic savings to our members.

Costco is open only to members and offers three types of membership: Executive, Business and Gold Star. Executive Members are offered additional savings on Costco Services such as auto and home insurance, Costco Auto Program, check printing, identity protection, payment processing, bottled water delivery, and payroll services. Executive Members in the U.S earn an annual 2% Reward (up to $1,000) on qualified Costco purchases. All types of membership include one free Household Card. Costco membership cards are accepted at Costco locations worldwide and online at Costco.com.

Business Members qualify by owning or operating a business, and pay an annual fee ($60 in the U.S.) to shop for resale, business and personal use. This fee includes one free Household Card. Business members may purchase up to six additional membership cards ($60 each) for partners or associates in the business.

If you want real world evidence of how large Costco’s opportunity is outside the U.S, look no further than the new store in Shanghai. This is inning #1 in China and they have plenty of growth ahead across the world.

 
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Recent Earnings

Q4 2019 & fiscal year ending September 1, 2019

  • Net sales for the quarter were $46.45 billion, an increase of 7.0 percent

  • Net sales for the fiscal year were $149.35 billion, an increase of 7.9 percent

  • Costco currently operates 783 warehouses, including 544 in the United States and Puerto Rico, 100 in Canada, 39 in Mexico, 29 in the United Kingdom, 26 in Japan, 16 in Korea, 13 in Taiwan, 11 in Australia, two in Spain, one in France, one in Iceland, and one in China.

  • $2.47/share vs $2.36/share.

  • Comp sales 16 weeks: U.S. 6.2%, Canada 2.6%. Total company 5.1% total.

  • Q4 traffic increased strongly.

  • Average transaction +1.4%

  • Membership income +5.3% or $1B

  • Renewal rates 90.9% US and Canada, worldwide 88.4% - both all time highs

  • 53.9m member households, total card holders 98.5m

  • 20.8m paid commercial memberships

  • 10 net new store openings this quarter including the first store in China and 50 new stores for the year.

  • China - overwhelming crowds caused the store to close in the first 4 hours - record sign-ups thus far - 200k memberships already

  • Next China opening early 2021

  • Tariffs: managing tariffs well, accelerate ordering when they can before tariffs and working with suppliers but have to raise prices where applicable. Every item and every vendor is different. Overall in a good position versus retailers given their scale.

  • 114m total square feet of store space around the world

  • Buybacks: 52m shares purchased in Q4 average price $268.08 and for the year $247m in total capital deployed for avg price $225.16

  • Online grocery is growing fast off a low base with the help of Instacart

  • Sold another large diamond ring this quarter for total of $220,000! Speechless

  • Upcoming E-commerce sites planned for Japan & Australia mid fiscal year

  • Costco app - allows digital membership, view gas prices, rewards growth, pharmacy management, new shopping lists, etc.

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Eric’s Opinion

From a factor scoring perspective versus the other 199 brands in the brands index, here’s where Costco scores well as of 9/17/19:

  • 84% low debt to enterprise value

  • 86% low price/sales so despite what people say, COST is NOT expensive when you take into consideration their total sales

  • 88% strong price momentum

  • 94% high total sales

I Love it, Period. I can’t think of a brand better suited for the current environment than Costco. Saving money matters right now and Costco’s focus on keeping costs low anIt’s a buy on every dip, particularly when the “death of grocery” stories surface. When Amazon bought Whole Foods, all food & grocery stocks got crushed, that knee-jerk reaction was a bit short-sighted, and it offered a wonderful buying opportunity. When Costco finally loses its growth opportunities and ceases to be a place where consumers love to shop regularly, it will be a sale, until then, buy it, hold it, enjoy the stores. The stock is always expensive, get over it, it’s expensive because of its stability, predictability, and continued growth in the U.S, online, and across the globe. Costco will open its first warehouse in China later this year. They are starting slow and being cautious in this potential huge market, yet another reason to own the stock; STELLAR MANAGEMENT.

What’s their secret weapon?

Kirkland Signature means quality & value

Kirkland Signature means quality & value

Costco’s Kirkland Signature products brought in more than $39 billion in 2018, making up almost a third of all Costco sales. That’s up from $35 billion in 2017. In most cases, Costco doesn’t have any manufacturing costs, they outsource the production, have unbelievably strong negotiation power for prices given their scale and drive high volumes with more attractive pricing than most brands. It was a brilliant strategy many years ago and one that Trader Joe’s has been exploiting for years. The best part, many of the private label manufacturers are the same brands we have always used but are now cheaper under the Kirkland brand. Examples include Starbucks coffee, Duracell batteries, Huggies from Kimberly Clark (rumor), Bumble Bee brand tuna, Grey Goose Vodka, Tough Athletics Brand (similar to LULU), and Pureology brand moisturizers. On a stand-alone basis, Kirkland would be bigger than many popular brands in America, that offers real power for Costco and its loyalists. The growth of private label across all retailers has no end in sight which ultimately forces big brands to innovate and be more competitive on price. Consumers are now being selective where brand loyalty is concerned so if a brand plays in a commodity product area and there’s no real differentiation across peers, the pricing power and brand relevancy will surely erode. Some will keep high brand relevancy and pricing power and the rest will wither away. Either way, Costco & Kirkland win big and the consumer gets more choice across all price points.

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